Are Mergers Responsible for the Surge in New Bank Charters? (continued)

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I. HOW THE CONTROVERSY OVER MERGERS AND NEW CHARTERS AROSE

While economists have long been interested in the determinants of new bank formation, they have only recently become interested in the influence of bank mergers on new charters. This interest was first aroused in the second half of the 1990s by the coincidence of high merger activity and high rates of new bank formation. Interest in the relationship between mergers and new bank charters then intensified last year with the appearance of two empirical studies employing similar methods but reaching opposite conclusions.

Empirical studies of new bank formation before the 1990s did not focus on the link between mergers and start-ups (Amel and Liang; Hanweck; Rose; Moore and Skelton). Instead, the studies examined how entry to local markets depended on factors such as recent rates of population and income growth, the profitability of banks operating in the market, and the extent to which loans and deposits were concentrated in a few banking organizations. While differing in some of their findings, the studies typically found that the rate of new bank formation was higher in markets with high bank profitability, high rates of population and income growth, and lower levels of market concentration.

The influence of bank mergers on new bank formation began to attract attention in the second half of the 1990s, when a jump in new bank charters coincided with a continued rise in merger activity. As shown in the chart above, the number of new bank charters surged to almost 400 in the early 1980s, fell steadily over the next ten years, and then rebounded sharply in the second half of the 1990s. While showing considerable year-to-year volatility, merger activity trended upward over the period, averaging three times as much in the 1990s as the 1980s. The fact that merger activity was high prior to and during the rebound in new charters led many banking analysts to claim that mergers helped spark the rebound. This view was supported by numerous stories of new banks being started to serve dissatisfied customers of merging banks or to take advantage of merger-related layoffs.

The view that mergers lead to more new bank charters was not seriously questioned until the appearance early last year of a new empirical study on the issue (Seelig and Critchfield). The study pointed out that the coincidence of heavy merger activity and high new bank formation in the second half of the 1990s did not prove that mergers lead to more new banks. Instead, merger activity and new bank activity could both have increased in response to other factors such as high bank profits and strong economic growth. Controlling for these other factors and examining data on mergers and new bank charters across markets, the study concluded that mergers actually discourage start-ups.

Adding to the controversy, a second study appeared shortly afterward confirming the popular view that mergers lead to more new banks (Berger and others). While differing from the first study in many details, the second study was similar in two key respects-it examined data on mergers and new bank charters across markets in the second half of the 1990s, and it controlled for other factors that could have simultaneously boosted mergers and new bank charters during that period. Despite these key similarities, the second study reached the opposite conclusion from the first, finding that mergers encourage start-ups.

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