Profits and balance sheet developments at U.S. commercial banks in 1996 - includes related articles on consolidation of commercial banks, credit card banks

Federal Reserve Bulletin, June, 1997 by William R. Nelson, Ann L. Owen

RELATED ARTICLE: Consolidation of the Banking Industry

The past decade has seen a marked consolidation of the U.S. commercial banking industry. In 1996, 359 banking organizations with combined assets totaling about $450 billion merged or were acquired, contributing to the continuing decline in the number of banks and bank holding companies (chart). As a result of this consolidation, the assets held by the fifty largest bank holding companies represent an increasing share of total banking assets (chart).

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Regulatory changes have been an important factor in the consolidation of the banking industry. For many years, legal restrictions on the geographic expansion of banks generally limited the size of any one bank or bank holding company; in many cases a banking organization was prohibited from expanding within its home state as into other states. Over the past fifteen years, these restrictions have been eased. Most states now allow some, if not all, out-of-state bank holding companies to own banks within their state. Many states have also lifted restrictions on intrastate branching of state-chartered banks, which in turn has resulted in broader branching powers being given to national banks.

The Riegle-Neil Interstate Banking and Branching Efficiency Act of 1994 went even further in moving geographic restrictions by allowing bank holding companies to purchase bank throughout the United States after September 1995. In June 1997, remaining legal restrictions on geographic expansions were removed, and all banks are now allowed to acquire established branches through interstate mergers, provided that the state has not opted out of interstate banking.(1) (Only Texas and Montana have opted out.)

Before completing a merger or acquisition, banks and bank holding companies still must obtain approval from the appropriate regulatory agencies. Under the Bank Holding Company Act and the Bank Merger Act, the Board of Governors of the Federal Reserve System oversees the mergers and acquisitions of bank holding companies and of state member banks. In considering these applications, the Board looks at the effect of the merger or acquisition on the competitiveness of the relevant banking market, the financial and managerial resources of the firms involved, and the convenience and needs of the community.

(1.) Both the purchase of banks by out-of-state holding companies and the acquisition of established branches through interstate mergers are subjects to deposits caps and certain state laws. Specifically, the combined organization may control no more than 10 percent of the insured deposits in the United States and is subject to deposit limits of the relevant state. In addition, the acquired bank must have been in existence the minimum amount of time required by state law.

RELATED ARTICLE: Credit Card Banks

Since the early 1980s, bank holding companies have been creating subsidiary banks that specialize in credit card lending. These institution were initially established in states that had a high interest rate ceiling, or no at all, to avoid the limitations imposed by usury laws in other states. Although interest rate ceiling no longer restrict desired lending rates in most states, bank holding companies continue to create subsidiaries that specialize in credit card lending, presumably because of the economies of scale that are obtained by concentrating this line of business at a single bank. In 1996, credit cards banks, defined here as banks among the top 1,000 by assets, accounted for more than 60 percent of credit card outstandings at all banks. By this definition, there were forty credit card banks at the end of 1996, up from eleven at the end of 1985.