Transcript Geographic Diversification: Domestic Chapter 22

Geographic Diversification:
Domestic
Chapter 22
Financial Institutions Management, 3/e
By Anthony Saunders
Irwin/McGraw-Hill
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Domestic Expansions
Historically FIs' ability to expand
constrained by regulation.
 Regulations also create potential
opportunities for new entrants to exploit
existing monopoly rents.

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Regulatory Factors Impacting
Geographic Expansion

Insurance companies
• State regulated.
• Usually easy to establish subsidiaries

Thrifts
• Since 1980s, restrictions on expanding across
state lines have been loosened considerably.
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Constraints on Domestic Expansion

Commercial Banks
• Restrictions on intrastate banking have been
liberalized in a piecemeal fashion.
• Interstate restrictions:
» McFadden Act, 1927
» From 1927 to 1997 relied on establishing
subsidiaries rather than branching.
» Multibank holding companies (MBHC)
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Stages in Regulation of BHCs

One-bank holding company loophole in
Douglas Amendment 1956.
• Growth in one-bank holding companies from
1956 to 1970.

1970 Bank Holding Company Act
Amendments.
• Permissible activities “closely related to
banking”
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Erosion of Interstate Banking
Restrictions

Regional and national banking pacts
• Nationwide
• Nationwide reciprocal
• Regional reciprocal
Purchase of troubled banks
 Nonbank banks

• Ended by Competitive Equality Banking Act,
1987
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Erosion (continued)
Expansion in OBHC activities.
 Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994

• U.S. and nondomestic banks allowed to branch
interstate.
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Synergies from Geographic Expansion

Cost synergies
• X-efficiency
• Less evidence of cost savings from economies
of scale and scope

Revenue synergies
• Enhance revenues by expanding into growing
market or less than fully competitive market
• More stable revenue stream
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Monopoly Power Concerns
Regulators concerned with merger activity
that could result in monopoly power.
 Concentration ratios such as HerfindahlHerschman Index (HHI) employed to
measure the effects of merger.

• HHI = sum of squared percentage market
shares.
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Other Factors Impacting Geographic
Expansion

Attractiveness of bank merger measured in
terms of merger premium.
• Analysis indicates that highest merger
premiums paid for well-managed banks in
relatively uncompetitive environments.
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Success of Geographic Expansion

Investor reaction
• Abnormal returns for both acquiring bank and
target bank.

Postmerger performance
• merged banks tended to outperform industry
• improved ability to attract loans and deposits,
increase employee productivity and enhance
asset growth.
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