Local or State? Evidence on Bank Market Size Using Branch Prices
11 Pages Posted: 21 Jul 2006
With the elimination of state laws against branching, banks can now compete across states. They are no longer limited to competing in local markets, defined by the Federal Reserve as metropolitan statistical areas or small groups of rural counties. Accordingly, a "local or state?" debate over market size is taking place among researchers, with some arguing that banking markets are statewide and others contending that they remain local. This article contributes to the debate with a novel, arguably better, indicator of market size: bank branch prices, as opposed to bank deposit rates. The pattern of branch price data suggests that banking markets are not necessarily local. The authors find that branch prices in ten northeast states over the 1990s are more closely correlated with bank concentration at the state level than at the local level, consistent with the "state-market" argument. However, they caution that the relationship is not completely robust; it depends partly on how the data are parsed. Further study using a larger set of branch price data will help settle the debate more definitively.
Keywords: local banking markets, state banking markets
JEL Classification: G21, G28
Suggested Citation: Suggested Citation