The Competitive Dynamics of Geographic Deregulation in Banking: Implications for Productive Efficiency

Authors


  • An earlier version of this paper circulated under the title “Local Market Consolidation and Bank Productive Efficiency.” The authors acknowledge very helpful comments from Debbie Lucas (the editor) and an anonymous referee. They also thank Ken Brevoort, Nicola Cetorelli, Bob DeYoung, Iftekhar Hasan, Joe Hughes, Tara Rice, Frank Skinner, Larry Wall, and participants at the International Atlantic Economic Society Meetings, the Federal Reserve Bank of Chicago's Conference on Bank Structure and Competition, the American Economic Association meetings, the Financial Management Association meetings, and the Midwest Finance Association Meetings for constructive comments on earlier drafts. Outstanding data and editorial support provided by Nancy Andrews, Portia Jackson, and Sue Yuska is greatly appreciated. The views expressed here are those of the authors and may not be shared by others including the Federal Reserve Bank of Chicago, the Federal Reserve System, or any of the above-mentioned reviewers.

Abstract

Deregulation of geographic restrictions in banking over the past 20 years has intensified both potential and actual competition in the industry. The accumulating empirical evidence suggests that potential efficiency gains associated with consolidating banks are often not realized. We evaluate the impact of this increased competition on the productive efficiency of non-merging banks confronted with new entry in their local markets and find that the incumbent banks respond by improving cost efficiency. Thus, studies evaluating the impact of bank mergers on the efficiency of the combining parties alone may be overlooking the most significant welfare-enhancing aspect of merger activity.

Ancillary