Trends in Home Purchase Lending: Consolidation and the Community Reinvestment Act

Federal Reserve Bulletin, Feb, 1999 by Robert B. Avery, Raphael W. Bostic, Paul S. Calem, Glenn B. Canner, Kelly A. Bryant, John E. Matson

Although banking institutions involved in consolidation reduced their overall lending in the communities where they had banking offices, this reduction did not disproportionately affect their lending to lower-income and minority borrowers and neighborhoods. The analysis shows that the typical consolidating organization generally increased the proportion of loans it extended to each of these groups within its local communities. These results are consistent with the view that the CRA has been effective in encouraging banking organizations, particularly those involved in consolidation, to serve lower-income and minority borrowers and neighborhoods.

A full understanding of these relationships requires a broader analysis and is beyond the scope of this article. For example, loan pricing, the complexity of product offerings, and the varied motivations driving consolidation must all be investigated fully to reach more definitive conclusions about the effects of consolidation on home purchase lending. It should also be emphasized that the results presented here reflect aggregate trends and may not apply to any particular market or consolidation.

TRENDS IN BANKING CONSOLIDATION

Over the past twenty years, the number of banking institutions declined substantially, from 18,679 in 1975 to 11,077 in 1997--a decline of more than 40 percent. Just since 1993, the number of institutions has dropped about 18 percent. Consolidation during the 1980s and early 1990s was associated with a quickening pace of merger and acquisition activity along with substantial numbers of failures and liquidations. More recently, the decline in the number of banking institutions has been overwhelmingly the result of mergers and acquisitions. From 1993 through 1997, the number of banking institutions acquired in a merger or acquisition totaled 2,839, or 21 percent of all institutions. Over the same period, only 40 institutions were liquidated, and 431 new institutions were formed.

Consolidation in the banking industry has been driven in important ways by technological advances, globalization of financial services markets, and efforts to increase efficiency, reduce costs, or gain competitive advantage. Besides the effects of these economic factors, the pace of consolidation has accelerated because of the relaxation of regulatory restrictions on the ability of banking organizations to expand geographically and to establish banking offices, although some legal restrictions, including federal antitrust laws, continue to restrict potential combinations.(7) (See box "Geographic Restrictions in Banking.")

Much of the industry's consolidation has involved mergers and acquisitions among banks that had been operating in different local markets within the same state, in different states within the same geographic region, or even in different regions. As a result, consolidation has been accompanied by a substantial broadening of the geographic reach of many banking organizations, so that many of the nation's largest organizations now operate across entire regions or even across multiple regions of the country. Whereas before 1980 only a handful of banking organizations operated in more than one state, by mid-1998, more than one-quarter of banking institution assets were owned by banking organizations with headquarters in another state. Moreover, a substantial increase has occurred in the share of total banking institution assets controlled by the largest banking organizations.(8) In many cases, mergers have had a significant effect on concentration in local banking markets, although, on average across the United States, local market concentration has not increased substantially over time. One might expect this broad restructuring of the industry to have potential implications for retail banking relationships, such as the provision of financial services to lower-income and minority communities.