Thesis_gd_final_vers.. - Vernimmen

US banks decreased by almost 30% 4 . On a longer period of time, from 1980 to 2001, the number
of community banks (i.e. banks with total assets lower than $1 billion) nearly halved, declining
from 14,078 to 7,631. This drop, explained by mergers between community banks, is all the more
impressive as during the same time interval 4,336 de novo banks were created. Assets held by
community banks fell from 34% to 16% of total industry assets (DeYoung et al. (2004)). Even
though most mergers occurred between community and small banks, some of them eventually
lead to the creation of banking giants such as Citigroup, Bank of America or JP Morgan Chase.
This dramatically increased assets concentration in the industry with the share of top 10 banks
going from 20% to 34% between 1988 and 1997, and the share of top 50 banks going from 51%
to 66% over the same period.
Not only did deregulation encourage bank mergers, it also fostered the creation of new
commercial banks. Keeton (2000) and Seelig and Critchfield (2003) suggest that mergers caused
the apparition of new banks. De Young (2003) finds these newly formed banks experienced lower
failure rates over their first few years of existence, but after a while the failure rate increased
significantly and then converged with the industry failure rate. This has also been verified by Jeon
and Miller (2007).
The trend towards a more concentrated banking system has had several major consequences. First,
geographic deregulation engendered a two-tier commercial banking system with a small number of
national and super-regional banks holding most of banking assets and an overwhelming majority
of small and community banks forming a fraction of the banking industry. The size factor is
extremely important as strong growth and creation of large banks through mega-mergers has gone
hand in hand with the apparition of a new business model exploiting the scale economies that are
not accessible to smaller players. Overtime these very large banks expanded into new and more
sophisticated products and activities, while small and community banks kept a traditional role of
intermediation (i.e. collecting deposits and making loans) and limited themselves in most cases to
traditional financial products. Concerning lending, large banks have developed standardized
products based on hard quantifiable information and credit-scoring, while small and community
banks keep offering more customized products by maintaining relationship lending, especially for
small business loans for which soft non-quantifiable information may be more relevant than hard
quantitative data.
Second, the concentration of commercial banking assets among large institutions at the national
level did not have a significant effect on local market concentration. Indeed, Berger and Mester
(2003) report that the average Herfindal index of local deposit market concentration across stays
more or less the same through the 1990s. Thus bank mergers were more likely to be of the out-of-
4 Meyer (1998)
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