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Researchers are debating whether bank markets are local or statewide. Since the 1960s, each Federal Reserve Bank has defined the markets in its District as local: metropolitan statistical areas or small groups of rural counties. Today, however, the elimination of state laws against branching enables banks to compete across states, suggesting that markets are actually bigger.
The definition of market size can have important implications for bank mergers, as competition could be stifled if the combined deposit share of two merging banks in one market is too large.
Authors Edelstein and Morgan advance the debate by arguing that bank branch prices—the amount one bank pays to buy another bank's branches—may be a better indicator of market size than the current measure, bank deposit rates.
Using prices on 110 branch sales, the authors run a type of "horse race" to determine whether branch prices depend more on bank concentration at the local level or at the state level.
The pattern of branch prices observed in the study suggests that bank markets are not necessarily local. Prices for branch sales in ten northeast states over the 1990s are more closely correlated with concentration at the state level, consistent with the argument that banking markets are statewide.
Edelstein and Morgan caution, though, that this relationship may be based on an arguably small sample of banks as well as on how the data are "cut." They suggest that a larger set of branch price data will help settle the "local or state?" debate more definitively.
About the Authors
Paul Edelstein, formerly a research associate at the Federal Reserve Bank of New York, is a graduate student in economics at the University of Michigan; Donald P. Morgan is a research officer at the Federal Reserve Bank of New York.
The views expressed in this summary are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.