FDIC Banking Review 

Interstate Banking The Past, Present And Future 

by David Holland, Don Inscoe, Ross Waldrop and William Kuta 

The nation's press has been rife with announcements of merger and acquisition 

plans by large banking organizations since midyear 1995. This burst of 

announcements is part of a long-term fundamental restructuring of the industry 

that began in the early 1980s and is likely to continue for the foreseeable future. 

An integral component of this restructuring is the rise of interstate or multi-state 

banking, and particularly an increase in the number and economic importance of 

banking organizations with banking offices in more than one state. 

The restructuring of the banking industry may be decomposed into three 

interrelated trends. First, interstate banking has moved from being an oddity to 

being a prominent characteristic of the industry. At midyear 1995, two-thirds of the 

nation's banking assets were held by multi-state banking organizations. Second, 

consolidation, due mostly to mergers and acquisitions but also to bank failures 

and to a paucity of new entrants, has reduced the numbers of banking and thrift 

institutions substantially. For example, between year-end 1984 and March 31, 

1996, the number of banking organizations bank holding companies and 

independent banks and thrifts declined 36 percent, from 14,887 to 9,481. Third, 

by some measures, the banking industry has become more concentrated. At 

year-end 1984, the largest 42 banking organizations held 25 percent of domestic 

deposits. At the end of the first quarter of 1996, the largest 13 banking 

organizations held 25 percent of domestic deposits. Moreover, five percent of the 

nation's banking organizations held 75 percent of domestic deposits. 

In 1994, Congress, with the enactment of the Riegle-Neal Interstate Banking and 

Branching Efficiency Act, added impetus to the ongoing trends. The major effect 

of this law derives from its authorization of interstate branching. Given the 

consolidation that has previously occurred in states where branching laws were 

already liberalized, banking organizations are expected to make extensive use of 

this authorization. 

This study documents the changes in the geographic scope, structure and 

concentration of the U.S. banking and thrift industries that have occurred over the 

past decade. Prospects for the continuation of these trends are analyzed from a 

variety of perspectives. Finally, the study attempts to identify the effect of 

increasing consolidation in banking on the Federal Deposit Insurance 

Corporation's supervisory activities. 

The Past and Present 

For most of the nation's history, state boundaries controlled and curtailed the 

growth of individual banking organizations. In most instances, a U.S. banking 

organization could not establish domestic deposit-taking offices outside of the 

state where its home office was located. Moreover, its ability to expand within its 

home state was often limited. One result of this situation was a decentralized 
 

 

 

 

banking industry with numerous participants and protected geographic markets. 

Over the brief period of little more than a decade, however, the U.S. banking 

industry has undergone what could be called a structural change of seismic 

proportions.1 State banking barriers have dropped quickly and significantly. At 

midyear 1984, 33 percent of the nation's banking assets were controlled by bank 

and thrift organizations with operations in two or more states. By midyear 1995, 

the proportion had grown to 67 percent, representing two-thirds of the nation's 

banking assets. A major consequence of the rise of interstate banking has been 

consolidation and concentration in the industry. The number of banking 

organizations has declined, and the proportions of banking assets and deposits 

controlled by larger banking organizations have risen. 

The growth of interstate banking and the accompanying industry consolidation 

has been propelled by marketplace forces that do not recognize political borders.2 

In the decades following World War II, technological changes in communications 

and data processing eroded much of the common ground that banking markets 

and political boundaries may once have shared. Beginning in the late 1970s and 

early 1980s, a number of states acknowledged the changing economics of 

banking by allowing the creation and development of interstate bank holding 

companies companies that own banks in two or more states. The state laws 

varied considerably. Some of the states acted individually. Other states required 

reciprocity an out-of-state bank holding company could acquire an in-state bank 

only if the out-of-state holding company's home state granted similar acquisition 

privileges to holding companies in the target state. Still other states entered into 

reciprocal compacts with neighboring states. Some state laws, particularly those 

enacted pursuant to so-called "compacts," limited permissible out-of-state 

entrants to those from the neighboring geographic region. 

Table 1 

State Elections Under the Interstate Branching Provisions

of the Riegle-Neal Act April 30, 1996 

States Opting-In Prior to June 1, 1997 (24): 

Alaska 

Utah 

Idaho Mississippi North Carolina 

Arizona 

Vermont 

Indiana Nevada Oregon 

California 

Virginia

Connecticut 

Washington

Delaware 

Maine 

Maryland 

Michigan 

New Jersey 

New Mexico 

New York 

Pennsylvania 

Rhode Island 

South Dakota 

States Opting-In on June 1, 1997 Trigger Date (11): 

Alabama Illinois Oklahoma 

Florida Minnesota Tennessee 

Georgia

Hawaii 

New Hampshire

North Dakota 

West Virginia 
 

 

 

 

 

 

State Opting Out:

Texas (sunsets September 2, 1999)

Source: The American Banker
 

Any uncertainties regarding state initiatives to remove barriers to bank holding 

company expansion across state lines were eliminated in 1985. In its decision in 

Northeast Bancorp v. Board of Governors of the Federal Reserve System, 472 

U.S. 159, the U.S. Supreme Court upheld the ability of the states to reduce 

selectively, under the Bank Holding Company Act, restrictions on entry by out-ofstate holding companies. 

In 1994, Congress in the Riegle-Neal Interstate Banking and Branching Efficiency 

Act ("the Riegle-Neal Act"), Pub. L. 103328, added a federal element to the states' 

initiatives on interstate banking. Under the Riegle-Neal Act, most remaining state 

barriers to bank holding company expansion were removed effective September 

29, 1995. Holding company growth, however, is restrained by explicit, statutory 

deposit concentration limits: a ten percent nationwide limit and a 30 percent 

statewide limit.3 

The Riegle-Neal Act also authorizes a previously unused interstate expansion 

alternative for banks branching.4 Beginning June 1, 1997, banks may merge 

across state lines, a process that would result in the offices of one bank becoming 

branches of the other. Interstate branching through merger is subject to the same 

concentration limits as are interstate acquisitions by bank holding companies. 

States may elect to either prohibit or authorize interstate branching through 

mergers prior to June 1, 1997. States may also elect to authorize de novo 

interstate branching, or entry from out of state by acquisition of one or more 

existing branches. The status of state elections as of April 30, 1996, is 

summarized in Table 1. 

Speculation on the impact of the Riegle-Neal Act requires an awareness of the 

interstate and consolidation trends that have been underway for at least the last 

ten years. The Riegle-Neal Act was not a precipitator of these trends. The Act, 

particularly its branching provisions, may shape and accelerate, the future course 

of these trends. To a large extent, however, the Riegle-Neal Act is merely an 

acknowledgment of what is being wrought by the marketplace under state laws. 

Consequently, the remainder of this section details the recent movements 

affecting the structure of the banking industry. A complete set of charts and data 

chronicling changes in the statistics of the banking industry is available from the 

authors. 

The Growth of Interstate Banking 

From midyear 1984 to midyear 1995, the number of multi-state banking 

organizations bank holding companies with banks in two or more states, and thrift 

institutions with offices in two or more states increased from 89 to 303 (Figure 1). 

When compared with the number of commercial banks and savings institutions in 

the nation (12,249 at midyear 1995), the number of multi-state organizations 

might seem small. The low number is misleading, however. Together, these multistate organizations held 67 percent of the combined assets of the nation's 

commercial banks and thrifts at midyear 1995 up from 33 percent in 1984 and 59 

percent of the nation's domestic deposits up from 23 percent in 1984 (Figure 1). 
 

 

 

The states have embraced interstate banking with varying degrees of enthusiasm, 

but no state has avoided it entirely. In every state, some proportion of deposits is 

held in offices owned ultimately by out-of-state banking organizations. At year-end 

1995, the average proportion of state deposits held by out-of-state organizations 

was 27.6 percent, the median was 28.8 percent, and the range stretched from 1.2 

percent for North Carolina to 95.7 percent for Arizona (Figure 2). The five states, 

including the District of Columbia, with the largest percentages of deposits held by 

out-of-state organizations were: Arizona, 95.7 percent; Nevada, 70.6 percent; 

Wyoming, 68.2 percent; the District of Columbia, 64.7 percent; and Colorado, 

61.0 percent. 
 

It should be noted that measuring a state's involvement in the interstate banking 

movement by the percentage of in-state deposits controlled by out-of-state 

organizations can be misleading. For example, only 1.2 percent of North 

Carolina's deposits are in offices of out-of-state organizations. Yet because 

several bank holding companies headquartered in North Carolina are among the 

leading multi-state banking organizations and have substantial presences in other 

states, North Carolina could certainly not be considered a bystander in the 

interstate banking movement. 

Banking Industry Consolidation 

A variety of statistics show a consolidating banking industry. The consolidation 

has been due to a large number of exits from the industry mostly in the form of 

mergers and acquisitions among healthy institutions but also in the form of bank 

failures coupled with only a small number of entrants. From 1984 to the end of the 

first quarter of 1996, the number of commercial banks declined 32 percent, from 

14,483 to 9,841. The number of savings institutions declined 41 percent, from 
 

 

 

 

 

 

 

 

3,418 to 2,005. The number of bank holding companies declined seven percent, 

from 5,707 to 5,305. The number of banking organizations bank holding 

companies and independent banks and thrifts, perhaps the most meaningful 

tabulation declined 36 percent, from 14,887 to 9,481(Figure 3). 

Declining numbers of institutions do not necessarily equate to a declining industry. 

During the same period that the numbers of institutions were declining, 1984 to 

the end of the first quarter of 1996, in nominal terms5 the combined assets of 

commercial banks and savings institutions grew 46 percent, and domestic 

deposits grew 28 percent (Figure 4). 

Table 2 

Percentages of Assets and Deposits in

Independents and Holding Companies 

12/84 12/85 12/86 12/87 12/88 12/89 12/90

12/91 12/92 12/93 12/94 12/95 3/96 

Percent of Total 

Assets 

Holding Companies 

Multibank 46.54 49.61 51.61 51.93 51.01 53.38 55.67 

57.36 58.79 61.07 64.04 66.65 66.86 

One-Bank 15.52 13.47 11.83 11.57 11.93 12.56 13.83 

14.91 15.40 15.27 14.31 13.27 13.22 

IndependentBanks/Thrifts 37.94 36.93 36.56 36.56 37.06 34.06 30.50 

27.73 25.81 23.70 21.65 20.08 19.92 

Percent of Total 

Domestic Deposits 

Holding Companies 
 

 

 

 

Multibank 38.06 41.42 44.68 45.83 46.23 48.05 50.90 

51.96 53.39 55.01 57.16 59.45 59.71 

One-Bank 17.37 15.71 14.11 13.57 13.92 14.45 15.59 

16.82 17.45 17.76 17.62 16.97 16.94 

IndependentBanks/Thrifts

31.22 29.15 27.23 25.21 

44.57 42.87 

23.58 23.35 

41.21 40.59 39.85 37.50 33.51 

The decline in the numbers of banks and savings institutions reflects a shift 

toward the holding company form of organization. As can be seen in Table 2, the 

proportion of depository institution assets controlled by holding companies both 

one-bank and multibank grew from 62 percent at year-end 1984 to 80 percent as 

of March 31, 1996. Similarly, the proportion of domestic deposits controlled by 

holding companies grew from 55 percent to 77 percent. The proportion of banks 

and thrifts in holding company structures grew from 49 percent to 65 percent 

(Figure 5). 

In contrast to the declining numbers of banking organizations, the number of 

banking offices remained fairly constant through 1990, as branch offices 

proliferated. The number of bank and thrift offices rose from 81,000 in 1984 to 

87,000 in 1990. Subsequently, they have declined 6.7 percent, to 81,000 as of 

March 31, 1996 (Figure 6). 
 

 

 

There are three main factors responsible for the net decline of 5,931 commercial 

banks and thrifts during the period 1985 to 1995 (Figure 7). First, mergers and 

acquisitions that have not involved federal assistance have accounted for most of 

the consolidation among commercial banks and savings institutions over the past 

decade. From the end of 1985 through 1995, more than 6,000 commercial banks 

and savings institutions have been absorbed through unassisted mergers. 

Second, over the same period, more than 2,400 insolvent banks and thrifts have 

been closed or merged into healthy institutions with federal assistance. Third, 

there have been 2,554 new commercial banks and savings institutions chartered. 

Banking Industry Concentration 

A consolidating industry can be a concentrating industry. The number of banking 

organizations controlling 25 percent of domestic deposits declined from 42 at 

year-end 1984 to 13 at the end of the first quarter of 1996 (Figure 8). Similarly, the 

number controlling 50 percent of domestic deposits declined from 242 to 61, and 

the number controlling 75 percent of domestic deposits declined from 1,314 to 

466. Another way to view the concentration of banking is to note that at the end of 

the first quarter of 1996, five percent of the nation's banking organizations 501 

companies held 75 percent of domestic deposits. 

 

 

 

 

 

 

With increased consolidation, will antitrust problems become a major concern in 

banking?6 The Riegle-Neal Act addresses this issue through state and national 

deposit concentration limits that reduce the likelihood of antitrust problems 

developing. These limits are 30 percent of a state's deposits and ten percent of 

the nation's deposits. With certain exceptions, an application by a banking 

organization for an interstate merger or acquisition cannot be approved if the 

effect would be to exceed one of these limits. As of the first quarter of 1996, the 

banking organization with the largest proportion of the nation's domestic deposits 

was BankAmerica Corporation, with 3.62 percent, well below the ten percent limit 

(Table 3). Banking organizations in six states exceeded the 30-percent state limit, 

and 13 other banking organizations each held more than 20 percent of a state's 

deposits (Table 4). Concentration limits apply only as a condition of approval for 

interstate merger or branching transactions and not to intrastate transactions. 

Fall of Intrastate Barriers 

Other legal changes that have received less notice than the lifting of interstate 

barriers to bank expansion are the easing of geographic barriers within states. 

Over the last ten years, a number of states have removed or reduced restrictions 

within their borders on mergers and branching by banks (Figure 9). The resultant 

increase in freedom to expand within these states and to adopt preferred 

organizational structures has been a major contributor to the industry 

consolidation and concentration trends. The 16 states that adopted statewide 
 

 

 

 

 

 

 

 

 

 

 

branching since 1984 have accounted for 67.9 percent of the net reduction in 

commercial banks and savings institutions during that time. 

Table 3 

Banking Organization With the Largest Percentages

of National Domestic Deposits

as of March 31, 1996 

Banking Organization Percent 

BankAmerica Corp. 

NationsBank Corp.

Chase Manhattan Corp.*

First Union Corp.

Banc One Corp.

Citicorp

Fleet Financial Group 

First Interstate Bancorp.

First Chicago NBD Corp.

PNC Bancorp. 

3.62 

2.94 

2.93 

2.74 

2.12 

1.57 

1.49 

1.47 

1.38 

1.37 

* Chemical Banking Corporation and Chase Manhattan Corporation merged April

1, 1996. 

Sources: Bank Summary of Deposits, Thrift Branch Office

Survey, FRB NIC Database, FDIC DRS RIS Database 

Recent Merger and Acquisition Activity 

A number of mergers and acquisitions among large banking organizations were 

announced in 1995. The total number of transactions announced during the year 

was 443.7 The amount of assets in the institutions to be acquired totaled $488 

billion, far exceeding the amount of assets in acquired institutions in any previous 

year (Table 5). The next highest year was 1991 when the assets in acquired 

institutions totaled $297 billion. A variety of reasons may help to explain the 

unprecedented merger activity among very large banks. Through July 1996, 229 

transactions have been announced with assets in institutions to be acquired 

totaling $164 billion. The largest transaction announced in 1996 involved the 

acquisition of First Interstate Bancorp by Wells Fargo and Company with seller's 

assets of $58 billion. 

Favorable Environment. The legal environment is now more permissive. As has 

been discussed, the Riegle-Neal Act allows bank holding companies more 

freedom to acquire banks across state lines than was possible under the existing 

state authorizations. At the same time, there are few potential acquisitions that 

would be precluded by the deposit concentration limitations specified in the new 

law. 

Table 4 

States Where an Out-of-State Banking Organization Holds

More Than 20 Percent of the Domestic Deposits in a State, 
 

 

 

 

 

 

 

 

 

 

 

as of June 30, 1995 

State Banking Organization Percent 

Rhode Island 

Arizona 

Nevada 

Nevada 

Idaho 

Arizona 

Royal Bank of Scotland

Banc One Corp.

First Interstate BancCorp.

BankAmerica Corp.

First Security Corp.

BankAmerica CorP. 

33.28 

31.05 

25.44 

25.30 

26.13 

27.47 

Washington

South Dakota 

New Mexico 

Bank America Corp.

Citicorp

Boatmen's Bancshares 

21.95 

21.26 

21.96 

Maine 

North Dakota 

Wyoming 

KeyCorp.

First Bank System

NorWest Corp. 

20.73 

20.89 

27.71 

States Where Banking Organization Holds More Than20

Percent of the Domestic Deposits in Its Own State,

as of June 30, 1995 

State Banking Organization Percent 

Alaska National BancCorp of Alaska 41.25 

Idaho West One BancCorp. 34.09 

Rhode Island Fleet Financial Group 33.74 

Hawaii BancCorp Hawaii 30.52 

Utah First Security Corp. 30.10 

Oregon US BancCorp. 28.85 

Hawaii First Hawaiian 27.98 

District of Columbia Riggs National Corp. 26.55 

Alaska First National Bank of Anchorage 22.23 

California BankAmerica Corp. 20.90 

Minnesota Norwest Corp. 20.69 

Minnesota First Bank System 20.37 

Utah Zions BancCorp. 20.22 

Delaware MBNA Corp. 22.21 

Sources: Bank Summary of Deposits, Thrift Branch Office

Survey, FRB NIC Database, FDIC DRS RIS Database 

The economic climate also favors mergers and acquisitions. Low interest rates 

and an improved economy have combined to push bank profits to record levels. 

This, in turn, has boosted stock prices, giving acquirers more purchasing power. 

High stock prices have facilitated "poolings" in which the acquirer trades its stock 

for the stock of the selling company. Of the 443 transactions announced in 1995, 

177 were cash-only purchases, and 255 included stock trades.8 Also, equity 

capital ratios have reached their highest level in 40 years. Historically, high capital 

levels have provided more leveraging capability, allowing companies with excess 

capital to grow their assets through acquisitions. 
 

 

 

 

 

 

 

 

 

 

Table 5 

Bank and Thrift Merger and Acquisition Announcements,

1989 through August 5, 1996

(Dollar Amounts in Billions)
 

Announced 

Mergers and Acquisitions

Acquisitions 

Completed

Mergers and 

Number Percent of Sellers' 

Percent of Value Percent of 

of Announced Assets of 

Announced of Announced 

Deals 

Number Sellers' 

Completed Deals 

Deal Deals Deals Completed 
 

 

 

 

 

 

Year Announced Assets Value Completed Completed Deals 

Assets Deals 

Value 

1996 229 163.9 $23.7 35 15.28% $69.8 

42.59% $14.0 59.07% 

1995 443 488.0 63.2 373 84.20 482.6 

98.89 62.4 98.81 

1994 565 190.1 22.4 523 92.57 181.9 

95.69 21.2 94.78 

1993 477 175.4 23.5 447 93.71 169.0 

96.37 22.5 95.69 

1992 399 181.0 16.3 357 89.47 159.3 

87.99 15.3 93.51 

1991 305 296.7 22.1 274 89.84 291.3 

98.21 21.7 98.41 

1990 216 87.4 4.6 168 77.78 36.6 

41.84 3.1 68.37 

1989 201 115.2 11.5 173 86.07 103.3 

89.62 10.5 91.58 

*1995 Sellers' Assets and Deal Value do not include theannounced merger of

First Bank, Inc. and

First Interstate Bancorp.

(seller assets of $55 billion and deal value of $10.7 billion). This deal was

terminated. The 1996 

Sellers' Assets include 

the Wells Fargo acquisition of First Interstate, which was completed on April

1, 1996.

Note: Run date for 1996 and 1995 data is 8/5/96. Run date for 1989 - 1994 

data is 7/30/96.

Source: SNL Securities 

Motivations for Sellers. Sellers have an opportunity to lock in high stock prices. 

Bank stock prices have risen since 1991, reflecting three consecutive years of 

record earnings by the commercial banking industry. Various bank-stock indexes 

show that prices continued to increase during 1995. Many acquisitions announced 

in 1995 were priced at a high premium over book value. The average price-tobook value ratio for acquisitions has increased in each of the last four years. 

According to data compiled by SNL Securities, the average price-to-book ratio for 

banks and thrifts acquired during 1995 was 169 percent. 

Some banks may choose to sell to a friendly purchaser to avoid the possibility of a 

hostile takeover in the future. Many of the target companies have fully recovered 

from asset-quality problems and have clean balance sheets. Some companies 

may opt to sell instead of trying to expand in a slow-growth industry. 

Motivations for Buyers.Some of the recent transactions involve institutions that 

each predominantly operate in the same market. Operating efficiencies and 

product synergies are cited as motivations where branch structures or product 

lines overlap. Acquirers in within-market transactions may be seeking to protect 

today's high profits through cost-cutting and increased market share. 

A number of the announced transactions expand the acquirer's geographic and 
 

 

 

 

 

 

 

 

 

 

 

product markets. Inter-market transactions may be motivated by the desire to 

diversify sources of income and risks. Transactions may also be undertaken for 

defensive reasons: larger banking companies have fewer potential acquirers. 

Table 6 

Number of FDIC-Insured Commercial Banks and Savings 

Institutions, 

by Asset Size*

Yr./ Less than $100 Million to $1Billion to $5 Billion to 

$10 Billion 

Qtr. $100Million $1Billion $5Billion $10 Billionor 

More 

TOTAL 

%of %of %of %of 

%of 

No. Total No. Total No. Total No. Total 

No. Total 

96:1 7,480 63.1 3,787 32.0 406 3.4 86 0.7 

87 0.7 11,846

95:4 7,568 63.2 3,820 31.9 414 3.5 78 0.7 

90 0.8 11,970

95:3 7,754 64.0 3,789 31.3 395 3.3 92 0.8 

82 0.7 12,112

95:2 7,930 64.7 3,759 30.7 388 3.2 92 0.8 

80 0.7 12,249

94:4 8,254 65.5 3,792 30.1 389 3.1 93 0.7 

74 0.6 12,602

93:4 8,837 66.8 3,827 28.9 405 3.1 87 0.7 

64 0.5 13,220

92:4 9,401 67.9 3,884 28.0 426 3.1 82 0.6 

59 0.4 13,852

91:4 9,982 68.9 3,921 27.1 435 3.0 86 0.6 

58 0.4 14,482

90:4 10,576 69.8 3,967 26.2 470 3.1 85 0.6 

60 0.4 15,158

89:4 11,177 70.8 3,973 25.2 499 3.2 88 0.6 

59 0.4 15,796

88:4 11,911 71.9 3,985 24.1 511 3.1 92 0.6 

62 0.4 16,561

87:4 12,676 73.1 4,025 23.2 507 2.9 71 0.4 

57 0.3 17,336

86:4 13,221 74.0 4,049 22.7 484 2.7 75 0.4 

47 0.3 17,876

85:4 13,631 75.6 3,836 21.3 462 2.6 68 0.4 

36 0.2 18,033

84:4 13,807 77.1 3,594 20.1 409 2.3 59 0.3 

32 0.2 17,901

84:1 14,034 78.5 3,399 19.0 375 2.1 50 0.3 

28 0.2 17,886 

Assets of FDIC-Insured Commercial Banks and Savings 

Institutions, 

by Asset Size* 
 

 

 

 

 

 

 

Yr./ Less than $100 Million to $1Billion to $5 Billion to 

$10 Billion 

Qtr. $100 Million $1 Billion $5 Billion $10 Billion 

orMore 

TOTAL 

%of %of %of %of 

%of 

Assets Total Assets Total Assets Total Assets Total 

Assets Total 

96:1 $341,862 6.4 $971,161 18.2 $869,835 34.2 $596,911 11.2 

$2,544,972 47.8 $5,324,741

95:4 344,564 6.5 975,148 18.3 897,196 34.9 549,033 10.3 

2,572,479 48.2 5,338,420

95:3 348,932 6.6 973,733 18.5 844,973 34.5 639,911 12.2 

2,446,431 46.6 5,253,980

95:2 354,785 6.8 962,844 18.6 836,752 35.0 644,157 12.4 

2,389,397 46.1 5,187,935

94:4 366,345 7.3 969,139 19.3 850,211 39.3 671,097 13.4 

2,162,509 43.1 5,019,301

93:4 388,472 8.3 975,725 20.7 883,409 48.2 626,293 13.3 

1,833,181 38.9 4,707,080

92:4 401,966 8.9 996,429 22.0 927,719 56.9 580,012 12.8 

1,629,763 35.9 4,535,889

91:4 412,705 9.1 1,008,979 22.2 964,673 62.1 604,639 13.3 

1,552,646 34.2 4,543,642

90:4 423,960 9.1 1,020,390 22.0 1,034,167 66.1 605,861 13.0 

1,564,271 33.7 4,648,649

89:4 436,058 9.2 1,028,182 21.8 1,093,290 71.5 639,324 13.5 

1,530,020 32.4 4,726,874

88:4 457,330 9.7 1,037,334 21.9 1,096,655 71.9 620,073 13.1 

1,525,893 32.2 4,737,285

87:4 477,774 10.6 1,031,801 22.9 1,073,738 74.8 483,646 10.7 

1,435,100 31.9 4,502,059 

86:4 490,312 11.3 1,038,162 24.0 992,492 76.9 515,354 11.9 

1,291,245 29.8 4,327,565

85:4 489,922 12.3 985,035 24.7 936,800 84.5 472,688 11.8 

1,108,881 27.8 3,993,326

84:4 484,170 13.3 934,770 25.6 827,910 82.5 403,091 11.0 

1,003,176 27.5 3,653,117

84:1 482,454 14.3 874,915 25.9 746,222 79.5 332,415 9.9 

938,115 27.8 3,374,121 

*Excludes institutions operating in RTC conservatorship.

Source: FDIC Division of Research and Statistics, RIS Database 

Consummation of the Transactions. To achieve cost savings, acquirers may 

decide to convert newly acquired subsidiaries to branches, and to close branches 

where there is overlap. The transactions require approval by stockholders and 

regulators. Completion of an announced transaction reduces the number of 

independent banking organizations but may not necessarily lead, immediately or 

ultimately, to a reduction in the number of banks. Whether the number of 

commercial banks or savings institutions declines after bank holding companies 

combine depends on whether the holding company subsidiaries are also 
 

 

 

 

 

combined. While there has been considerable consolidation activity following the 

completion of mergers and acquisitions in the past, state and federal branching 

restrictions have limited the decline in the number of banks. The Riegle-Neal Act, 

however, will allow bank holding companies considerable freedom to merge 

banking subsidiaries across state lines and to convert acquired institutions into 

branches. 

The full effect of the announced transactions on industry structure data will not 

appear for some time. As of August 5, 1996, 373 of the 443 announced 

transactions have been completed; 21 have been terminated. The largest 

announced deal of 1995 involved Chemical Banking Corp. acquiring Chase 

Manhattan Corp. with assets of approximately $118 billion, or nearly 24 percent of 

total assets covered by all 1995 announcements. This deal was completed on 

April 1, 1996. 

The Future 

It is fairly safe to predict that the interstate banking and industry consolidation 

trends have not run their course. These trends had been proceeding apace under 

previous law, and now have the additional spur of the Riegle-Neal Act. The real 

uncertainties regarding the future concern how much further the trends are likely 

to proceed and how their impacts may differ regionally and from state to state. In 

the following discussion, several approaches are taken to these issues. 

Before the scenarios are presented, however, a caveat is in order. The expansion 

and consolidation opportunities opened by the Riegle-Neal Act will not necessarily 

be pursued by all, or even a majority, of banking organizations. This might be 

particularly the case with interstate branching. For a variety of managerial and 

competitive reasons, some banking organizations may prefer to conduct interstate 

operations through holding company structures rather than through branching 

systems. That is, instead of converting all of its banking offices to branches of a 

single bank, a holding company might want to maintain one or more legally 

distinct bank subsidiaries in states or banking markets in which it operates. Some 

multibank holding companies currently operate more than one commercial bank 

subsidiary within a single state even when branching laws would permit those instate banks to be merged. 
 

 

 

 

A banking organization may perceive competitive advantages in having 

community banks with local management, or in retaining the distinct identities and 

names of acquired banks. A banking organization may prefer to operate different 

businesses, such as credit cards or mortgage lending, out of separately chartered 

institutions. Some banking organizations may not agree that potential cost 

savings from converting banks into branches outweigh the advantages of 

operating multiple banks. Some banking organizations may choose to explore the 

possibilities of the "affiliate as agent" provision in Section 101 of the Riegle-Neal 

Act. This provision permits affiliated banks to receive deposits, renew time 

deposits, and collect loan payments for one another. 

The point is that the Riegle-Neal Act only increases the structural alternatives 

available to banking organizations. Neither it nor the marketplace mandates that 

all banking organizations select an identical structure. 

A Minimalist Approach 
 

 

 

 

At midyear 1995, there were 303 banking organizations with interstate banking 

operations, representing 1,605 commercial banks and savings institutions with 

combined assets of $3.58 trillion. If each of these multi-state companies were to 

consolidate into a single lead bank or thrift and convert all other subsidiaries to 

branch offices, and no other interstate or intrastate transactions were to occur, the 

net reduction would be 1,302 institutions. The number of banks and thrifts would 

decline to 10,947, a reduction of 11 percent from the midyear 1995 total of 12,249 

institutions (Table 6). For the FDIC, the net reduction in supervised institutions 

would be 322 out of 6,635. 

A recent study finds that, due to the very favorable industry conditions since 1990, 

many banking organizations appear to have the strong performance and 

capitalization necessary to take advantage of future acquisition opportunities.9 

Although noting that it is difficult to know the extent to which future merger activity 

will be stimulated by the Riegle-Neal Act, the study finds that mergers and 

consolidations have risen in the past when state restrictions upon intrastate 

branching were relaxed. 

O'Keefe states that it is difficult, if not impossible, to predict which banks will 

combine operations through mergers, that is, to predict pairs of targets and 

acquirers. However, analyses of the financial characteristics of past target banks 

and acquirers show that one may be able to predict which banks are likely merger 

targets, and acquirers may then be used to infer the level of future merger activity. 

An Extrapolation Approach 

In a paper published in April 1995, Daniel Nolle, an economist with the Office of 

the Comptroller of the Currency, used an extrapolation approach to arrive at the 

total number of U.S. commercial banks that might exist in the year 2001.10 

Assuming that recent patterns of structural changes closings, de novo charters, 

thrift conversions, intra-company mergers, and inter-company mergers persist, 

Nolle arrives at a figure of 8,798 commercial banks at year-end 2000, a 19­

percent reduction from 10,870 commercial banks at the end of 1993. Then, to 

allow for the impact of interstate branching, he increased the assumed rates of 

intra- and inter-company mergers, resulting in 7,787 commercial banks at the end 

of the year 2000, a 28-percent reduction over seven years. By way of comparison, 

if one simply takes the actual reduction in the number of commercial banks in 

1993 504 banks and multiplies that number by seven (for the years 1994 through 

2000), the result is a net reduction of 3,528 banks, or 32 percent. 
The Future of the Community Bank 

A noteworthy aspect of the consolidation process over the past decade has 

been a decline in the number of small institutions. For example, there has 

been a 45-percent reduction in the number of banks and thrifts with less 

than $100 million in assets since 1984 (Table 5). The decline in the number 

of these small institutions accounts for the entire decrease in the number of 

insured commercial banks and savings institutions over that period. Given 

that the imminent arrival of interstate branching is expected to add 

momentum to the trends of industry consolidation, it may reasonably be 

asked whether the small community bank has a viable place in the future 

structure of the industry. This question is of interest to the FDIC in its 

supervisory role; the FDIC is the primary federal regulator for two out of 

every three insured institutions with less than $100 million in assets. 

Four factors have contributed to the decline in the number of the smallest 

institutions. The most significant has been the number absorbed by 

unassisted mergers. Approximately 4,500 small banks and thrifts have been 

merged into larger institutions since 1984. A second factor has been 

growth. Since 1984, about 2,100 institutions have increased their assets 
 

 

 

 

 

 

 

above the $100-million asset-size threshold. Failures are the third factor. 

From 1985 through 1995, there were 1,599 failures of commercial banks 

and savings institutions with assets of less than $100 million. Finally, the 

number of new charters has declined, and new charters are issued most 

often for smaller institutions. Although 2,424 new charters were issued 

from 1985 through 1995, the number has trended steadily downward. In 

1985, there were 598 new commercial banks and thrifts chartered. By 

1994, the number of new charters had declined to 75. As more institutions 

are removed from the ranks of the smallest, fewer new institutions are 

replacing them. 

Over half (61.4 percent) of the net reduction in the smallest institutions 

since 1984 has occurred in the 16 states that had restrictive branching laws 

but have since removed those restrictions. Branching restrictions tend to 

increase the number of new charters, which serve as substitutes for de novo 

branches. For example, four out of every five new commercial bank 

charters in 1985 occurred in one of the 31 states that restricted branching at 

that time; almost one-third were in a single unit banking state, Texas. The 

lifting of these restrictions has spurred the subsequent pace of merger and 

consolidation activity as more multibank holding companies are able to 

convert subsidiaries into branches. 

If the decline in the number of smaller institutions is all that is considered, 

the future prospects of this segment of the banking industry might seem 

unpromising. The picture painted by the declining number, however, is 

incomplete. Smaller banks still are the most numerous category of 

institution. As of March 31, 1996, there were nearly 7,500 commercial 

banks and savings institutions with less than $100 million in assets, 

accounting for two out of every three FDIC-insured depository institutions. 

More than 95 percent of all insured institutions have less than $1 billion in 

assets. Although institutions with less than $100 million in assets together 

represent only 6.4 percent of industry assets, they held 22 percent of all 

loans to small businesses. 11 They operate in over 4,000 cities and towns in 

which there are no offices of larger banks, providing essential financial 

services to consumers and businesses. 

Yr./

Qtr. 

Table 7 

Number of FDIC-Insured Commercial Banks and Savings

Institutions according to Primary Regulator*

FDIC OCC FRB OTS** 

%of %of %of %of 

No. Total No. Total No. Total No. Total 

TOTAL 

96:1 

95:4 

95:3 

95:2 

94:4 

6,561

6,637

6,726

6,832

7,010 

55.4 

55.4 

55.5 

55.8 

55.6 

2,822

2,855

2,892

2,946

3,075 

23.8 

23.9 

23.9 

24.1 

24.4 

1,047

1,042

1,034

994 

975 

8.8 1,416

8.7 1,436

8.5 1,460

8.1 1,477

7.7 1,542 

12.0 

12.0 

12.1 

12.1 

12.2 

11,846

11,970

12,112

12,249

12,602 
 

 

 

 

 

93:4 7,278 55.1 3,304 25.0 969 7.3 1,669 12.6 13,220

92:4 7,432 53.7 3,593 25.9 955 6.9 1,872 14.0 13,852

91:4 7,606 52.5 3,790 26.2 974 6.7 2,112 14.6 14,482

90:4 7,811 51.5 3,979 26.3 1,009 6.7 2,359 15.6 15,158

89:4 7,969 50.4 4,175 26.4 1,034 6.5 2,618 16.6 15,796

88:4 8,182 49.4 4,353 26.3 1,059 6.4 2,967 17.9 16,561

87:4 8,462 48.8 4,623 26.7 1,092 6.3 3,159 18.2 17,336

86:4 8,679 48.6 4,871 27.2 1,094 6.1 3,232 18.1 17,876

85:4 8,742 48.5 4,959 27.5 1,070 5.9 3,262 18.1 18,033

84:4 8,793 49.1 4,902 27.4 1,056 5.9 3,150 17.6 17,901

84:1 8,886 49.7 4,790 26.8 1,059 5.9 3,151 17.6 17,886 

Assets of FDIC-Insured Commercial Banks and Savings institutions

(Dollars in Millions) 

FDIC OCC FRB OTS** 

Yr./ %of %of %of %of 

Qtr. Assets Total Assets Total Assets Total Assets Total 

TOTAL 

96:1 $1,174,513 22.1 $2,398,414 45.0 $988,962 18.6 $762,851 14.3 

$5,324,740

95:4 1,182,984 22.2 2,400,831 45.0 983,630 18.4 770,973 14.4 

5,338,418

95:3 1,181,091 22.5 2,319,184 44.1 978,635 18.6 775,069 14.8 

5,253,979

95:2 1,166,646 22.5 2,299,720 44.3 943,912 18.2 777,657 15.0 

5,187,935

94:4 1,144,169 22.8 2,255,941 44.9 845,067 16.8 774,124 15.4 

5,019,301

93:4 1,104,868 23.5 2,100,566 44.6 726,871 15.4 774,775 16.5 

4,707,080

92:4 1,080,667 23.8 2,004,940 44.2 638,233 14.1 812,049 17.9 

4,535,889

91:4 1,070,232 23.6 1,985,322 43.7 592,893 13.0 895,195 19.7 

4,543,642

90:4 1,073,242 23.1 1,987,777 42.8 557,788 12.0 1,029,842 22.2 

4,648,649

89:4 1,020,819 21.6 1,978,226 41.9 540,830 11.4 1,186,999 25.1 

4,726,874

88:4 984,188 20.8 1,850,460 39.1 534,256 11.3 1,368,381 28.9 

4,737,285

87:4 914,052 20.3 1,773,470 39.4 529,563 11.8 1,284,974 28.5 

4,502,059

86:4 848,164 19.6 1,743,902 40.3 533,196 12.3 1,202,303 27.8 

4,327,565

85:4 759,757 19.0 1,632,586 40.9 495,721 12.4 1,105,262 27.7 

3,993,326

84:4 690,488 18.9 1,498,179 41.0 455,728 12.5 1,008,722 27.6 

3,653,117

84:1 654,124 19.4 1,399,298 41.5 438,743 13.0 881,956 26.1 

3,374,121 

* Excludes institutions operating in RTC conservatorship.

** FHLBB prior to the enactment of FIRREA on August 9,1989.

Source: FDIC Division of Research and Statistics, RIS Database 
 

 

 

Smaller institutions have demonstrated the ability to thrive in both large and small 

markets. Indeed, smaller institutions have flourished in states such as California, 

New York and Virginia where statewide branching has been allowed for many 

years. The recent performance of small banks and thrifts does not offer cause to 

doubt their future viability. In four of the last six years, and in four of the last six 

quarters through the first quarter of 1996, institutions with less than $100 million in 

assets have been more profitable than the industry average as measured by 

return on assets (ROA). In 1994, 1995, and through the first quarter of 1996, more 

than 95 percent of these institutions were profitable. More than half reported 

ROAs above 1.00 percent, and more than three-quarters had ROAs above 0.75 

percent. 

In summary, although the trend toward consolidation in banking appears likely to 

continue, data on bank performance suggest that the smaller banking 

organization, focused on service to a particular local community, taking advantage 

of competitive strengths resulting from that focus, can continue to prosper. 

Impact on Supervision: 

Background 

In terms of numbers of institutions supervised, the consolidation process has 

affected all four federal regulators. As shown in Table 7, from the end of 1984 

through the first quarter of 1996, the number of banks and thrifts supervised by 

the FDIC declined by 25 percent, from 8,793 to 6,561; the number of national 

banks supervised by the Office of the Comptroller of the Currency declined by 42 

percent, from 4,902 to 2,822; the number of banks supervised by the Federal 

Reserve declined by one percent, from 1,056 to 1,047; and the number of savings 

institutions supervised by the Federal Home Loan Bank Board (FHLBB) and its 

successor, the Office of Thrift Supervision (OTS), declined by 55 percent, from 

3,150 to 1,416. 
 

 

 

As shown in Figures 11 through 14, different factors explain the decline in the 

number of institutions supervised by each regulator. Since the beginning of 1989 

through 1995, the number of institutions supervised by the FDIC has declined by 

1,334 (Figure 11). Nearly 1,900 FDIC-supervised institutions have been absorbed 

in unassisted mergers and consolidations (consolidations occur when multibank 

holding companies merge together their subsidiary banks). An additional 317 

FDIC-supervised institutions failed and were closed. On the increase side, 434 

new FDIC-supervised banks were chartered. A number of these new charters 

were issued in acquisitions of failing banks. During the same period, charter 

conversions resulted in 598 institutions switching to FDIC supervision from one of 

the other three federal regulators, and 374 FDIC-supervised institutions switching 

to another regulator, for a net gain to the FDIC of 224 institutions. 

A large share of the institutions switching to FDIC supervision consisted of 

"Sasser" charter conversions by OTS-supervised savings associations.12 Since 

the passage of FIRREA in 1989, SAIF-member savings associations regulated by 

the OTS have been able to convert their charters and become state savings 

banks regulated by the FDIC where state law permits, or they can become 

commercial banks regulated by one of the three federal bank regulators. As of 

March 31, 1996, the FDIC supervised 233 SAIF-member "Sasser" savings banks 

and 57 SAIF-member "Sasser" commercial banks that previously had been 

savings associations supervised by the OTS. 

The OCC has experienced a similar decline 1,317 banks since 1989 in the 
 

 

 

 

 

 

number of institutions it supervises (Figure 13). If this reduction is expressed as a 

percentage, it is more than twice the decrease experienced by the FDIC (-31.5 

percent, as compared with -16.7 percent), because the OCC supervises a smaller 

number of banks. As with the FDIC, the reduction in the number of institutions 

supervised by the OCC since 1989 has been due primarily to unassisted mergers 

and consolidations. The addition of 253 new charters and the conversions of 171 

existing charters to OCC supervision were offset by the loss of 309 national banks 

to failures and 280 national banks converting to state charters. 

In contrast, there has been a slight increase in the number of banks supervised by 

the Federal Reserve. At year-end 1995, the Federal Reserve supervised 1,042 

state-chartered member banks, eight more than at the end of 1989. Increases 

from new charters (70) and conversions from other charters (329) have been 

matched by conversions of state member banks to other charters (82) and by 

absorptions of Federal Reserve-supervised banks in mergers and consolidations 

(269). There have been 50 failures of state member banks since 1989, accounting 

for the net decline in banks under Federal Reserve supervision. 

The most dramatic reduction in institutions under supervision has occurred at the 

OTS (Figure 14). Although the net decline of 1,182 OTS-supervised savings 

institutions is smaller than the declines for the FDIC or the OCC, it represents a 

45.2-percent decrease. The substantial reduction in the number of OTSsupervised savings institutions was initially due to failures but more recently has 

resulted from mergers and "Sasser" charter conversions. Unlike the case with the 

other three federal supervisory agencies, the impact of these losses has not been 

cushioned by the addition of new charters or conversions from other charters. 

From the beginning of 1989 through the end of 1995, 761 OTS/FHLBBsupervised institutions failed.13 Another 502 institutions were absorbed by 

unassisted mergers and consolidations, while 370 savings associations converted 

to state savings banks supervised by the FDIC or commercial banks supervised 

by one of the three federal bank regulators. Only 89 new thrift charters were 

issued during this period. 
 

It is clear from these trends that the factors determining the number of institutions 

unassisted mergers and acquisitions, failures, new charters, and charter 

conversions have affected each of the agencies differently. As a result, each 

agency's share of institutions supervised has shifted. The FDIC's share has 

shown the greatest increase, rising from 49.1 percent of insured banks and thrifts 

in 1984 to 57.1 percent as of March 31, 1996 (Table 7). The OTS/FHLBB share 

experienced the greatest decrease, declining from 17.6 percent in 1984 to 12.0 

percent at year-end 1995. During the same period, the OCC's share declined 

slightly, from 27.4 to 23.8 percent, and the Federal Reserve's share rose 

modestly, from 5.9 to 8.8 percent. 

The shifts in shares of the number of institutions regulated can be largely 

explained by changes in the thrift industry. If only commercial banks are 

considered, the shares of the three bank regulatory agencies show little 

movement (Table 8). Between year-end 1984 and the end of the first quarter of 

1996, the FDIC's share of the number of commercial banks supervised increased 

from 58.9 percent to 60.1 percent, and its share of industry assets under 

supervision shrank slightly, from 22.1 percent to 21.4 percent. The OCC's shares 

of institutions and assets supervised both showed small declines, while the 

Federal Reserve's shares both rose slightly. 
 

 

The portion of the thrift industry supervised by the OTS/FHLBB has decreased 

over the last ten years, while that of the FDIC has increased (Table 9). The 

decline in the OTS/FHLBB share is largely a result of financial difficulties 

experienced by thrifts in the 1980s. Much of the shift has occurred since the 

creation of the RTC in 1989, when large numbers of insolvent savings-and-loan 

associations began to be resolved. From August 1989 through July 1995, 745 

insolvent OTS-supervised thrifts were resolved by the RTC. In addition, large 

numbers of OTS institutions have either been acquired without government 

assistance or have converted their charters and are now supervised by one of the 

other federal regulators. From the end of 1984 to the end of the first quarter of 

1996, the OTS/FHLBB's share of thrifts supervised declined from 92.2 percent to 

70.6 percent, while the FDIC's share rose from 7.8 percent to 29.4 percent. 

During this period, the OTS/FHLBB's share of thrift assets supervised declined 

from 88.2 percent to 75.1 percent, while the FDIC's share rose from 11.8 percent 

to 24.9 percent. 

The shrinkage in the number of commercial banks during the past ten years has 

been accompanied by an increase in industry size as measured by total assets. 

All three banking regulators have experienced significant increases in assets 

under supervision since the end of 1984, even as the OTS/FHLBB experienced a 

decline (Table 7). Total assets under Federal Reserve supervision grew by 117 

percent, while assets under FDIC supervision increased by 70 percent, and those 

under OCC supervision grew by 60 percent. Assets under OTS/FHLBB 

supervision declined by 24 percent. The three banking agencies all had minor 
 

 

 

 

 

 

 

 

 

 

 

increases in the share of assets supervised during this period. The FDIC's share 

rose from 18.9 percent to 22.1 percent; the OCC's share rose from 41.0 percent 

to 45.0 percent; and the Federal Reserve's share rose from 12.5 percent to 18.6 

percent. The increases were at the expense of the OTS/FHLBB, which saw its 

share decline from 27.6 percent to 14.3 percent. 

Table 8
 

Number of FDIC-Insured Commercial Banks
 

According to Primary Regulator

FDIC OCC FRB 

Yr./ %of %of %of 

Qtr. No. Total No. Total No. Total TOTAL 

96:1 5,972 60.7 2,822 28.7 1,047 10.6 9,841

95:4 6,044 60.8 2,855 28.7 1,042 10.5 9,941

95:3 6,126 60.9 2,892 28.8 1,034 10.3 10,052

95:2 6,228 61.3 2,946 29.0 994 9.8 10,168

94:4 6,400 61.2 3,075 29.4 975 9.3 10,450

93:4 6,685 61.0 3,304 30.2 969 8.8 10,958

92:4 6,914 60.3 3,593 31.3 955 8.3 11,462

91:4 7,157 60.0 3,790 31.8 974 8.2 11,921

90:4 7,355 59.6 3,979 32.2 1,009 8.2 12,343

89:4 7,500 59.0 4,175 32.9 1,034 8.1 12,709

88:4 7,711 58.8 4,353 33.2 1,059 8.1 13,123

87:4 7,999 58.3 4,623 33.7 1,092 8.0 13,714 

86:4 8,234 58.0 4,871 34.3 1,094 7.7 14,199

85:4 8,378 58.2 4,959 34.4 1,070 7.4 14,407

84:4 8,525 58.9 4,902 33.8 1,056 7.3 14,483

84:1 8,610 59.5 4,790 33.1 1,059 7.3 14,459 

Assets of FDIC-Insured Commercial Banks 

(Dollars in Millions)

FDIC OCC FRB 

Yr./ %of %of %of 

Qtr. Assets Total Assets Total Assets Total TOTAL 

96:1 $920,960 21.4 $2,398,414 55.7 $988,962 23.0 $4,308,336

95:4 928,217 21.5 2,400,831 55.7 983,630 22.8 4,312,678

95:3 931,486 22.0 2,319,184 54.8 978,635 23.1 4,229,305

95:2 927,074 22.2 2,299,720 55.1 943,912 22.6 4,170,706

94:4 909,648 22.7 2,255,941 56.2 845,067 21.1 4,010,656

93:4 878,754 23.7 2,100,566 56.7 726,871 19.6 3,706,191

92:4 862,501 24.6 2,004,940 57.2 638,233 18.2 3,505,674

91:4 852,425 24.8 1,985,322 57.9 592,893 17.3 3,430,640

90:4 843,906 24.9 1,987,777 58.6 557,788 16.5 3,389,471

89:4 780,306 23.7 1,978,226 60.0 540,830 16.4 3,299,362 

88:4 746,080 23.8 1,850,460 59.1 534,256 17.1 3,130,796

87:4 696,915 23.2 1,773,470 59.1 529,563 17.7 2,999,948

86:4 663,600 22.6 1,743,902 59.3 533,196 18.1 2,940,698

85:4 602,364 22.1 1,632,586 59.8 495,721 18.2 2,730,671

84:4 554,964 22.1 1,498,179 59.7 455,728 18.2 2,508,871

84:1 518,763 22.0 1,399,298 59.4 438,743 18.6 2,356,804 

Source: FDIC Division of Research and Statistics, RIS Database 
 

 

 

 

 

 

 

 

 

 

Three points summarize the trends in regulatory responsibilities over the last 

decade. First, the decline in the number of supervised institutions began with a 

wave of failures in the 1980s extending into the early 1990s. At the same time 

there was an increase in the pace of unassisted mergers that is still continuing 

and a sustained decline in new chartering activity. Second, mergers have 

increased the average sizes of supervised institutions14 and have led to a greater 

concentration of industry assets. Supervisory responsibilities, as measured by 

assets under supervision, have increased at the three banking agencies. Third, 

except for the declines experienced by the OTS/ FHLBB, there has been little 

change so far among the three bank regulatory agencies in shares of institutions 

and assets supervised. This stability in bank regulators' shares will probably not 

continue in light of the recent trend in large company mergers. Major acquisitions 

announced during 1995 involve changes in ownership of 10.2 percent of all 

commercial bank and thrift assets. 

Table 9
 

Number of FDIC-Insured Savings Institutions

According to Primary Regulator*
 

FDIC OTS** 

Yr./ %of %of 

Qtr. No. Total No. Total TOTAL 

96:1 589 29.4 1416 70.6 2,005

95:4 593 29.2 1436 70.8 2,029

95:3 600 29.1 1460 70.9 2,060

95:2 604 29.0 1477 71.0 2,081

94:4 610 28.3 1,542 71.7 2,152

93:4 593 26.2 1,669 73.8 2,262

92:4 518 21.7 1,872 78.3 2,390

91:4 449 17.5 2,112 82.5 2,561

90:4 456 16.2 2,359 83.8 2,815

89:4 469 15.2 2,618 84.8 3,087

88:4 471 13.7 2,967 86.3 3,438

87:4 463 12.8 3,159 87.2 3,622

86:4 445 12.1 3,232 87.9 3,677

85:4 364 10.0 3,262 90.0 3,626

84:4 268 7.8 3,150 92.2 3,418

84:1 276 8.1 3,151 91.9 3,427 

Assets of FDIC-Insured Savings Institutions

(Dollars in Millions)

FDIC OTS** 

Yr./ %of %of 

Qtr. Assets Total Assets Total TOTAL 

96:1 253,553 24.9 762,851 75.1 1,016,404

95:4 254,767 24.8 770,973 75.2 1,025,740

95:3 249,604 24.4 775,069 75.6 1,024,673

95:2 239,572 23.6 777,657 76.4 1,017,229

94:4 234,521 23.3 774,124 76.7 1,008,645

93:4 226,114 22.6 774,775 77.4 1,000,889

92:4 218,166 21.2 812,049 78.8 1,030,215

91:4 217,807 19.6 895,195 80.4 1,113,002

90:4 229,336 18.2 1,029,842 81.8 1,259,178 
 

 

 

 

 

 

 

 

 

89:4 240,513 16.8 1,186,999 83.2 1,427,512

88:4 238,108 14.8 1,368,381 85.2 1,606,489

87:4 217,136 14.5 1,284,974 85.5 1,502,110

86:4 184,563 13.3 1,202,303 86.7 1,386,866

85:4 157,392 12.5 1,105,262 87.5 1,262,654

84:4 135,524 11.8 1,008,722 88.2 1,144,246 

84:1 135,361 13.3 881,956 86.7 1,017,317 

* Excludes institutions operating in RTC conservatorship.

** FHLBB prior to the enactment of FIRREA on August 9, 1989.

Source: FDIC Division of Research and Statistics, RIS Database 

Table 6 illustrates how the drop in the number of smaller banks has coincided with 

an increase in the number of very large banks and the assets they hold. Between 

early 1984 and March 31, 1996, the number of banks and savings institutions with 

less than $1 billion in assets declined by almost one-third, from 17,433 to 11,267. 

During that period, their share of industry assets declined from 40.2 percent to 

24.6 percent. In contrast, the number of institutions with more than $1 billion in 

assets increased from 453 to 579. The most significant increase in terms of 

industry asset share has taken place at the largest institutions. The number of 

institutions with over $10 billion in assets increased almost threefold, from 28 in 

1984 to 87 as of March 31, 1996. The proportion of bank and thrift assets held by 

this relatively small number of large institutions increased from 28 percent to 48 

percent. 

Implications 

Consolidation within multibank organizations may simplify some aspects of 

supervision by decreasing the number of federal regulators that have jurisdiction 

over a banking organization. For example, many bank holding companies have 

multiple bank subsidiaries. The regulator of each subsidiary is determined by the 

subsidiary's charter and, if the charter is from a state, the subsidiary's Federal 

Reserve membership status. Thus, each of the four federal bank and thrift 

regulators may supervise a portion of a multibank holding company. When banks 

or thrifts merge, the resultant institution has only one primary federal regulator. In 

the case of a holding company with national banks the resultant institution would 

have two federal regulators. Although interstate branching, to the extent it 

encourages such consolidation, may simplify federal jurisdictions, it will 

complicate the task of state bank supervisors. Branching across state lines will 

result in a number of banking organizations that must answer to more than one 

state authority. 

Finally, attention to communications and information-sharing both within and 

between federal and state regulators will assume increasing importance as a 

nationwide banking system evolves and more institutions find themselves subject 

to multiple regulatory jurisdictions. Organizations as disparate as the Basle 

Committee on Bank Supervision and the Conference of State Bank Supervisors 

have recognized the need for regulatory agencies to communicate adequately 

with each other. 

Table 10
 

Shifts of Federally Insured Depository Institutions Among Primary

Federal Regulators If All Institutions Were Consolidated into

Largest Institution Under the Top Holder (Regulatory High Holder)
 
 

 

 

 

 

 

 

(as of March 31, 1996; excludes IBAs)

Assets % 

ofTotal 

Number (Millions) Number 

Assets 

Total 11,846 $5,324,740

Institutions regulated by FRB on 3/31/96 1,047 988,962 8.8% 

18.6% 

Institutions that would be regulated by FRB 1,083 1,135,190 9.1 

21.3 

Current regulator

FDIC 88 60,686

FRB 895 860,960

OCC 88 207,948

OTS 12 5,595

Institutions regulated by FDIC on 3/31/96 6,561 1,174,513 55.4 

22.1 

Institutions that would be regulated by FDIC: 6,177 984,126 52.1 

18.5 

Current regulator

FDIC 5,987 954,937

FRB 46 5,545

OCC 116 17,608

OTS 28 6,036

Institutions regulated by OCC on 3/31/96 2,822 2,398,414 23.8 

45.0 

Institutions that would be regulated byOCC: 3,219 2,501,691 27.2 

47.0 

Current regulator

FDIC 474 156,407

FRB 981 20,984

OCC 2,611 2,172,007

OTS 36 52,293

Institutions regulated by OTS on3/31/96: 1,416 762,851 12.0 

14.3 

Institutions that would be regulated byOTS: 1,367 703,733 11.5 

13.2 

Current regulator

FDIC 12 2,483

FRB 8 1,473

OCC 7 849
 

OTS 1,340 698,927

Institutions shifiting to a new regulator: 1,013 637,909 8.6 

12.0 

* Excludes insured branches of foreign banks.

Source: FDIC Division of Research and Statistics 

The final chart, Table 10, shows how the balance among the regulators would 

shift if all bank holding companies were to merge all of their bank and thrift 

subsidiaries into the "lead" bank.15 It assumes that the largest subsidiary would 

retain its current charter and federal regulator. It is apparent that the consolidation 

process would bring many institutions under the supervision of new regulators. 

For example, 574 banks and thrifts that are currently regulated by the FDIC would 
be consolidated into "lead" banks supervised either by the Federal Reserve (88 

banks), the OCC (474), or the OTS (12). At the same time, 190 banks that are 

currently regulated by the Federal Reserve (46), the OCC (116) or the OTS (28) 

would be consolidated into "lead" banks supervised by the FDIC. 
 

 

 

FDIC Banking Review 

Banking Industry Consolidation: Financial Attributes of Merging Banks 

by John P. O'Keefe 

Congress eliminated the remaining federal legal restrictions on interstate banking 

and branching in September 1994, with the passage of the Riegle-Neal Interstate 

Banking and Branching Efficiency Act of 1994 (Riegle-Neal Act).1 While many 

banking organizations had effectively circumvented legal barriers to interstate 

banking prior to the Riegle-Neal Act, they had to do so through the formation of 

multibank holding companies. Multibank holding companies may own and 

establish banks across states, provided they obtain a separate bank charter in 

each state.2 Many industry observers expect, therefore, that the Riegle-Neal Act 

will facilitate the consolidation of multibank holding companies into multistate 

branch bank networks. Moreover, the reduced legal barriers to market entry might 

also encourage mergers between unaffiliated banking organizations. The potential 

for large structural change in the industry and the resultant reallocation of real and 

financial resources across markets is of interest to market participants and 

observers. 

In order to analyze what form this structural change might take, this study draws 

upon merger and consolidation activity among depository institutions between 

January 1984 and June 1996. Merger and consolidation transactions for the 

period are used to develop financial profiles of participating banks. Next, those 

profiles are used to develop statistical models that predict the likelihood that a 

bank will become involved in a merger, either as the acquirer or target, in the near 

term. The Riegle-Neal Act represents an unprecedented change in the legal 

environment in which mergers occur. Empirical merger-prediction models draw 

upon known merger histories and cannot incorporate the effects that changes to 

the legal or regulatory environment might have upon mergers. Nevertheless, an 

understanding of the financial characteristics of many acquirers and target banks 

should be useful in predicting mergers and consolidations in the near term. 

The merger forecasts presented here indicate that the current rapid pace of bank 

mergers and consolidations is likely to continue into the near future. In addition, 

the forecasts indicate a substantial divergence between the number of potential 

acquirers and target banks in several geographic regions. Consequently, the 

continued growth of interstate banking organizations is also likely. The first 

section of this study describes recent trends in mergers and consolidations, and 

discusses the impact of the thrift and banking crises during the 1980s upon 

industry restructuring. Section two reviews the incentives that bank owners and 

managers have to act upon the reduced legal restrictions on interstate banking. 

The potential for merger activity is examined in the third section. Specifically, the 

financial profiles of acquirers and targets in mergers and consolidations 

developed previously are used to form statistical models that relate the incidence 

of mergers and consolidations to important financial characteristics of banks. 

Those models are then used to predict the likelihood of an institution being a 

target bank or an acquirer in a merger or consolidation over a two-year horizon. 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The study concludes with a discussion of the merger forecasts, as well as the 

geographic areas where interstate merger activity appears most likely to occur. 

Recent Trends in Mergers and Consolidations 

The recent legalization of full interstate branch banking could alter banking 

industry structure in two ways. First, many larger banking organizations used the 

multibank holding company organizational structure to form interstate banks 

before the passage of the Riegle-Neal Act. Some of these multibank holding 

companies might consolidate operations into multistate branch-bank networks if 

such networks offer advantages over existing organizational structures. Second, 

the ability to enter markets across state lines via branching might be a lower-cost 

alternative to the chartering of a new bank, as was required before the new 

legislation. Consequently, if barriers to market entry are reduced, there might be 

shifts in merger activity as banks implement their strategic merger plans. 

The removal of legal impediments to interstate banking does not necessarily 

mean that more interstate banking organizations will develop. Mergers involve 

changes in ownership and, more importantly, can result in the reallocation of real 

and financial resources across markets. Such reallocations are motivated by the 

long-term expected risks and returns on invested capital. The present and 

expected future profitability of the industry will play an important role in such 

capital reallocations. In order to gain some perspective on what structural 

changes might occur, this section first examines recent merger and consolidation 

trends among depositories. 

Table 1 shows the number of mergers and consolidations among commercial 

banks, savings banks and savings associations between January 1984 and June 

1996. Mergers and consolidations were partitioned into five groups: (1) the 

formation of FDIC bridge banks; (2) RTC conservatorships; (3) FDIC-assisted 

failed-bank acquisitions; (4) FSLIC/RTC-assisted failed-thrift acquisitions; and (5) 

unassisted acquisitions. When a bank or thrift fails, the deposit insurer in its role 

as receiver has two general options to resolve the failure. The first is to liquidate 

the institution and compensate its creditors, particularly insured depositors; this 

type of resolution is known as a payoff. The second option is to sell some or all of 

the failed institution's operations intact to a financially sound bank or thrift; this 

type of resolution is known as a purchase-and-assumption transaction. The main 

criterion for selecting a resolution method is to select the method that is least 

costly to the deposit insurance fund.3 Only those transactions that involve keeping 

some portion of the failed institution's franchise intact are included in Table 1. 

Table 1 

Associations) 

Mergers and Consolidations: January 1984 - June 1996

(All Commercial Banks, Savings Banks and Savings 

Number and Percent of Regional Total 

Region

Unassisted 

FDIC 

Bridge 

Banks 

Total 

RTC 

Conservatorships FDICAssisted 

FSLIC/

RTCAssisted 

Northeast 1 0.1% 59 7.7% 119 15.4% 78 10.1% 

514 66.7% 771 
 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-Atlantic 0 0.0 27 7.3 11 3.0 31 8.4 

300 81.3 369 

Southeast 1 0.1 132 7.7 75 4.4 155 9.1 

1,344

Central 

78.7 1,707

0 0.0 71 4.0 38 2.1 118 6.6 

1,561

Midwest 

87.3 1,788

0 0.0 59 4.0 190 12.9 75 5.1 

1,152 78.0 

Southwest 

1,476

20 0.9 159 7.3 685 31.4 311 14.2 

1,009

West 

46.2 2,184

0 0.0 87 7.1 188 15.4 150 12.3 

794 65.1 

Islands 

1,219

0 0.0 1 9.1 2 18.2 3 27.3 

5 45.5 11 

Total 

6,679 

22 0.2% 

70.1% 9,525 

595 6.2% 1,308 13.7% 921 9.7% 

In some cases the government will take over ownership of the failed institution 

prior to arranging a merger with another bank or thrift (government-assisted 

mergers). This is included in Table 1 as bridge bank and conservatorship 

transactions. When the government eventually sells the bridge bank or 

conservatorship to another depository or sells the failed institution immediately 

upon closure to another depository, these are shown as either FDIC-assisted or 

FSLIC/ RTC-assisted mergers in Table 1. All other mergers and consolidations 

that do not involve the deposit insurers or the RTC are designated as unassisted 

mergers. Table 1 shows that unassisted mergers comprised 70.1 percent of all 

mergers and consolidations during the period. The remainder involved 

government-assisted acquisitions of failed banks and failed thrifts by healthy 

depositories.4 

Table 2 

Mergers and Consolidations

(All Commercial Banks, Savings Banks and Savings

Associations) 

Number and Percent of Yearly Total

FDIC RTC FSLIC/

Bridge Conserva- FDIC- RTCYear Banks torships Assisted Assisted 

Unassisted Total 

1984 0 0.0% 0 0.0% 75 15.6% 14 2.9% 393 

81.5% 482 

1985 0 0.0 0 0.0 94 18.4 33 6.4 385 

75.2 512 

1986 0 0.0 0 0.0 121 22.1 52 9.5 375 

68.4 548 

1987 0 0.0 0 0.0 176 21.0 54 6.5 607 

72.5 837 

1988 0 0.0 0 0.0 201 19.2 189 18.0 658 

62.8 1,048

1989 0 0.0 34 4.1 197 23.9 138 16.7 455 

55.2 824 

1990 1 0.1 259 23.8 158 14.5 221 20.3 448 

41.2 1,087 
 

 

 

 

 

 

 

 

 

 

1991 0 0.0 166 17.6 118 12.5 145 15.3 516 

54.6 945 

1992 0 0.0 54 7.3 109 14.8 64 8.7 508 

69.1 735 

1993 20 2.9 23 3.4 37 5.4 8 1.2 594 

87.1 682 

1994 1 0.1 58 8.0 13 1.8 1 0.1 655 

90.0 728 

1995 0 0.0 1 0.1 6 0.8 2 0.3 723 

98.8 732 

June 1996 0 0.0 0 0.0 3 0.8 0 0.0 362 

99.2 365 

All 

70.1% 

22 

9,525 

0.2% 595 6.2% 1,308 13.7% 921 9.7% 6,679 

Regional differences in merger activity during the period have been driven in large 

part by economic conditions, as well as by changes in state banking laws. For 

example, the regional recessions in the Southwest and Northeast in the late 

1980s and early 1990s, respectively, contributed to the high proportions of 

government-assisted mergers in those regions. Table 2 also shows that both the 

number and proportion of unassisted mergers rose steadily after 1990 as the 

economy improved. 

Another interesting aspect of industry restructuring is the proportion of industry 

consolidation that has involved affiliated versus unaffiliated banks. Table 3 

identifies consolidations of multibank holding companies versus mergers between 

unaffiliated banks. Because historical information on thrift holding company 

affiliations was not available, savings associations are excluded from Table 3. The 

data show a marked increase in consolidation activity in 1995, driven partly by the 

recent relaxation of federal restrictions on interstate banking and branching. 

TABLE 3 

Mergers and Consolidations

Commercial Banks and Savings Banks

January 1984 - December 1995 

Banks in Banks in 

Consolidations Multibank Non-afflicted One-Bank 

With Holding Co. Holding* Transactions Holding

Total 

Year Number (Yearly %) Company Number (Yearly %) Companies

Mergers 

1984 107 (36.2%) 3,741 189 (63.9%) 11,032

296 

1985 188 (44.4) 4,127 235 (55.6) 10,670

423 

1986 165 (36.9) 4,510 282 (63.1) 10,159

447 

1987 333 (46.4) 4,422 284 (53.6) 9,766

717 
 

 

 

 

 

 

1988 420 (52.3) 4,226 283 (47.7) 9,388

803 

1989 286 (46.7) 4,067 327 (53.3) 9,131

613 

1990 286 (51.4) 3,925 271 (48.7) 8,892

557 

1991 314 (55.3) 3,677 254 (44.7) 8,708

568 

1992 264 (49.8) 3,474 266 (50.2) 8,522

530 

1993 261 (47.9) 3,375 284 (52.1) 8,192

545 

1994 298 (51.7) 3,287 278 (48.3) 7,790

576 

1995 402 (65.2) 3,073 215 (34.9) 7,459

617 

Total 3,324 (49.7%) 3,368 (50.3%)

6,692 

*The number of banks in multibank holding companies, as well as in one-bank

companies, are as of the calenday year-ends. 

It is difficult to know what portions of the national merger trends seen in Tables 2 

and 3 were driven by industry and regional economic conditions versus changes 

in federal and state banking laws. A state-by-state comparison of trends with 

associated changes in business and regulatory conditions would be too lengthy to 

present here. To gain some perspective on the impact that local economic 

conditions and changes in bank regulation can have upon merger activity, Tables 

2b and 3b present bank and thrift merger trends for Texas depositories. Texas 

banking markets provide a useful illustration because of the severe changes in 

the state's economy and banking laws during the 1980s. Texas underwent a 

severe business downturn in the late 1980s. In addition, intrastate bank branching 

prohibitions in Texas were relaxed in 1987, permitting branching in contiguous 

counties; subsequently, statewide branching was permitted. Both events 

contributed to consolidations in Texas banking markets in the late 1980s and 

early 1990s. 

Table 2b shows that merger activity in Texas increased sharply, from 41 to 233 

transactions, between 1986 and 1987. Although a portion of this activity was due 

to commercial bank failures, most of the transactions involved unassisted mergers 

and consolidations. Table 3b shows that consolidations rose from 9 to 121 

between 1986 and 1987. This increase was largely a result of the relaxation of 

state branching restrictions and consisted of unassisted transactions. 

Interestingly, mergers of non-affiliated banks between 1986 and 1987 also rose, 

from 23 to 96. While 45 of the 96 mergers in 1987 involved failed banks, the 

remaining 51 non-affiliate mergers represented a substantial increase over 1986 

mergers. 

Table 2b 

Texas Mergers and Consolidations

(All Commercial Banks, Savings Banks and Savings

Associations) 

Number and Percent of Yearly Total 
 

 

 

 

 

 

 

 

 

 

 

 

Year 

Unassisted 

FDIC 

Bridge

Banks 

Total 

RTC 

Conservatorships FDICAssisted 

FSLIC/

RTCAssisted 

1984 0 0.0% 0 0.0% 6 40.0% 1 6.7% 8 

53.3% 15 

1985 0 0.0 0 0.0 10 47.6 0 0.0 11 

52.4 21 

1986 0 0.0 0 0.0 22 53.7 6 14.6 13 

31.7 41 

1987 0 0.0 0 0.0 45 19.3 5 2.1 183 

78.5 233 

1988 0 0.0 0 0.0 110 29.9 89 24.2 169 

45.9 368 

1989 0 0.0 8 3.4 131 55.3 39 16.5 59 

24.9 237 

1990 0 0.0 45 19.9 99 43.8 45 19.9 37 

16.4 226 

1991 0 0.0 28 27.2 30 29.1 10 9.7 35 

34.0 103 

1992 0 0.0 5 7.7 29 44.6 0 0.0 31 

47.7 65 

1993 20 23.8 0 0.0 10 11.9 0 0.0 54 

64.3 84 

1994 0 0.0 0 0.0 0 0.0 0 0.0 31 

100.0 31 

1995 0 0.0 0 0.0 0 0.0 0 0.0 51 

100.0 51 

June 1996 0 0.0 0 0.0 2 4.7 0 0.0 41 

95.3 43 

All 20 1.3% 86 5.7% 494 32.5% 195 12.8% 723 

47.6% 1,518 

Incentives for Mergers and Consolidations Merger Theory 

There are two participants in all mergers, the acquiring firm and the target firm. 

Because of the high degree of regulatory oversight of bank mergers, nearly all 

bank mergers result from the joint decisions of the controlling directors and 

shareholders of both of the merging banks. A discussion of the decision on 

whether to merge should, therefore, consider both the acquiring and target bank's 

perspectives. This section reviews the potential motives underlying the merger 

decision, drawing upon the bank merger studies of Rose (1987), (1988).5 

TABLE 3B 

Texas Mergers and Consolidations

Commercial Banks and Savings Banks, January 1994 - December 1995 

Banks in Banks in 

Consolidations Multibanks Non-afflicted One-Bank 
 

 

 

 

Within Holding Co. Holding Transactions Holding

Total 

Year Number (Yearly %) Companies* Number (Yearly%) Companies

Mergers 

1984 1 (16.7%) 757 5 (83.3%) 1,096

6 

1985 7 (43.8) 819 9 (56.3) 1,117

16 

1986 9 (28.1) 860 23 (71.9) 1,111

32 

1987 121 (55.8) 675 96 (44.2) 1,091

217 

1988 132 (47.5) 467 146 (52.5) 1,025

278 

1989 50 (26.3) 323 140 (73.7) 990 

190 

1990 22 (16.4) 255 112 (83.6) 928 

134 

1991 19 (30.2) 223 44 (69.8) 898 

63 

1992 9 (16.1) 191 47 (83.9) 898 

56 

1993 24 (30.8) 172 54 (69.2) 839 

78 

1994 5 (16.1) 186 26 (83.9) 802 

31 

1995 15 (31.9) 193 32 (68.1) 755 

47 

Total 414 (36.1%) 734 (63.9%)

1,148 

*The number of banks in multibank holding companies, as well as in one-bank 

campanies, are as of the calendar year-ends. 

Merger motives can be classified into two broad categories: shareholder wealth 

maximization and managerial"well being." The notion that mergers are motivated 

by shareholder wealth maximization is a fundamental assumption of most 

economic theories on firm investment decisions. Under the wealth-maximization 

motive,mergers are treated like any other investment decision. Target firms in 

mergers are priced by bidders based upon the present discounted value of the 

expected returns on the acquisition, where the discount rate and return 

expectations consider the assumed firm's performance within the acquirer's 

portfolio of assets. In mergers, acquirers can share a portion of expected gains 

from the transaction with target firm owners to help encourage the merger. Such 

gains can result from post-merger improvements in the efficiency and profitability 

of the target bank's franchise or when the merged entity is expected to perform 

better than both of the individual firms. In either situation, the target bank's owners 

can be offered more than the current market value of their shares, because the 

"going concern value" of the target bank will be less than its value when combined 

with the acquirer's franchise.6 If the merged firm has greater long-term market 

value than the simple sum of the parts, merger synergies are said to have 

occurred. Specific sources of merger synergies are risk diversification in revenues 
 

 

 

 

 

 

 

and costs, economies of scale and scope, and market power. 

Investment theory shows that as one increases the number of assets in an 

investment portfolio whose returns are positively correlated, the total variance in 

the portfolio's return decreases and approaches the average covariance between 

individual asset returns.7 If bank mergers increase portfolio diversification, the 

risk-reduction will benefit bank owners. The potential for increased geographic 

loan exposure diversification is probably the most likely source of benefits from 

interstate banking and branching. The regional concentrations of bank failures 

during the 1980s and 1990s were fueled by many banks' geographic lending 

concentrations, particularly those in commercial real estate. 

Economies of scale refer to the ability to spread fixed operating costs over larger 

output levels, thereby reducing average total production costs. For example, bank 

mergers can reduce average costs when overlapping branch offices are closed, 

or fixed information processing costs and advertising costs are spread over 

increased revenues. In addition, personnel costs can be reduced when tasks 

overlap. Acquirers can benefit from applying "fixed" managerial and technical 

expertise to a larger business operation. Economies of scope are similar in 

nature, except that the cost savings result from applying fixed resources to a 

broader range of services, as opposed to simply increasing the level of the current 

mix of services. In addition, economies of scale can be achieved in financing. The 

costs of issuing debt and equity include a substantial fixed component. 

Consequently, larger banking organizations can spread fixed financing costs over 

larger equity issues, reducing per share issuance costs. 

Mergers can also enhance market shares for acquirers for both balance-sheet 

and off-balance-sheet activities. This can confer some pricing advantages and 

improve profitability; however, there are limits to the extent to which mergers can 

be used to garner market power. Federal antitrust laws and regulatory policies 

restrict merger transactions in banking and other industries and are intended to 

prevent undue concentrations of market power. The primary federal antitrust laws 

that restrict merger activity are the Clayton Act of 1914, the Sherman Act of 1980 

and the Federal Trade Commission Act of 1914. The Bank Merger Act of 1960, 

which was amended in 1966, clarifies federal bank regulators' role regarding bank 

merger policy. The U.S. Department of Justice (DOJ) and the Federal Trade 

Commission (FTC) are responsible for ensuring that bank merger transactions do 

not violate federal antitrust laws. The DOJ and the FTC have developed and 

published horizontal merger guidelines that present their policies and 

interpretation of appropriate merger practices.8 

If a bank's owners or equity shareholders are not well represented on the firm's 

board of directors, the merger decision can be driven by managers' interests 

rather than those of shareholders. For example, managers seeking to protect their 

employment positions might actively block takeover attempts by many means, 

such as making preemptive acquisitions to ensure the firm is "too big to be a 

target." Since the assumed firm's management is often placed at risk of job loss in 

a merger, there is the potential for this motive to cause a divergence between 

shareholders' interests and managers' interests among targeted firms. The fact 

that managerial compensation usually increases with the revenues and assets of 

the firm also gives acquiring firms' managers an empire-building motive. This 

motive might not translate into increased wealth for their shareholders. 

Finally, third-party influences on the merger decision can result in mergers with 
 

 

 

 

 

 

 

 

 

 

 

 

little or no benefit to either acquirers or target banks. Third parties involved in 

facilitating the transaction, such as investment bankers and securities dealers and 

underwriters, can profit from a merger transaction even when it does not produce 

the expected benefits to the acquiring firm's shareholders.9 As Rose (1988) points 

out, with such a large and diverse array of possible motives for mergers it is not 

unexpected that empirical studies differ in explaining why mergers occur. One can 

expect that some combination of the previous factors have influenced bank 

mergers over the past decade. The empirical analysis of merger motives 

developed in this study draws upon the motive of shareholder wealth 

maximization. 

Practical Considerations: Identifying Likely Targets and Acquirers 

Banks that are actively seeking to expand operations through mergers can have 

unique characteristics that distinguish them from their peers. Businesses that are 

in an expansion mode should be perceived to be in sound financial condition and 

could be expected to be outperforming their peers. An adequate equity capital 

base and healthy profit rates are necessary to attract the additional capital often 

needed to finance mergers. Conversely, managements that are not successfully 

operating an organization could not be expected to do any better with expanded 

responsibilities and should not be engaged in mergers. 

While these traits could be found among banks actively seeking mergers, such 

banks might not always be able to translate their abilities into action, that is, 

acquire other banks. One reason for inaction might be the lack of worthwhile 

merger candidates within a bank's geographic market or targeted new markets. 

State and federal restrictions on branching and interstate banking might also have 

limited the scope of merger candidates available to some banks. Prior to the 

Riegle-Neal Act, regional banking compacts limited banks' ability to acquire banks 

in states that did not have reciprocal agreements. Finally, a variety of factors, 

such as expectations of regional and national economic recessions, or constraints 

on existing managements' ability to assume new responsibilities, can delay 

merger activity. Thus, while acquirers could have common characteristics, these 

traits might also be present in banks not active in merger markets. 

Similar generalizations might be possible for target banks in mergers. Target 

banks might be underperforming their peers and could benefit from mergers. 

Inefficient scale and scope of operations can, at times, only be overcome with 

difficulty when banks have limited access to capital markets. While target banks 

might be underperforming peers, one would not expect acquirers to seek out 

targets with substantial problems or weak franchises. Hence, targets are likely to 

have deficiencies that can be remedied without substantial cost to acquirers. 

Deficiencies need not always be present in target banks, however. One 

commonly cited example is that of owner-managers of closely held banks. These 

owners can choose takeovers as a means to cash out on their investment at 

retirement, particularly when leaving the business to family members is not a 

consideration. Finally, as with acquirers, to be a target bank implies that 

acquisition mode banks must exist within the target's geographic market or out-ofmarket acquirers must find the potential target's market attractive. While many 

target banks might have common traits, one can expect these traits also to be 

present among banks that have not yet become merger targets. 

If one can identify potential acquirers and targets within markets, more might be 

said about the likelihood of future merger activity. One first needs to identify 
 

 

 

 

 

 

 

common traits of acquirers and target banks. This section looks at the financial 

characteristics of both groups in three ways. First, acquirers' and target banks' 

income statements and balance sheets are reviewed to learn whether certain 

attributes appear just before mergers occur, or whether they are longstanding. 

Second, comparisons of financial characteristics with peer groups are made to 

determine whether acquirers and targets differ from banks of similar size and 

location. Third, acquirers are compared with their targets to investigate possible 

motives for mergers such as portfolio diversification and improvements in 

operating efficiency. 

The attractiveness of target banks' franchises to potential acquirers is influenced 

by market demographics, as well as current and expected future economic 

conditions in the local and regional markets. Demographic data and economic 

activity measures might aid in explaining merger activity. This study relied, 

however, upon the financial statements of banks, as well as bank examiners' 

assessments (CAMEL ratings) of banks' financial condition in analyzing merger 

activity. Both market demographics and business cycles affect financial 

statements; therefore, these factors are not entirely ignored when relying upon 

financial statements. Moreover, because the geographic scope of most banks' 

markets is not well known, relating merger activity to demographic and economic 

activity measures involves uncertainties. For example, high commercial property 

vacancy rates in a particular market might be expected to reduce the 

attractiveness of area target banks with substantial commercial real-estate loan 

exposures; however, banks do not report geographic loan exposures to federal 

bank regulators. Thus, the relevance of local vacancy rates to all potential target 

banks is uncertain. Banks do report nonperforming asset levels that directly show 

the effect of market conditions upon bank asset quality. 

Peer Group Comparisons 

In order to learn how acquirers and target banks differ from each other and their 

peers, a sample of 890 mergers occurring among commercial banks and savings 

banks between January 1984 and December 1995 was obtained. To help ensure 

that banks' financial profiles would not be distorted by the accounting changes 

that can appear with mergers and consolidations, acquirers were required to not 

have made acquisitions nor consolidations over the eight quarters prior to a 

merger.10 All financial trends were tracked over the eight quarters prior to 

mergers. Second, only mergers between unaffiliated organizations were 

considered; consolidations of banks within the same holding company were 

excluded. Finally, all government-assisted mergers were excluded because of the 

unique nature of such mergers.11 The characteristics of the sample of acquirers 

and their target banks are given in Tables 4, 5 and 6. As shown in these tables, 

the sample of mergers is fairly diverse across geographic regions and over time. 

All comparisons of financial performance were made based upon mean values of 

income statement and balance-sheet variables, expressed as a percent of bank 

assets, or, for loan portfolio analysis, as a percent of gross loans and leases. 

Financial ratios were computed over each of the eight quarters prior to mergers. 

In order to determine whether the financial performance of acquirers and targets 

differed from that of their peers, samples of peer banks were selected for both 

groups. The peer groups consisted of banks of similar size, regional geographic 

location, and timing of financial data as the target banks (acquirers). Financial 

trends were computed using an abstract time measure, the number of quarters 

from a merger. As a result, each quarter consists of data "pooled" from several 

points in time for the 890 banks. For comparability, peer banks that had 
 

 

 

 

 

 

 

 

 

 

 

 

contemporaneous financial data with the target banks (acquirers) were selected. 

The mean values of several important financial ratios and their differences 

between groups of banks are available from the author upon request. The results 

of that analysis are summarized next. 

Table 4 

Sample of 890 Mergers Commercial Banks and Savings Banks,

1984 - 1995(Dollars in Billions) 

Acquirer Location* Acquirers' Targets'

Region Number (Percent) Assets Assets 

Northeast 56 (6) $72.6 $17.8
 

Mid-Atlantic 36 (4) 47.8 6.6
 

Southeast 138 (16) 115.9 7.3
 

Central1 40 (16) 39.1 9.0
 

Midwest 253 (28) 46.6 9.3
 

Southwest 140 (16) 63.2 16.4
 

West 127 (14) 226.0 75.2
 

Total 890 $611.3 $141.6
 

* The regional locations of target banks were the same as

those for their acquirers in all but one instance. 

Table 5 

Sample of 890 Mergers

Commercial Banks and Savings Banks 1984 - 1995 

Acquirers Target Banks

Asset Size Number (Percent) Number (Percent) 

$5 Billion or More 20 (2) 3 (0)

$5 Billion to $1 Billion 64 (7) 15 (2)

$500 Million to $1Billion 57 (6) 10 (1)

$100 Million to $500Million 273 (31) 99 (11)

$50 Million to $100Million 185 (21) 127 (14)

$25 Million to $50Million 175 (20) 192 (22)

Under $25 Million 116 (13) 444 (50) 

Total 890 890 

Income and Expenses 

The sample of target banks had significantly higher average loan-loss provisions 

and total noninterest expenses than did their acquirers.12 These higher expenses 

were not offset, on average, by interest and noninterest income among target 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

banks. The result was a significantly lower average return on assets (ROA) 

among target banks than for their acquirers during the eight quarters before 

mergers took place. Net interest margins did not differ significantly between the 

sample of acquirers and their targets, however. The target banks were also 

typically much smaller than their acquirers. As a result, profit rates on assets 

(ROA) might differ due to bank size and capitalization. Targets could offset a 

lower ROA by increasing leverage; however, this will also increase the volatility in 

profits. This was not the case, however, because the target banks' equity 

capitalization was somewhat higher, on average, than that of their acquirers. In 

order to control for the effect of bank size on performance, peer bank 

comparisons also were made and are discussed next. 

Table 6 

Sample of 890 Mergers

Commercial Banks and Savings Banks

1984 - 1995 

Median 

Ratio of 

Target-toAcquirer

Year Number (Percent) Assets* 

1986 77 (9) 22.3% 

1987 93 (10) 30.2 

1988 99 (11) 34.1 

1989 68 (8) 28.1 

1990 61 (7) 21.9 

1991 77 (9) 27.8 

1992 93 (10) 31.7 

1993 103 (12) 26.3 

1994 124 (14) 26.8 

1995 95 (11) 22.4 

Total 890 

*Asset values were measured as of the quarter-end prior to

the merger. 

Target banks had significantly higher rates of loan-loss provisioning and expenses 

on premises than did their peers. The result was that target banks' ROAs were 

significantly lower than those of their peers over most of the pre-acquisition 

period. Target banks were both less efficient than their peers and riskier based 

upon loan-loss provisioning. There were no significant differences between the 

net interest margins of target banks and their peers over the eight quarters prior to 

acquisition. Acquirers had significantly higher net interest margins than did their 

peers over the pre-acquisition period. Acquirers, however, did not have 

significantly different loan-loss provisions nor noninterest expenses than their 

peers. The result was that acquirers had marginally higher ROAs than did their 

peers during the pre-acquisition period, but the divergence in profit rates was not 
 

 

 

 

 

 

 

 

statistically significant. 

Portfolio Composition: Assets 

Target banks were, on average, significantly more liquid than their acquirers, with 

a greater proportion of their assets in cash balances, federal funds sold and 

resale agreements than their acquirers. Correspondingly, acquirers had 

significantly higher proportions of total assets comprised of gross loans and 

leases than did their targets. Acquirers might find target banks' liquid asset levels 

attractive because these assets can be turned into loans at low cost if lending 

opportunities exist. One negative aspect of targets was their significantly higher 

proportions of other real estate owned, which includes repossessed real estate, 

than those of acquirers. 

Target banks had significantly higher proportions of their assets in cash balances, 

federal funds sold and resale agreements than did their peers; however, targets 

also had significantly lower levels of securities than did peer banks. Target banks 

also held significantly higher proportions of their assets in gross loans and leases. 

Moreover, as one might expect, target banks had higher levels of assets in bank 

premises and other fixed assets. This might explain the higher overhead 

expenses found for target banks as compared with their peers. Finally, target 

banks had higher asset concentrations in other real estate owned, which includes 

repossessed assets. This latter finding supports the prior statement that targets 

might be riskier, on average, than their peers in terms of the credit quality of 

assets. 

Surprisingly, acquirers compared to their peers in much the same way that target 

banks compared to their peers. Acquirers had higher asset concentrations in cash 

balances, federal funds sold and resale agreements than did their peers. In 

addition, acquirers held lower proportions of assets in securities and more in 

gross loans and leases than did peer banks. Finally, acquirers had higher 

proportions of assets in premises and other fixed assets than their peers. 

However, there were no significant differences between acquirers and their peers 

with respect to levels of other real estate owned. 

Portfolio Composition: Liabilities 

There were several differences between acquirer and target banks' liability 

composition, as measured as a percent of total assets. Acquirers had slightly 

lower levels of deposit funding than did their target banks and relied more on 

federal funds purchased and repurchase agreements, other borrowed money, 

banks' liabilities on acceptances outstanding, and subordinated debt. 

Interestingly, acquirers had significantly higher levels of volatile liabilities than did 

target banks and, consequently, lower levels of core deposits. Acquirers might, 

therefore, seek target banks with a more stable core deposit base. Equity 

capitalization was slightly lower among acquirers than target banks, but the 

difference was not statistically significant in most instances. Because target banks 

were, on average, about one-quarter the asset size of their acquirers, one might 

have expected significantly higher capitalization for the small target banks than for 

the larger acquirers, based upon historical capitalization rates across bank size 

groups. This asset size difference can explain some of the divergence in liability 

composition difference between acquirers and targets. 

Target banks had higher levels of total deposit funding than did their peers but no 
 

 

 

 

 

 

significant differences existed for other major liability items, including large time 

deposit accounts and brokered deposits. Target banks, however, did have 

significantly lower equity capitalization rates than their peers. Although acquirers' 

deposit funding levels were similar to those of their peers, acquirers relied 

significantly more on volatile liabilities. In addition, acquirers had higher levels of 

federal funds purchased and repurchase agreements than did peer banks. The 

higher reliance upon volatile liabilities among acquirers could be an important 

motivator in mergers. Finally, acquirers had significantly lower equity capitalization 

rates than their peers. Because one must judge capital adequacy in relation to a 

bank's entire operations, including important factors such as loan-loss reserves, 

nonperforming asset levels, and profitability, these lower capitalization rates do 

not necessarily imply acquirers had weaker capital positions than their peers. 

Portfolio Composition: Loans 

There were some significant differences in the loan concentrations of acquirers 

and their target banks. Comparisons of loan portfolio composition, as a percent of 

gross loans and leases, indicated that acquirers had a slightly different mix of 

loans than did target banks and acquirers appear to have somewhat riskier loan 

concentrations than target banks. Acquirers had significantly higher average loanto-asset ratios than did target banks and higher concentrations of both short- and 

long-term commercial real- estate loans (construction and land development 

loans and loans secured by nonfarm nonresidential real estate) than did target 

banks. Acquirers also had significantly higher concentrations of commercial and 

industrial loans and municipal loans than did target banks. Conversely, acquirers 

had lower proportions of loans in 1-to-4 family residential mortgages, consumer 

loans and loans to officers, directors and principal shareholders (insider loans) 

than did their targets. 

Target banks had significantly higher ratios of gross loans and leases to assets 

than their peers. Target banks differed from their peers primarily in terms of realestate lending, with higher loan concentrations in all areas of real-estate loans, 

including commercial real estate, than that of peer banks. Acquirers had 

significantly higher ratios of gross loans and leases than their peers. Among major 

loan categories, acquirers were somewhat more heavily concentrated in realestate loans, particularly loans secured by nonfarm nonresidential properties 

(long-term commercial real-estate loans). 

Predicting Acquirers and Target Banks 

The previous section indicated that the sample of acquirers and their target banks 

differed systematically from each other and their peers prior to mergers. If these 

differences in financial characteristics are common and persistent over time, as 

the prior analysis indicates, it might be possible to use this information to identify 

banks that will become acquirers or targets in mergers. This section presents the 

results of logit estimation of models predicting the likelihood of being an acquirer 

or target bank in a merger. Logit estimation is used to relate mergers, either from 

the acquirers' or target banks' perspective, to a number of the factors, both 

endogenous and exogenous to a bank that the previous analysis indicated can 

affect the incidence of mergers.13 Because acquirers differ from their target banks, 

and both groups differ from their peers, separate logit estimations were obtained 

for acquirers and target banks. 

Acquirers and their target banks appear to differ from their peers in terms of many 
 

 

 

 

 

 

 

 

important financial characteristics. Therefore, logit models were formed relating 

the incidence of mergers to the major attributes of banks' financial condition: 

capital adequacy, asset quality, management, earnings, and liquidity (henceforth, 

CAMEL attributes). Broad measures of bank condition were used in order to 

obtain models that would be robust across time and geographic regions. 

Therefore, details on loan portfolio composition and other factors likely to be 

correlated with time or location were excluded from the logit analysis. 

To obtain general measures of condition, bank assets were partitioned into broad 

groups based upon earnings, liquidity, risk, and asset quality. Total assets were 

first partitioned into risk and nonrisk assets. Nonrisk assets were defined as the 

sum of cash balances due, securities, and federal funds sold plus resale 

agreements. Risk assets were, therefore, defined as total assets minus nonrisk 

assets. Nonrisk assets were further partitioned into two groups, noninterestbearing nonrisk assets (that is, noninterest-bearing cash balances due) and 

interest-bearing nonrisk assets (that is, the sum of interest-bearing cash balances 

due, securities, and federal funds sold plus resale agreements). Risk assets were 

partitioned into performing and nonperforming risk assets. Nonperforming risk 

assets were defined as the sum of loans and leases past due 90 days or more, 

nonaccrual loans and leases, other real estate owned, and goodwill. 

Two additional aspects of banks' asset portfolios were included in the analysis: 

lending levels and loan portfolio concentration. The proportion of banks' total 

assets comprised of loans and investment securities with maturities of five years 

or more was included as a measure of asset liquidity. In addition, a summary 

measure of loan-portfolio concentration was devised and included in the analysis. 

Specifically, total bank loans were divided into 15 well-defined categories of loans, 

which comprised nearly all of total loans. Next, the loan portfolio shares were 

obtained for these loan categories and the sum of squared shares were computed 

to form a concentration index analogous to the Herfindahl-Hirschman Index 

(HHI).14 

The peer group analysis also indicated that measures of operating expense and 

profitability would be useful in predicting merger activity. Three components of 

noninterest expense were considered: expenses on salaries and employee 

benefits, expenses on fixed assets and premises, and all other noninterest 

expense. Bank profitability was measured by the return on earning assets 

(ROEA), which was defined as the ratio of operating income to earning assets. 

Operating income was measured by income before taxes and extraordinary items, 

gross of loan-loss provisions. Earning assets were defined as the sum of interestearning cash balances, securities, federal funds and repurchase agreements sold, 

net loans and leases, and assets held in trade accounts, minus nonperforming 

assets. 

Profitability and financial health are ultimately reflected in banks' capital 

adequacy; therefore, bank equity capital and loan-loss reserves were included in 

the models. Further, a bank's deposit franchise appeared to be an important 

factor in merger decisions. The main deposit measure considered was core 

deposits, defined as total deposits minus volatile liabilities. Volatile liabilities were 

defined as the sum of time deposits of $100,000 or more, all foreign-office 

deposits, federal funds purchased and securities sold under repurchase 

agreements, demand notes issued to the U.S. Treasury, and other borrowed 

money. Previous studies have also shown core deposit growth rates, as well as 

growth rates in gross loans and leases, might be important terms in predicting 
 

 

 

 

 

 

 

 

 

 

target banks. 

Bank performance also varies systematically with bank asset size. It was 

hypothesized that the influence of asset size upon performance and condition 

decreases as total assets increase; therefore, the logarithm of bank assets was 

included as a size measure. In addition, de novo or recently established banks 

often have unusual financial characteristics when compared to established banks. 

These banks can also be precluded from being targets for a period after 

establishment by their chartering authority. Consequently, a de novo bank dummy 

variable, set equal to one for all banks in existence for three years or less (as of 

the model estimation date) and zero for all other banks, was included. 

Because bank mergers require regulatory approval before transactions can 

proceed, bank regulators' assessments of banks' financial condition were 

particularly relevant to merger prediction. Bank regulators rate five aspects of 

banks' condition during periodic safety-and-soundness examinations: capital 

adequacy, asset quality, management, earnings, and liquidity. Banks receive 

ratings in each of the five CAMEL component areas that vary in integer levels 

from "1" to "5." Generally speaking, ratings of "3," "4," or "5" are given to banks 

considered to have moderate to serious deficiencies, respectively, that need to be 

addressed by bank management. These deficiencies can present risks that 

increase the chances of failure. Banks rated "1" are considered to be performing 

well-above-average, while a rating of "2" is given to banks with adequate 

performance, as dictated by regulatory safety-and-soundness standards. To 

gauge the extent of regulatory concern regarding banks' condition, the five 

CAMEL component ratings were included in the analysis using dummy variables 

set equal to one for banks rated "3," "4," or "5" for the component area and zero 

otherwise. 

Equation 1 presents the most general form of the predictive equation, henceforth 

referred to as model 1.15 Model 1 was used to predict the likelihood of being either 

an acquirer or a target bank. Model 1 was estimated separately for target banks 

and acquirers, yielding two different sets of coefficient estimates. Finally, to 

control further for systematic differences in condition measures across bank 

asset-size groups, all balance-sheet variables were measured as percents of 

bank assets, and income and expense items were measured as percents of 

average assets. A second model, which excluded the bank examination terms, 

was also tested and is presented below (model 2). Comparisons of models 1 and 

2 allow one to see the additional information that bank examination ratings add to 

merger prediction. 

A stepwise logit estimation procedure was used in all estimations. This procedure 

systematically identifies those terms that have a significant relationship with the 

likelihood of being an acquirer or target bank and excludes all other terms. This 

allows one to include several measures of the same attribute in the logit model, 

allowing the estimation procedure to isolate the most important factors in terms of 

predicting merger activity. 

The samples of banks used in estimating the models consisted of all commercial 

banks and savings banks reporting financial data at year-ends between 1984 and 

1995. Further, two different samples of "merger events" were used for estimating 

the models. In the first sample all unassisted mergers between unaffiliated banks, 

as well as consolidations of member banks of a multibank holding company 

(affiliates) were defined as merger events. Assisted mergers were not counted as 
 

 

merger events, but were, however, left in the population of all other nonmerging 

banks. The assisted mergers were excluded from the definition of merger events 

because identification of assisted target banks would yield bank-failure prediction 

models rather than the type of target-bank prediction models of interest to this 

study. As shown in Tables 1 and 2, the proportions of assisted transactions were 

quite high during part of the estimation period; therefore, the "failure-prediction" 

results could best be avoided by the exclusion of assisted transactions. In 

addition, while consolidations might be of interest to some groups, such 

consolidations do not alter the actual number of economic agents or banking 

firms. Therefore, a second sample of merger events was defined as all unassisted 

mergers between unaffiliated banks. Banks involved in consolidations and 

assisted mergers were, however, left in the population of nonmerging banks. By 

construction, these two samples of merger events will allow for predictions on 

both aspects of industry consolidation from the population of banks. 

The models were estimated by relating year-end financial and related data, to the 

incidence of mergers and consolidations over the subsequent two years. 

Estimates were obtained separately for target banks and acquirers. Nine sets of 

estimates were obtained, starting with 1985 and ending at 1993. The stepwise 

logit estimations are presented in the Appendix in Tables A-1 through A-6. In 

interpreting the results, a positive (negative) coefficient estimate, k, implies that an 

increase in that variable will increase (decrease) the likelihood of being an 

acquirer (or target) bank.16 

Tables A-1 through A-6 also give some indication of the accuracy of the prediction 

models. To do this, estimated probabilities of being an acquirer or target bank 

were obtained for each period. Next, a critical probability value was chosen and 

banks whose estimated transaction probabilities were above that critical value 
 

 

 

 

 

 

 

were labelled likely acquirers or targets. A critical probability value of five percent 

was used in all "in-sample" merger forecasts. The five percent value was chosen 

based upon a subjective judgment that this value yielded fair predictive power. 

Finally, another measure of logit models' explanatory power is the pseudo R2 

statistic.17 The pseudo R2 statistic is equal to 1 when the model perfectly predicts 

bank mergers, and zero when the explanatory variables provide no predictive 

information. For values between zero and 1, the pseudo R2 statistic measures 

"the percent of uncertainty in the data explained by the empirical results."18 

Results of Logit Estimations 

The results of the logit estimations were generally consistent with the profitmaximization, cost-reduction motives often given for mergers and consolidations. 

For brevity, the discussion will focus on positive results and will not attempt to 

explain why certain factors tested did not affect merger activity. Generally 

speaking, estimates of models 1 and 2 for target banks suggest that target banks 

had lower earnings, higher expenses on fixed assets and more liquid asset 

portfolios than non-target banks (all other banks). Table A-1 shows that the 

likelihood of being a target bank in an unassisted merger or consolidation 

increased with the proportion of liquid assets. In addition, the likelihood of being a 

target rose with expenses on premises and fixed assets, as well as with all other 

noninterest expenses. Interestingly, Table A-1 shows that the probability of being 

a target declined as expenses on employee salaries and benefits rose. This latter 

result, however, did not appear when consolidations were excluded from the 

definition of merger events (see Tables A-2 and A-3). The employee expense 

result in Table A-1 seems at odds with the cost-reduction motive for 

consolidations and might be related to high "trimming costs" that result from 

paying accrued benefits and severance pay when personnel is cut back. While 

such costs can occur with all mergers, in consolidations the willingness to incur 

such costs might play a larger role in decisions. 

The coefficient estimates for the examination indexes for the five CAMEL 

component areas also suggest some additional characteristics of target banks. 

Comparisons of Tables A-1 and A-2 indicate that the likelihood of being a target in 

a consolidation decreases among banks with poorly rated management (Table A1), but the management rating was not a factor in mergers of unaffiliated banks 

(Table A-2). The management rating might be expected to be related to acquirers' 

desire to keep some staff and management of assumed banks. The "human 

capital" value of the acquired banks' staff can come from knowledge of the local 

market or general experience and expertise. The result that target banks' 

management quality is not a determinant of mergers of unaffiliated banks could 

indicate acquirers' willingness to replace key staff. 

Because the management of targets in consolidations is from the same holding 

company organization as the acquirers, the role of the management rating in 

Table A-1 might actually be driven by the overall organization involved in the 

consolidation. If this is the case, then the interpretation of the management rating 

among targets could have more to do with the acquirer side of the transaction. 

Results for the predictions of acquiring banks (Tables A-4 and A-5) show that the 

likelihood of being an acquirer decreases among banks with poor management 

ratings. This result is logical, given the importance of acquiring banks' 

management in obtaining regulatory approval of mergers, as well as shareholders' 

support. Tables A-1 and A-2 also show that the likelihood of being a target bank 

deceases the poorer the bank's earnings performance, perhaps indicating weaker 

franchises. In addition, comparisons of Tables A-1 and A-2 show that smaller 
 

 

 

 

 

 

 

 

 

 

banks are more likely to become targets in mergers of unaffiliated banks, but size 

is not a significant factor in consolidations. The results of model 2 in Table A-3 

support the previous results and indicate the importance of some factors, such as 

earnings strength, to target-bank prediction can be captured by returns on earning 

assets or by examiners' ratings of earnings strength. 

Tables A-4 through A-6 present similar tests of models relating banks' financial 

condition to the likelihood of being an acquirer in a merger or consolidation. Those 

results generally support the premise that acquirers are larger banks with wellrated management. Banks with more-liquid portfolios and lower loan 

concentration (loan HHI index) were also more likely to be acquirers. While these 

results agree with prior expectations regarding the characteristics of acquiring 

banks, the most striking result is how few factors were useful in predicting 

acquirers. Stated differently, the results clearly show how difficult it is to forecast 

merger activity. Of the 22 factors used to explain the characteristics of acquirers, 

only four appeared to be consistent in significance: asset size, liquidity, loan 

concentration, and the quality of management. 

These results are consistent with a very common portrayal of bank mergers, 

whereby a large, well-run bank acquires a much smaller, less efficient bank. The 

target bank offers favorable attributes, such as liquidity. The acquirer is also able 

to correct any deficiencies of the target bank, thereby maintaining efficiencies for 

the combined organization. While this study does not investigate the post-merger 

performance of acquirers, the pre-merger profiles of targets and acquirers fit the 

scenario. 

Forecasts of Acquirers and Targets 

An important test of the usefulness of a forecasting model's predictive power is 

how well it predicts events that occur outside of the period used in estimating the 

model. For example, estimates obtained by logit estimations that related 1990 

financial data to 1991 and 1992 merger events can be applied to 1992 financial 

data to forecast likely targets (acquirers) in 1993 and 1994. A series of such "outof-sample" forecasts were made for the period 1987 to 1997 and are presented in 

this section. Forecasts on the number and asset size of the group of potential 

target banks and acquirers can be done in two ways. First, estimates of the 

probability of being a target can be obtained for an out-of-sample period for all 

banks. Second, all banks whose measured probabilities of being a target are 

above some critical probability value can be designated potential targets. 

Comparisons of actual targets with predicted targets will give an indication of 

model accuracy, much like the in-sample forecasts presented in Tables 1 through 

3. The same approach can also be used to predict acquirers. One difficulty with 

this approach is the lack of any guide for selecting a critical probability. In 

practice, the lower the critical probability, the more likely one will correctly forecast 

actual targets or acquirers. However, this will also result in a large number of 

nonmerging banks being identified as targets or acquirers. 

Because the models assign all banks some probability of being a target bank, one 

can simply take the sum of the predicted probabilities of being a target as the 

number of predicted targets during the two-year forecast period. While this 

alternative approach cannot be used to identify individual banks likely to be 

engaged in mergers, it can give an indication of the total level of merger activity 

predicted by the model. Whether these banks are large or small in asset size is 

also of interest. To measure the asset size of the potential target-bank group, one 
 

 

 

can multiply each bank's predicted probability of being a target by its total assets. 

Such statistical forecasts of the size of the target and acquiring bank populations 

were made for the period 1987 to 1997, based upon the logit estimations of 

unassisted mergers and consolidations (Tables A-1 and A-4). Those forecasts are 

shown in Figures 1 and 2, along with the size of the actual target and acquiring 

bank populations. More specifically, Figure 1 shows the asset size of all target 

banks as of the start of the two-year forecast period, as well as that of the 

forecasted targets. Figure 2 shows similar forecasts for acquirers. 

Figures 1 and 2 show that the asset sizes of groups of potential targets and acquirers have been rising 

since 1990. The same is true of groups of actual merging banks. There are two interesting aspects of 

these forecasts. First, the large overestimation of forecasted target banks for the 1989 to 1990 period 

(Figure 1). This result might be due, in large part, to the higher proportion of assisted mergers in those 

two years. Assisted mergers accounted for about half of all transactions in 1989 and 1990 (Table 2). The 

forecasts shown in Figures 1 and 2 are for unassisted transactions. Many banks that fit the profile of 

target banks might not have been acquired during 1989 and 1990 because acquirers made governmentassisted acquisitions instead. Acquirers might prefer an assisted acquisition over an unassisted 

acquisition because of the risk-reducing assurances the government typically grants to failed-bank 

acquirers.19 A second feature of the forecasts is the dramatic increase in the size of both the target and 

acquiring bank populations for the period 1996 to 1997. While the actual extent of mergers and 

consolidations will fluctuate with economic and regulatory events, Figures 1 and 2 indicate a substantial 

potential for continued industry consolidation in the near future. 
 

 

 

 

 

Changes in States' Banking 

Markets 

The Riegle-Neal Act will undoubtedly contribute to the continued increase in interstate banking 

organizations, particularly through the advent of interstate bank branching. Many industry observers are, 

therefore, curious about which geographic regions will undergo the greatest change. Such information 

would be particularly helpful to state and federal bank regulators who wish to know the future demands 

upon their organizations. The previous sections showed the difficulties in profiling acquirers and target 

banks. Forecasting the geographic location of merger activity adds additional unknowns to the forecasting 

question by requiring one to know the likely pairs of targets and acquirers. Predicting pairs of merging 

banks is extremely difficult because those decisions are driven by the individual characteristics of both 

sides of the transaction. Statistical forecasts, however, are driven by the average attributes of groups. 

Consequently, this section looks at the geographic distribution of future merger activity indirectly, through 

forecasts of potential targets and acquirers at the state level. 
 

 

 

 

Figure 3 and Table 7 compare forecasts of the relative size of groups of potential targets and acquirers 

within each state for the period 1996 to 1997. Those forecasts were done using the same methodology 

outlined previously for national forecasts of unassisted bank mergers and consolidations. Target banks in 

mergers and consolidations are typically much smaller in asset size than acquirers. Table 6 showed that 

for a sample of 890 mergers between 1984 and 1995, the ratios of target-bank assets-to-acquirer assets 

averaged about 26 percent. To gauge the extent of potential targets and acquirers within each state, 

Figure 3 shows the ratio of forecasted target banks' assets to acquirers' assets within each state. There 

might be greater potential for interstate activity in regions where there is a high relative surplus of target 

banks, as indicated by a ratio of target-bank assets to acquirer assets much higher than the average rate 

of 26 percent. 

Figure 1 shows the Midwest region has a high concentration of states where potential target banks' 

assets exceed 70 percent of potential acquirers' assets. Conversely, in regions where potential target 

banks are relatively few compared to potential acquirers, acquirers might be encouraged to look outside 

their geographic markets. Figure 3 shows this is the case in California and Texas, as well as in several 

large East Coast markets where potential target banks' assets averaged 30 percent or less than 

acquirers' assets. Following this line of reasoning, one might infer from Figure 3 forecasts of increased 

mergers between coastal banks and Midwestern banks in the near future. There are, however, some 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

important caveats to such predictions. First, acquirers might not seek out small banks that fit the profiles 

of targets if market demographics are not attractive and offer limited growth opportunities. Second, the 

models this study develops can, at best, only give an indication of banks that have the attributes of 

acquirers and targets in mergers. Forecasting which banks will pair up in mergers requires more 

information than these statistical models can provide. 

Table 7 

Projected Acquirers and Target

Banks: 1996 - 1997 

Unassisted Mergers &

Consolidations 

Dollars in 

Thousands 

Number of State Banking Projected Projected

Targets' Projected Projected Projected Projected

State Banks Assets Target Assets State 

Assets Acquirer Acquirer State Number Number 

Ratio 

Assets Assets Ratio of Acquirers of Targets

AK 9 5,603,888 493,232 8.8 

1,555,104 27.8 1.4 0.7 

AL 186 56,322,295 6,149,388 10.9 

27,535,026 48.9 12.8 15.5 

AR 243 29,157,505 3,328,037 11.4 

3,947,776 13.5 16.7 24.9 

AZ 34 51,393,634 7,866,666 15.3 

23,173,264 45.1 4.6 3.3 

CA 383 368,222,678 42,646,860 11.6 

246,549,406 67.0 29.8 36.4 

CO 231 37,351,782 5,083,485 13.6 

11,621,795 31.1 13.1 19.0 

CT 86 66,818,979 9,746,381 14.6 

23,148,034 34.6 7.1 8.9 

DC 13 9,836,783 1,374,280 14.0 

2,231,971 22.7 1.3 1.6 

DE 42 111,177,750 3,539,376 3.2 

6,672,123 6.0 2.2 2.8 

FL 333 150,762,005 21,325,205 14.1 

60,004,077 39.8 30.8 33.1 

GA 383 132,670,009 25,315,300 19.1 

69,383,306 52.3 27.4 34.2 

HI 14 21,722,636 2,547,194 11.7 

11,278,133 51.9 2.1 1.1 

IA 491 42,018,384 4,567,017 10.9 

8,265,976 19.7 25.2 46.4 

ID 18 12,890,701 2,330,384 18.1 

5,201,836 40.4 2.6 2.2 

IL 917 244,479,856 26,336,931 10.8 

80,644,262 33.0 56.4 86.7 

IN 221 70,041,613 9,802,370 14.0 

23,341,953 33.3 21.1 22.7 

KS 433 31,428,922 3,578,873 11.4 

4,961,034 15.8 18.0 37.8 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KY 276 49,638,651 6,351,407 12.8 

13,750,515 27.7 19.8 28.3 

LA 190 46,221,952 4,849,155 10.5 

13,249,696 28.7 12.8 17.3 

MA 235 163,138,452 15,034,191 9.2 

57,059,667 35.0 13.3 17.7 

MD 93 69,033,564 8,662,148 12.5 

34,804,499 50.4 9.3 8.5 

ME 37 15,212,125 2,047,830 13.5 

4,177,485 27.5 3.5 3.0 

MI 180 118,900,391 15,425,932 13.0 

65,769,103 55.3 16.2 16.1 

MN 525 70,201,176 8,555,405 12.2 

26,564,292 37.8 27.1 45.4 

MO 459 80,481,252 14,834,989 18.4 

31,330,691 38.9 31.0 44.8 

MS 112 27,183,016 2,558,715 9.4 

7,543,576 27.8 9.2 9.6 

MT 104 8,193,543 963,920 11.8 

1,854,750 22.6 5.1 8.4 

NC 104 185,083,269 34,073,825 18.4 

137,493,851 74.3 10.8 8.8 

ND 127 8,036,833 785,129 9.8 

1,096,467 13.6 5.8 10.8 

NE 336 26,688,333 3,269,710 12.3 

4,815,469 18.0 15.2 30.7 

NH 42 17,763,748 3,996,050 22.5 

4,154,242 23.4 3.2 4.6 

NJ 110 121,721,651 15,039,922 12.4 

52,692,790 43.3 11.3 10.5 

NM 68 14,773,677 1,726,965 11.7 

2,844,086 19.3 5.3 6.4 

NV 25 26,334,174 2,106,497 8.0 

3,954,798 15.0 2.3 2.0 

NY 214 987,473,090 78,001,125 7.9 

518,616,102 52.5 21.6 16.1 

OH 287 162,398,816 22,490,673 13.8 

70,605,006 43.5 26.5 28.6 

OK 342 34,526,994 3,880,763 11.2 

6,424,699 18.6 17.2 28.0 

OR 45 31,570,733 4,249,998 13.5 

15,703,178 49.7 5.5 3.3 

PA 271 202,354,452 24,778,430 12.2 

105,860,073 52.3 25.0 26.0 

RI 11 22,708,039 2,644,297 11.6 

10,814,279 47.6 1.9 0.8 

SC 71 24,588,928 3,061,755 12.5 

9,148,011 37.2 6.2 5.7 

SD 116 28,614,803 633,473 2.2 

513,370 1.8 4.5 9.0 

TN 240 66,595,870 6,865,736 10.3 

22,540,387 33.8 18.8 22.5 

TX 948 210,076,213 22,519,635 10.7 

82,562,199 39.3 53.8 84.8 

UT 45 19,912,754 2,468,610 12.4 

6,939,982 34.9 3.9 4.3 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- - - - -

- - - - -

VA 158 77,818,910 7,401,301 9.5 

32,086,378 41.2 13.5 15.0 

VT 25 7,659,631 954,146 12.5 

1,300,318 17.0 2.5 2.8 

WA 99 74,214,908 12,243,496 16.5 

44,599,653 60.1 10.4 8.1 

WI 411 69,320,911 8,476,630 12.2 

16,290,528 23.5 30.5 41.7 

WV 118 21,255,773 2,177,964 10.2 

3,874,201 18.2 7.6 10.8 

WY 53 8,348,581 874,505 10.5 

1,288,045 15.4 3.1 5.2 

U.S. Total 10,514 4,539,944,633 520,035,306 11.5 

2,021,837,462 44.5 725.9 962.9 

*Note that all asset values were based upon December 1995 Call

reports. 

TABLE A-1 

Model 1. - Predicting Targets in Mergers & 

Consolidations 

Stepwise Logit Estimation of the Relationships Between 

Banks' Year-End Financial Condition 

and the Incidence of Mergers and Consolidations Over the

Succeeding Two Years. 

(FDIC-Assisted Mergers not classified as 

Mergers) 

Estimated Coefficients (Standard

Error) 

Explanatory

Variables 1985 1986 1987 1988 

1989 1990 1991 1992 1993 

Intercept -14.6565 -8.3238 -1.2914 0.8515 ­

2.5419 -3.4490 -3.5004 -4.4129 -1.4954 

(2.0932) (1.8343) (0.1912) (0.5576)

(0.1197) (0.2711) (0.2986) (0.4977) (0.1592)

Interest-Bearing 0.1016 0.0734 - -0.0284 

Nonrisk Assets (0.0211) (0.0182) (0.0052)

Noninterest-Bearing 0.1586 0.1169 0.0425 ­

0.0651 0.0583 0.0671 0.0621 0.0288 

Nonrisk Assets (0.0234) (0.0201) (0.0117)

(0.0116) (0.0118) (0.0106) (0.0116) (0.0119)

Performing 0.1292 0.1011 0.0260 ­

Risk Assets (0.0215) (0.0181) (0.0051)

Loan Portfolio - -0.0001 -0.0001 -0.0001 

- - - - -0.0001 

Concentration (HHI) (0.00004) (0.00003) (0.00004)

(0.00003) 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- - -

- - -

- - -

- - -

- - -

Total Loans plus Securities 

with >= 5 yrs maturity

Expense on Salaries 

0.6928 -0.6459 -0.5842 

and Benefits 

(0.0809) (0.0884) (0.0848)

Expense on Premises

- 0.6687 0.4559 

and Fixed Assets 

(0.1438) (0.1538) (0.1582)

All Other Noninterest 

0.4356 0.3417 0.1873 

Expense

(0.0446) (0.0443) (0.0351)

Return on Earning 

- - -

Assets 

(0.0310)

Equity Capital 

- - -

Loan-Loss Allowance 

- 0.2356 0.2334 

(0.0501) (0.0480) (0.0519) 

Core Deposits

- 0.0065 0.0092 

(0.0032) (0.0035) (0.0036) 

Core Deposit Growth 

(0.0004) 

Growth in Gross Loans 

De Novo Bank Dummy 

Supervisory Concern

- -0.2678 ­

for Capital Dummy

(0.1197)

Supervisory Concern 

for Asset Quality Dummy

Supervisory Concern

- -0.3290 -0.2460 

for Management Quality Du

(0.1041) (0.0923) (0.0888)

Supervisory Concern

- 0.3831 0.4713 

for Earnings Dummy

(0.0934) (0.0885) (0.0859) 

-0.0187 

-

(0.0074)

-0.5489 

-0.6311 

(0.0745)

(0.0835)

0.7369 

0.5536 

(0.1106)

(0.1686)

0.3942 

0.1771 

(0.0507)

(0.0391)

-

-

-

-

-

0.2480 

(0.0507) 

-

0.0142 

-

-

-

-

-0.4653 

-

(0.1843)

-

-

-

-

-

-0.2149 

(0.0980)

-

0.4263 

(0.0945) 

-0.0343 

-

(0.0058)

-0.7900 

-0.7580 

(0.0851)

(0.0797)

0.5554 

0.3629
 

(0.1205) 

0.4095 

0.3090 

(0.0553)

(0.0423)

-0.1838 

-0.0743 

(0.0322) 

-

-

0.1612 

0.2382
 

(0.0552) 

-0.0134 

-

(0.0025) 

-

0.0010
 

-

-

-0.5728 

-

(0.1745)

-

-

-

-

-0.3865 

-0.4336 

(0.0923) 

-

0.2438
 

-0.0277 

(0.0052)

-1.1888 

(0.0949) 

0.6779 

(0.1342) 

0.3247 

(0.0538) 

-0.1024 

(0.0311) 

-

0.1616 

(0.0493) 

-

-0.0211 

(0.0054)

-0.7964 

(0.0841) 

-

0.2832 

(0.0338) 

-0.1465 

(0.0262) 

-

-

-

-

- -

-

-

-

-

-

-

-0.4513 

(0.1317) 

-

-0.4438 

(0.0951) 

0.1901 

(0.0838) 

-0.3366 

(0.1130) 

0.4982 

(0.0919) 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- - - - -

Supervisory Concern - 0.2757 - ­

for Liquidity Dummy (0.1061)

Log of Total Assets 0.0947 0.0710 - ­

- - - 0.0697 ­

(0.0297) (0.0297)

(0.0274) 

2x Log of Likelihood 5875 7082 6646 5647 

5705 5864 6085 6678 7213 

Number of Observations 13,822 14,037 13,642 13,081

12,715 12,395 12,024 11,659 11,272

Pseudo R2 0.040 0.065 0.047 0.040 

0.027 0.037 0.032 0.032 0.031 

In-Sample of 10% Critical Probability

Correct Predictions (%)

Targets 18.7 45.5 36.1 18.2 

14.2 24.9 28.7 41.1 63.1 

Nontargets 92.7 83.1 86.5 93.3 

95.6 91.1 87.0 77.2 58.3 

Incorrect Predictions (%)

False Failures or Type I 7.3 16.9 13.5 6.7 

4.4 8.9 13.0 22.8 41.7 

Missed Failures or Type I 81.3 54.5 63.9 81.8 

85.8 75.1 71.3 58.9 36.9 

Total Correct Predictions (%) 88.5 80.2 82.9 88.8 

90.6 86.6 82.8 74.1 58.8 

Number of Targets 801 1,072 965 775 

783 830 878 1,016 1,154

Number of Nontargets 13,021 12,965 12,677 12,306

11,932 11,565 11,146 10,643 10,119 

Table A-2 

Model 1 - Predicting Targets in Non-affiliate 

Mergers 

Stepwise Logit Estimation of the Relationships Between Banks' Yearend Financial Condition 

and the Incidence of Mergers Over the Succeeding 

Two Years. 

(Consolidations and FDIC-Assisted Mergers Not 

Classified as Mergers) 

Estimated Coefficients (Standard Errors) 

Explanatory

Variables 1985 1986 1987 1988 

1989 1990 1991 1992 1993 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-- -- -- --

-- -- -- -- --

-- -- -- -- --

-- -- -- -- --

-- -- -- -- --

-- -- -- -- --

-- -- -- -- --

-- -- -- -- --

-- -- -- -- --

Intercept -5.6309 -3.2043 -1.0598 -4.2086 ­

0.7494 -0.7118 -1.6850 -1.8376 -3.0233 

(0.4245) (0.2347) (0.7064) (1.0652)

(0.7197) (0.6216) (0.5133) (0.4645) (0.2228)

Interest-Bearing -- -- -0.0264 -- --

Nonrisk Assets (0.0072)

Noninterest-Bearing 0.0531 0.0493 -- 0.0389 

0.0446 -- 0.0380 0.0384 --

Nonrisk Assets (0.0132) (0.0116) (0.0196)

(0.0189) (0.0126) (0.0146)

Performing -- 0.0240 -- -­

Risk Assets (0.0086)

Loan Portfolio -- -- -- -­

-- -- -- -- 0.0001
 

Concentration (HHI)

(0.00003)

Total Loans Plus Securities -- -0.0318 -0.0344 -­

-- -- -0.0094 -0.0111 -0.0138
 

with >= 5 yrs Maturity (0.0088) (0.0077)

(0.0040) (0.0036) (0.0033)

Expense on Salaries -- -- -- -­

and Benefits 

Expense on Premises 0.5498 -- -- -­

-- -- 0.2409 -- -­

and Fixed Assets (0.0999)

(0.1079)

All Other Noninterest -- -- -- 0.0966 

0.1093 0.1501 -- -- -­

Expense (0.0390)

(0.0513) (0.0387)

Return on Earning -- -0.1727 -- -­

Assets (0.0306)

Equity Capital -- -- -- -­

Loan-Loss Allowance -- -- -- -­

-- -- 0.2510 0.1628 0.2067
 

(0.0653) (0.0704) (0.0631)

Core Deposits 0.0158 -- -- 0.0217 

(0.0050) (0.0076)

Core Deposit Growth -- -- -- -­

Growth in Gross Loans -- -- -- -­

De Novo Bank Dummy -- -- -- -­

Supervisory Concern for -- -- -- -­

-- -- -- -- 0.3752 
 

 

 

 

 

 

 

 

 

 

 

 

-- -- -- -- --

Capital Dummy

(0.1516)

Supervisory Concern for -- -- -- -­

-- 0.4802 0.4651 0.3618 -­

Asset Quality Dummy

(0.1471) (0.1359) (0.1234)

Supervisory Concern for 0.3625 -- -- -­

Management Quality Dummy (0.1155)

Supervisory Concern for -- -- 0.5912 0.5999 

0.5115 0.6305 0.4400 0.7165 0.7940 

Earnings Dummy (0.1206) (0.1382)

(0.1430) (0.1485) (0.1329) (0.1156) (0.1173)

Supervisory Concern for -- 0.3835 -- -­

-- -- -- 0.3154 -­

Liquidity Dummy (0.1440)

(0.1469)

Log of Total Assets -- -- -- -0.2014 ­

0.3684 -0.3480 -0.1975 -0.1351 -­

(0.0668) 

(0.0661) (0.0576) (0.0463) (0.0407) 

-2x Log of Likelihood 3206 3355 2810 2223 2091 

2537 3168 3772 3768 

Number of Observations 13,822 14,037 13,345 13,081 12,715

12,115 12,024 11,659 11,272

Pseudo R2 0.020 0.028 0.018 0.030 0.034 

0.052 0.045 0.046 0.036 

In-Sample at 4% Critical Probability 

Correct Predictions (%) 

Targets 15.4 22.2 5.4 7.9 13.6 

38.2 42.7 56.6 49.8 

Nontargets 93.0 91.1 96.6 97.4 96.9 

86.4 78.6 69.1 72.5 

Incorrect Predictions (%) 

False Targets or Type II Error 7.0 8.9 3.4 2.6 3.1 

13.6 21.4 30.9 27.5 

Missed Targets or Type I Error 84.6 77.8 94.6 92.1 86.4 

61.8 57.3 43.4 50.2 

Total Correct Predictions (%) 91.1 89.3 94.6 95.8 95.5 

85.3 77.5 68.6 71.6 

Number of Targets 351 374 297 227 213 

280 372 472 470 

Number of Nontargets 13,471 3,663 13,345 12,854 12,502

12,115 11,652 11,187 10,803 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-- -- -- --

-- -- -- --

Table A-3 

Model 2 - Predicting Targets in Non-affiliate Mergers

Stepwise Logit Estimation of the Relationships Between Banks' Year-end 

Financial Condition 

and the Incidence of Mergers Over the Succeeding Two Years.

(Consolidations and FDIC-Assisted Mergers Not Classified as Mergers)

Estimated Coefficients (Standard Errors) 

Explanatory

Variables 1985 1986 1987 1988 1989 

1990 1991 1992 1993 

Intercept -5.6860 -3.2075 -2.6312 -0.8507 -0.2565 ­

0.4328 -1.8917 -1.8731 -2.1432 

(0.4264) (0.2337) (0.5478) (0.6630) (0.7052)

(0.6148) (0.5002) (0.4600) (0.4522) 

Interest-Bearing -- -- -- -- --

Nonrisk Assets 

Noninterest-Bearing 0.0533 0.0494 0.0547 0.0400 0.0512 

-- 0.0504 0.0411 --

Nonrisk Assets (0.0130) (0.0116) (0.0164) (0.0187) (0.0182)

(0.0124) (0.0149)

Performing 

-­ -­ -­ -­

-­ 0.0228 -­ -­ -­

Risk Assets 

Loan Portfolio -­

(0.0086)

-­ -­ -­ -­

-­ -­ -­ 0.0001 

Concentration (HHI)

(0.00003)

Total Loans Plus Securities -­ -0.0293 -­ -­ -­

-­ -­ -0.0074 -0.0109 

with >= 5 yrs Maturity

(0.0035) (0.0035)

Expense on Salaries

-­ -­ -­ -­

-­

(0.0087) 

-­ -­ -­ -­

and Benefits 

Expense on Premises

0.2709 0.3398 0.4089 

0.5631 

0.4173 

-­ -­ -­ -­

and Fixed Assets (0.0974)

(0.1138) (0.0993) (0.1296) (0.1375)

All Other Noninterest -­ -­ -­ -­ 0.1371 

0.1273 -­ -­ -­

Expense

(0.0461)

Return on Earning

0.0761 -­ -0.0925 

-­

-0.1251 

-0.1827 -0.1227 -0.1313 

(0.0446) 

-­ -

Assets (0.0292) (0.0311) (0.0332)

(0.0228) (0.0304) (0.0379)

Equity Capital -- -- -- -- -­

Loan-Loss Allowance -- -- -- -- -­

0.2507 0.3878 0.3628 0.3226 

(0.0721) (0.0564) 0.0605) (0.0607) 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-- -- -- --

-- -- -- --

-- -- -- --

-- -- -- --

Core Deposits 0.0178 -- -- -- -­

(0.0050)

Core Deposit Growth -- -- -- -- -­

Growth in Gross Loans -- -- -- -- -­

De Novo Bank Dummy -- -- -- -1.2575 -­

(0.5865)

Log of Total Assets -- -- -0.1236 -0.3002 -0.4028 ­

0.3561 -0.2205 -0.1348 -0.0834 

(0.0505) (0.0623) (0.0655)

(0.0576) (0.0452) (0.0408) (0.0405) 

-2x Log of Likelihood 3240 3391 2829 2253 2110 

2571 3218 3847 817 

Number of Observations 13,928 14,110 13,695 13,116 12,740

12,412 12,035 11,660 11,272

Pseudo R2 0.017 0.024 0.012 0.024 0.029 

0.040 0.030 0.027 0.023 

In-Sample at 4% Critical Probability

Correct Predictions (%)

Targets 12.7 19.1 5.1 7.0 8.9 

24.3 32.3 56.4 60.4 

Nontargets 94.8 92.5 97.7 98.6 98.0 

93.5 85.1 64.8 60.0 

Incorrect Predictions (%)

False Targets or Type II Error 5.2 7.5 2.3 1.4 2.0 

6.5 14.9 35.2 40.0 

Missed Targets or Type I Error 87.3 80.9 94.9 93.0 91.1 

75.7 67.7 43.6 39.6 

Total Correct Predictions (%) 92.7 90.5 95.7 97.0 96.5 

91.9 83.5 64.5 60.0 

Number of Targets 354 377 297 229 214 

280 372 472 470 

Number of Nontargets 13,574 13,733 13,398 12,887 12,526

12,132 11,663 11,188 10,803 

Table A-4 

Model 1 - Predicting Acquirers in Mergers and 

Consolidations 

Stepwise Logit Estimation of the Relationships Between Banks' Yearend Financial Condition 

and the Incidence of Mergers and Consolidations Over the

Succeeding Two Years. 

(FDIC-Assisted Mergers Not Classified as Mergers)

Estimated Coefficients (Standard Errors) 

Explanatory 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-- -- -- --

-- -- -- --

-- -- -- --

Variables 1985 1986 1987 1988 1989 

1990 1991 1992 1993 

Intercept -10.4927 -8.6842 -8.4512 -8.2614 -8.7272 ­

8.9289 -9.1472 -9.3531 -8.4877 

(0.4298) (0.5009) (0.4077) (0.4733) (0.4273)

(0.3883) (0.3567) (0.3425) (0.3916)

Interest-Bearing -- -- -- -0.0080 -­

-- -- -- -0.0119 

Nonrisk Assets (0.0035)

(0.0031)

Noninterest-Bearing 0.0515 0.0546 0.0977 0.0715 0.0838 

0.0776 0.0485 0.0338 --

Nonrisk Assets (0.0131) (0.0110) (0.0135) (0.0138) (0.0150) 

(0.0137) (0.0128) (0.0153)

Performing 0.0156 -- 0.0081 -- 0.0119 

Risk Assets (0.0040) (0.0035) (0.0038)

Loan Portfolio -0.0002 -0.0002 -0.0003 -0.0002 -0.0002 ­

0.0003 0.0003 -0.0002 -0.0003 

Concentration (HHI)

(0.00006)(0.00006)(0.00005)(0.00006)(0.00005)(0.00006)(0.00005)(0.00004)(0.00

005)

Total Loans Plus Securities -- -- -- -- -­

0.0076 -- -- -­

with >= 5 yrs Maturity

(0.0038)

Expense on Salaries -- -- -0.4633 -- -0.3692 

and Benefits (0.1226) (0.1100)

Expense on Premises -- 0.4342 0.5809 -- -­

and Fixed Assets (0.1372) (0.1961)

All Other Noninterest -- -- -- -- 0.1761 

0.1117 0.1114 0.1048 -­

Expense (0.0538)

(0.0447) (0.0370) (0.0373)

Return on Earning

-­ -­ -­ -­

-­ -­ -­ 0.0798 -­

Assets 

Equity Capital

-­ -­ -­ -­

-­ -8.5427 -­

(0.0365)

-­ -­

Loan-Loss Allowance -­

(3.0338)

0.1604 -­ -­ -­

-­ -­ -­ -­

Core Deposits

-­ -­ -­ -­

-­

(0.0761)

-­ -­ -­ -­

Core Deposit Growth

-­ -­ -­ 0.0016 

-­ -­ -­ -­ -­

(0.0005)

Growth in Gross Loans -­ -­ -­ -­ -­

-­ -­ -­ -­

De Novo Bank Dummy

-­ -­ 0.6053 -­

-­ -­ -­ -­ -­
 

 

 

 

 

 

 

 

 

 

 

 

 

 

-- -- -- --

-- -- -- --

(0.2901)

Supervisory Concern for -0.4026 -0.5235 -- -- -- ­

0.4078 -- -- -­

Capital Dummy (0.1451) (0.1438)

(0.1356)

Supervisory Concern for -- -- -- -- -­

Asset Quality Dummy

Supervisory Concern for -- -- -0.4088 -0.6075 -0.5297 

-- -0.3587 -0.5921 -0.6023 

Management Quality Dummy (0.1218) (0.1414) (0.1335)

(0.1153) (0.1155) (0.1426)

Supervisory Concern for -- -- -- -- -­

Earnings Dummy

Supervisory Concern for -- 0.3247 -- -- -­

-- -0.4286 -- -­

Liquidity Dummy (0.1436)

(0.1658)

Log of Total Assets 0.5751 0.5028 0.4810 0.4853 0.4674 

0.4877 0.5723 0.5900 0.6134 

(0.0311) (0.0375) (0.0302) (0.0309)

(0.0320)(0.0299) (0.0275) (0.0269) (0.0276) 

-2x Log of Likelihood 3623 4161 4070 3694 3677 

3862 4001 4205 4220 

Number of Observations 13,822 14,037 13,642 13,081 12,715

12,395 12,024 11,659 11,272

Pseudo R2 0.121 0.122 0.110 0.110 0.110 

0.099 0.112 0.116 0.137 

In-Sample at 10% Critical

Probability Correct

Predictions (%)

Acquirers 26.8 32.0 26.7 25.8 26.9 

26.6 32.5 36.2 41.2 

Nonacquirers 96.1 94.6 95.0 95.6 95.3 

95.3 94.0 92.8 90.7 

Incorrect Predictions (%)

False Acquirers or Type II Error 3.9 5.4 5.0 4.4 4.7 

4.7 6.0 7.2 9.3 

Missed Acquirers or Type I Error 73.2 68.0 73.3 74.2 73.1 

73.4 67.5 63.8 58.8 

Total Correct Predictions (%) 93.7 92.1 92.3 93.0 92.7 

92.4 91.1 89.8 87.9 

Number of Acquirers 473 565 544 485 487 

515 557 605 636 

Number of Nonacquirers 13,349 13,472 13,098 12,596 12,228

11,880 11,467 11,054 10,637 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- -- -- -- --

- -- -- -- --

- -- -- -- --

- -- -- -- --

- -- -- -- --

- -- -- -- --

- -- -- -- --

- -- -- -- --

- -- -- -- --

Table A-5 

Model 1 - Predicting Acquirers in Non-affiliate 

Mergers 

Stepwise Logit Estimation of the Relationships Between Banks' Yearend Financial Condition 

and the Incidence of Mergers Over the Succeeding Two

Years. 

Consolidations and FDIC-Assisted Mergers Not Classified 

as Mergers) 

Estimated Coefficients (Standard Errors) 

Explanatory

Variables 1985 1986 1987 1988 

1989 1990 1991 1992 1993 

Intercept -10.0735 -10.2933 -9.2250 -11.3179 ­

8.8894 -7.2415 -8.6121 -9.0727 -9.8373 

(0.5422) (0.4662) (0.4878) (1.1054)

(0.5168) (0.5461) (0.4658) (0.4149) (0.4302)

Interest-Bearing -- -- -- -- -

Nonrisk Assets 

Noninterest-Bearing -- 0.0383 0.0518 -­

0.0550 0.0533 0.0427 -- --

Nonrisk Assets (0.0158) (0.0201)

(0.0223) (0.0174) (0.0154)

Performing -- -- -- -- ­

Risk Assets 

Loan Portfolio -0.0002 -- -- -0.0002 ­

- -0.0003 -0.0002 -0.0001 -0.0002 

Concentration (HHI) (0.00009) (0.00009)

(0.00008)(0.00007)(0.00005)(0.00005)

Total Loans plus Securities -- -- -- -- ­

with >= 5 yrs Maturity

Expense on Salaries -- -- -- -- ­

- -- -- -- 0.1650 

and Benefits 

(0.0551)

Expense on Premises 0.4572 0.5837 -- -- ­

and Fixed Assets (0.1785) (0.1576)

All Other Noninterest -- -- -- -- ­

Expense

Return on Earning -- -- 0.0705 0.1588 ­

Assets (0.0308) (0.0357)

Equity Capital -- -- -- -- ­

Loan-Loss Allowance -- -- -- -- ­

Core Deposits -- -- -- 0.0173 ­

(0.0067) 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Deposit Growth

- -­

-­

0.0014 

-­

(0.0005)

Growth in Gross Loans -­ -­

- -­ -­ -­ -­

De Novo Bank Dummy

- -­ 1.0700 0.8955 

-­

-­

-­

(0.3013) (0.3235)

Supervisory Concern for

- -­ -­ -­

-­

-­

-­

Capital Dummy

Supervisory Concern for

- -­ -­ -­

-­

-­

-0.4223 

Asset Quality Dummy

Supervisory Concern for -0.6379 

- -­ -0.6182 -0.6504 -0.4867 

(0.1578)

-­

Management Quality Dummy

(0.1540) (0.1549) (0.1855)

Supervisory Concern for

- -­ -­ -­

(0.2069) 

-­

-­

-­

Earnings Dummy

Supervisory Concern for -­ -­

0.7987 -- -- -- -­

Liquidity Dummy 

(0.3140)

Log of Total Assets 0.5637 0.5141 

0.3890 0.3194 0.4764 0.5200 0.5730 

(0.0385) (0.0382)

(0.0442) (0.0420) (0.0355) (0.0325) (0.0324) 

-2x Log of Likelihood 2077 2237 

1756 2094 2485 2798 2666 

Number of Observations 13,822 14,037

12,715 12,395 12,024 11,659 11,272

Pseudo R2 0.093 0.079 

0.045 0.030 0.076 0.081 0.106 

In-Sample at 4% Critical Probability 

Correct Predictions (%)

Acquirers 32.1 26.7 

12.6 14.0 35.9 44.6 48.2 

Nonacquirers 95.2 94.4 

97.2 96.5 89.6 84.5 85.8 

Incorrect Predictions (%)

False Acquirers or Type II Error 4.8 5.6 

2.8 3.5 10.4 15.5 14.2 

Missed Acquirers or Type I Error 67.9 73.3 

87.4 86.0 64.1 55.4 51.8 

Total Correct Predictions (%) 94.1 93.3 

96.1 95.1 88.3 83.3 84.7 

Number of Acquirers 224 240 

174 215 284 336 330 

Number of Nonacquirers 13,598 13,797

12,541 12,180 11,740 11,323 10,943 

-­ -­ -

-­

-­

-­

-­

-

-

-­

-­

-0.5009 

(0.1991) 

-­

-­

-­

-0.5878 

(0.2320)

-­

-­

-­ -

-

-

-

-

0.4249 

(0.0407) 

2060 

13,642 

0.058 

0.5439 

(0.0563) 

1777 

13,081 

0.074 

17.5 

95.9 

4.1 

82.5 

94.7 

212 

13,430 

19.8 

96.1 

3.9 

80.2 

95.1 

182 

12,899 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE A-6 

Model 2. - Predicting Acquirers in 

Nonaffiliate Mergers

Stepwise logit estimation of the relationships between banks' yearend financial condition 

and the incidence of mergers over the succeeding

two years. 

(Consolidations & FDIC-Assisted Mergers not 

classified as Mergers) 

Estimated Coefficients (Standard

Errors) 

Explanatory

Variables 1985 1986 1987 1988 

1989 1990 1991 1992 1993 

Intercept

-8.7693 -7.2196 -8.7029 

-10.6688 

-9.2381 

-10.3840 

-9.9427 

-9.5221 -11.7955 

(0.5154) (0.5446) (0.4657) 

(0.4507)

(0.4155) 

(0.4599)

(0.4316) 

(0.4739) (1.0940) 

Interest-Bearing 

- - - -

-

-

- - -

Nonrisk Assets 

Noninterest-Bearing 

0.0588 0.0531 0.0407 

-

-

0.0352 

-

0.0511 -

Nonrisk Assets 

(0.0213) (0.0174)

Performing

- -

(0.0152) 

- -

-

(0.0158) 

-

-

(0.0202) 

- -

Risk Assets 

Loan Portfolio - - - -0.0002 

- -0.0003 -0.0003 -0.0001 -0.0002 

Concentration (HHI)

(0.00008) (0.00007) (0.00005) (0.00006)

Total Loans plus Securities -

- - - - -

- -

(0.00009) 

-

with >= 5 yrs maturity

Expense on Salaries

- - - -

-

-

- - -

and Benefits 

Expense on Premises 

- - - -

- 0.5308 

0.1566 

- -

and Fixed Assets 

(0.0571)

All Other Noninterest -

(0.1576) 

- - -

- - - - -

Expense

Return on Earning

- - - -

-

-

- 0.0803 0.1705 

Assets (0.0294) (0.0342) 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Capital

- - -

Loan-Loss Allowance 

- - -0.2316 

-

-

-

0.2168 

-

-

-

-

-

-

-

-

(0.1053) (0.1016)

Core Deposits

- -

Core Deposit Growth

- -

-

-

-

-

-

-

-

-

-

0.0014 

-

-

0.0189 

(0.0067)

-

(0.0005)

Growth in Gross Loans 

- - -

De Novo Bank Dummy

- - 1.0112 

-

-

-

0.8820 

-

-

-

-

-

-

-

-

(0.3014) (0.3232)

Log of Total Assets

0.3713 0.3177 

(0.0440) (0.0419) 

0.4942 

(0.0373) 

0.5868 

0.5446 

(0.0377)

(0.0345) 

0.5173 

0.5787 

(0.0378)

(0.0323) 

0.4412 

(0.0399) 

0.5659 

(0.0556) 

2x Log of Likelihood

1785 2095 2498 

Number of Observations 

12,740 12,412 12,035

Pseudo R2 

0.039 0.035 0.071 

2097 

2813 

13,928

11,660

0.086 

0.076 

2263 

2674 

14,110

10,958

0.076 

0.103 

2068 

13,695 

0.055 

1785 

13,116 

0.070 

In-Sample at 4% Critical Probability 

Correct Predictions (%) 

Acquirers 29.9 

11.4 14.0 35.2 42.0 

Nonacquirers 95.6 

97.3 96.6 90.4 85.3 

28.1 

45.8 

94.7 

86.1 

16.5 

96.1 

19.2 

96.3 

Incorrect Predictions (%)

False Acquirers or Type II Error 4.4 

2.7 3.4 9.6 14.7 

Missed Acquirers or Type I Error 70.1 

88.6 86.0 64.8 58.0 

5.3 

13.9 

71.9 

54.2 

3.9 

83.5 

3.7 

80.8 

Total Correct Predictions (%)

96.1 95.2 89.1 

Number of Acquirers

176 215 284 

Number of Nonacquirers

12,564 12,197 11,751 

94.5 

84.1 

224 

336 

13,704

11,324 

93.6 

84.9 

242 

330 

13,868

10,943 

94.8 

212 

13,213 

95.2 

182 

12,934 

References 
 

 

 

 

 

 

 

 

 

 

Billett, Matthew T., Jane F. Coburn and John P. O'Keefe. "Acquirer Gains in 

FDIC-Assisted Bank Mergers: The Influence of Bidder Competition and FDIC 

Resolution Policies." Federal Reserve Bank of Chicago, Proceedings of the 31st 

Annual Conference on Bank Structure and Competition, Chicago: n.p., 1995. 

Hannan, Timothy H. and Stephen A. Rhoades. "Acquisition Targets and Motives: 

The Case of the Banking Industry." The Review of Economics and Statistics, Vol. 

LXIX, No. 1 (February 1987): 67-74. 

Houston, Joel F. and Michael D. Ryngaert. "The Overall Gains From Large Bank 

Mergers." Journal of Banking and Finance, Vol. 18 (1994): 1155-1176. 

Hunter, William C. and Larry D. Wall. "Bank Merger Motivations: A Review of the 

Evidence and Examination of Key Target Bank Characteristics." Federal Reserve 

Bank of Atlanta Economic Review, (September/October 1989): 2-19. 

Judge, G. G., W. E. Griffiths, R. C. Hill, H. Lutkepohl, and T. Lee. The Theory and 

Practice of Econometrics. Second Edition. New York: John Wiley and Sons, 1985. 

Maddala G. S. Limited-Dependent and Qualitative Variables in Econometrics. 

Cambridge, England: Cambridge University Press, 1983. 

McLaughlin, Susan. "The Impact of Interstate Banking and Branching Reform: 

Evidence From the States." Federal Reserve Bank of New York Current Issues In 

Economics and Finance, Vol. 1, No. 2 (May 1995): 1-5. 

Nolle, Daniel E. "Banking Industry Consolidation: Past Changes and Implications 

for the Future." Office of the Comptroller of the Currency Working Paper, 95-1, 

(April 1995). 

O'Keefe, John P. "Bank-Failure Resolutions: Implications for Banking Industry 

Structure, Conduct and Performance." FDIC Banking Review, Vol. 5, No. 1 

(Spring/Summer 1992): 17-35. 

Rose, Peter S. "Characteristics of Merging Banks in the United States: Theory, 

Empirical Results, and Implications for Public Policy." Review of Business and 

Economic Research, Vol. XXIV, No. 1 (Fall 1988): 1-19. 

Rose, Peter S. "The Impact of Mergers in Banking: Evidence From a Nationwide 

Sample of Federally Chartered Banks." Journal of Economics and Business, 

(November 1987) 39: 289-312. 

Scherer, F. M. Industrial Market Structure and Economic Performance. Second 

Edition. Boston, Massachusetts: Houghton Mifflin Company, 1980. 
 

 

 

 

 

 

 

 

 

 

 

 

 

FDIC Banking Review 

Recent Developments Affecting Depository Institutions 

by Benjamin B. Christopher and Valentine V. Craig 

REGULATORY AGENCY ACTIONS 

Inter-Agency Actions 

The federal bank and thrift regulatory agencies are engaging in joint or 

coordinated efforts in a number of regulatory areas that are mentioned specifically 

in this issue of the Review. These joint initiatives concern capital adequacy for 

derivatives; interest-rate risk; retail sales of nondeposit investment products; 

"suspicious activity" reporting; and regulatory relief in storm-damaged areas. 

Risk-Based Capital: Derivatives 

The federal banking agencies the Office of the Comptroller of the Currency 

(OCC), the Federal Reserve Board (FRB), and the Federal Deposit Insurance 

Corporation (FDIC) amended, effective October 1, 1995, risk-based capital 

standards for banks and bank holding companies to implement a revision to the 

Basle Accord. The Accord established a risk-based capital framework for 

assessing capital adequacy, implemented by the U. S. banking agencies in 1989. 

Under this framework, off-balance-sheet transactions were incorporated into the 

risk-based structure by converting each item into a credit-equivalent amount that 

was assigned to the appropriate credit-risk category according to the obligor or 

counterparty, or if relevant, the guarantor or the nature of the collateral. The 

credit-equivalent amount of an off-balance-sheet interest-rate or exchange-rate 

contract was determined by adding together the current replacement cost (current 

exposure) of the contract and an estimate of the possible increase in the future 

replacement cost (potential future exposure) in view of the volatility of the current 

exposure of the contract. The maximum risk category for rate contracts is 50 

percent. 

The effects of this final rule are: a) long-dated interest-rate and exchange-rate 

contracts are subject to higher conversion factors and new conversion factors are 

set forth that specifically apply to derivative contracts related to equities, precious 

metals, and other commodities; b) institutions are permitted to recognize a 

reduction in potential future credit exposure for transactions subject to qualifying 

bilateral netting arrangements; and c) derivative contracts related to equities, 

precious metals and other commodities may be recognized in bilateral netting 

arrangements for risk-based capital purposes. FR, 9/5/95, p. 46170; FIL-59-95, 

FDIC, 9/8/95. 

Additionally, the Bank for International Settlements, in July 1996, released a draft 

proposal to require derivatives dealers worldwide to record the notional and 

replacement cost of all derivative contracts. Public comment is due by September 

30, 1996, with reporting expected to begin on December 31, 1997. AB, July 19, 

1996. 
 

 

 

 

 

 

 

Capital Standards For Interest-Rate Risk 

The OCC, the FRB, and the FDIC issued a final rule, effective September 1, 

1995, implementing the FDICIA provision requiring banking agencies to revise 

risk-based capital standards to take adequate account of interest-rate risk. The 

final rule amended capital standards to specify that the banking agencies include 

in their evaluations of a bank's capital adequacy an assessment of the exposure 

to declines in the economic value of the bank's capital due to changes in interest 

rates. 

Subsequently, in May 1996, the three regulatory agencies approved a scaledback approach for considering bank interest-rate risk. The agencies adopted 

guidelines that advised bank directors to establish interest-rate-risk limits, to 

appoint officials to oversee policy, and to monitor management compliance. The 

agencies will continue to consider interest-rate risk when setting a bank's capital 

requirement, but agreed to examine each bank individually rather than apply a 

standardized interest-rate model across-the-board. The joint policy statement on 

interest-rate risk became effective on June 26, 1996. FR, 8/2/95, pp. 39490, 

39495; AB, 5/24/96; FR, 6/26/96, pp.33166; AB, 7/17/96. 

Retail Sales of Nondeposit Investment Products 

The FDIC, the FRB, the OCC and the Office of Thrift Supervision (OTS) issued 

joint interpretations of their Inter-Agency Statement, released on February 15, 

1994, on retail sales of mutual funds and other nondeposit investment products by 

federally insured financial institutions (see this Review, Winter 1995, p. 31). The 

interpretations give the inter-agency position regarding abbreviated disclosures 

and clarify instances where it is not necessary to provide disclosures. 

There are limited situations in which the disclosure guidelines need not apply or 

where a shorter logo format may be used in radio broadcasts of 30 seconds or 

less, electronic signs, and other signs (such as banners and posters) used only as 

location indicators. Third-party vendors not affiliated with the depository institution 

need not make the Inter-Agency Statement disclosures on nondeposit investment 

product confirmations and in account statements that may incidentally, with a 

valid business purpose, contain the name of the depository institution. The 

interpretations state that with respect to shorter logo format disclosures that can 

be used in visual media, such as television broadcasts, ATM screens, and signs, 

the text of an acceptable logo format disclosure would include the statements "Not 

FDIC Insured," "No Bank Guarantee," and "May Lose Value," which would be 

boxed, set in bold face type, and displayed conspicuously. FIL-61-95, FDIC, 

9/13/95; with "Joint Interpretations of the Inter-Agency Statement," and response 

letter to the American Bankers Association, 9/12/95. 

On May 5, 1996, the FDIC issued the results of a nationwide survey it funded of 

approximately 1,200 FDIC-insured institutions to determine their compliance with 

inter-agency guidelines on the sale of uninsured investment products. The survey 

found that banks were more likely to make required disclosures in face-to-face 

discussions than over the phone. Required disclosures were also found to be 

made more frequently by investment personnel who were members of the 

National Association of Securities Dealers (NASD) or employed by third-party 

affiliates than by investment representatives affiliated with an internal banking 

group. Survey of Nondeposit Investment Sales at FDIC-Insured Institutions, 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

prepared by Market Trends, 5/5/96. 

Suspicious Activity Reports (SARs) 

The Financial Crimes Enforcement Network (FinCEN) of the Department of the 

Treasury and the federal financial institutions' supervisory agencies issued new 

regulations requiring centralized filing with FinCEN of reports of suspicious 

transactions under the Bank Secrecy Act (BSA). A uniform "Suspicious Activity 

Report" (SAR) is to be used to report suspicious transactions and known or 

suspected criminal violations. Essentially the same rule was issued or is being 

issued by the five federal supervisory agencies for depository institutions. 

The regulation raises the mandatory reporting thresholds for criminal offenses and 

reducing bank reporting burdens. For the reporting of known or suspected 

criminal activity when a bank has a substantial basis for identifying a non-insider 

suspect, the reporting threshold based on asset involvement is raised from the 

existing $1,000 to $5,000; where the bank has no substantial basis for identifying 

a suspect, the reporting threshold rises from the existing $5,000 to $25,000. 

Banks may file the referral form in several ways: they may submit an original form, 

a photocopy, or they may file by magnetic means, such as by computer disk. The 

regulatory agencies are also developing computer software to assist banks in 

preparing and filing the reports. FR, 9/14/95, p. 47719; FIL-71-95, FDIC, 10/16/95; 

Comptroller of the Currency, News Release, OCC, NR96-12, 2/5/96. 

The designation of a single government recipient of all depository institution 

suspicious transaction reports is required under the Riegle Community 

Development and Regulatory Improvement Act of 1994. Previously, banks 

reported violations or suspected violations to their primary federal regulators and 

several law enforcement agencies using non-uniform criminal referral forms. They 

also filed currency transaction reports (CTRs) for transactions in currency of more 

than $10,000. FR, 9/7/95, p. 46556; BBR, 9/11, p. 377; CEO Memo 53, OTS, 

3/19/96. 

Record keeping For Funds Transfers 

The FRB and the Department of the Treasury jointly proposed amendments to 

their rules requiring enhanced Record keeping on certain wire transfers by 

financial institutions in accordance with the Bank Secrecy Act. The proposed 

amendments were made to conform the meanings of the definitions of 

international funds transfer to the Uniform Commercial Code. 

In January, the FRB and the Department of the Treasury adopted a final rule that 

required each domestic financial institution involved in a wire transfer to collect 

and retain certain information depending upon the type of financial institution, its 

role in the transfer, the amount of the transfer, and the relationship of the parties 

to the transaction. The rule exempted wire transfers below $3,000. The effective 

date was to have been January 1996, but postponements delayed the new 

Record keeping rules until May 1996. 

FinCEN reports that electronic wire transfer systems move funds between 

financial institutions and handle a daily volume in excess of 500,000 transactions, 

moving more than $2 trillion around the world each day. Wire transfers have 

provided money launderers with an efficient and secure method of transferring 

huge sums of money over a very short period of time. Because wire transfer 
 

 

 

 

 

 

 

 

 

 

messages often are sent through several banks and wire transfer systems, 

launderers have been able to confuse the money trail and make it difficult for law 

enforcement to trace the criminal proceeds. FR, 1/3/95, pp. 220, 231; 8/24, pp. 

44144, 44146; Press Release, FRB, 12/22/94; 8/18/95; BBR, 8/28/94, p. 330; AB, 

3/21/96. 

Bank Lending to Areas Subject to Floods 

The OCC, the FRB, the FDIC, the OTS and the National Credit Union 

Administration (NCUA) are amending regulations regarding loans in areas having 

special flood hazards to implement the provisions of the National Flood Insurance 

Reform Act of 1994. Among the proposed amendments are new escrow 

requirements a lending institution that requires the escrow of taxes, property 

insurance premiums, fees or other charges must require the escrow of flood 

insurance premiums; explicit authority for lenders and servicers to "force-place" 

flood insurance under certain circumstances; and a requirement that lending 

institutions notify purchasers or lessees if the property securing the loan is located 

in a special flood hazard area (SFHA). 

Additionally, the proposal requires each agency to assess compliance with the 

National Flood Insurance Program when examining the institutions it supervises, 

and to use a new standard form developed by the Federal Emergency 

Management Agency for recording whether a security property for a given loan is 

located in an SFHA. FR, 10/18/95, p. 53962; PR-57-95, FDIC, 9/26/95. 

Federal Financial Institutions Examination Council Appraisal Regulation 

The inter-agency Federal Financial Institutions Examination Council (FFIEC) is 

soliciting comment on how it should implement a section of Title XI of the 

Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which was 

amended by the Riegle Community Development and Regulatory Improvement 

Act of 1994. The amendment added the requirements that: a) state appraiser 

certifying or licensing agencies are not to impose excessive fees or burdensome 

requirements for temporary practice; and b) the states are encouraged to develop 

reciprocity agreements that readily authorize appraisers who are licensed or 

certified in one state, and who are in good standing, to perform appraisals in other 

states. Since January 1, 1993, Title XI, as amended, has required all federally 

regulated financial institutions to use state-licensed or certified real-estate 

appraisers, as appropriate, to perform appraisals in federally related transactions. 

In response to the Title, each state, territory and the District of Columbia has 

established a regulatory program for certifying, licensing and supervising realestate appraisers. Press Release, Appraisal Subcommittee, FFIEC, 9/8/95; FR, 

9/12, p. 47365. 

GAAP Approved For Call Reports 

The FFIEC adopted the generally accepted accounting principles (GAAP) as the 

reporting basis for the balance sheet, income statement, and related schedules in 

the bank Reports of Condition and Income (Call Report), effective with the March 

1997 report date. Adoption of GAAP as the reporting basis will eliminate existing 

differences between bank regulatory reporting standards and GAAP, among 

which are the accounting treatment of assets sold with recourse, futures, 

forwards, and option contracts. The reporting basis being adopted already is used 

for savings association Thrift Financial Reports and Federal Reserve bank holding 
 

 

 

 

 

 

 

 

 

 

 

 

 

company FR Y Reports, and is consistent with the objectives of Section 307 of the 

Riegle Community Development and Regulatory Improvement Act of 1994, which 

requires the federal banking agencies to develop a single form for the filing of 

core information by banks, savings associations, and bank holding companies. 

The FFIEC believes that adopting GAAP will reduce reporting burden as well as 

any confusion on the part of users about differences in the reporting principles 

governing regulatory reports and financial statements. GAAP does not require the 

disclosure of all of the information needed by federal banking agencies and does 

not address all of the agencies' supervisory concerns, thus institutions would still 

have to report, in supplemental schedules and items, some information needed 

for supervisory and other purposes. The Council and the agencies will continue 

when necessary to issue specific reporting guidance that falls within the range of 

acceptable practice under GAAP (for example, as is currently the case for the 

allowance for loan and lease losses), and each agency will retain existing 

authority to require an institution to report a transaction in regulatory reports in 

accordance with the agency's interpretation of GAAP. Press Release, FFIEC, 

11/3/95. 

Mortgage Lending Reports 

The FFIEC made available the reports of 1994 mortgage lending activity in 

metropolitan statistical areas (MSAs) for public inspection at a central depository 

in each MSA, and the agency headquarters. The reports, which are available 

almost two months earlier than last year, include individual disclosure statements 

and aggregate data for each MSA. They reflect the lending activity of the more 

than 9,800 lending institutions covered by the Home Mortgage Disclosure Act 

(HMDA) that reported data for 1994 to member agencies of the FFIEC and to the 

Department of Housing and Urban Development. The reports contain data about 

loan originations, loan purchases, and applications that did not result in a loan. 

Also, they give information about the race or national origin, gender, and annual 

income of the applicants or borrowers. For most loans relating to property located 

in MSAs, the reports identify the geographic location, usually by Census tract. 

Data from the HMDA reports released in July indicated that the number of 

conventional home purchase loans went up 54.7 percent for blacks and 42.0 

percent for Hispanics since 1993. Press Release, FFIEC, 9/1/95. 

Proposed Revisions to CAMEL Rating System 

The FFIEC proposed revisions to its Uniform Financial Institutions Rating System 

(commonly referred to as the CAMEL rating system) on July 9, 1996. Comments 

are due by September 16, 1996. The proposed changes include clarifying the 

component rating descriptions; addition of a sixth component to address market 

risk; and increased emphasis on risk management. FIL-56-96; 7/24/96; FR, 

7/18/96; p. 37472. 

Risks to Computer Systems in the New Millenium 

The FFIEC issued a statement on July 12, 1996, alerting financial institutions to 

the need to address risks involving their computer systems as the industry enters 

the new century. Examiners will review each institution's 2000 plan during regular 

supervisory reviews. The risks arise from the programming code in existing 

computer systems that may cause the system to function improperly due to the 
 

 

 

 

 

 

 

 

 

 

two digit year field containing "00." FIL-50-96, 7/12/96. 

Federal Deposit Insurance Corporation Assessments 

The FDIC Board of Directors voted on August 8, 1995, to reduce significantly the 

deposit insurance premiums paid by most banks but to keep existing assessment 

rates intact for savings associations. Under the new rate structure, the best-rated 

institutions insured by the Bank Insurance Fund (BIF) would pay four cents per 

$100 of domestic deposits, down from 23 cents per $100. The weakest 

institutions would continue to pay 31 cents per $100. The FDIC announced in 

September 1995, that the BIF was fully recapitalized and that it would refund to 

banks insurance overpayments for the period of June through September. The 

FDIC estimated the aggregate BIF assessment refund at $1.49 billion, plus $19.9 

million in interest. PR-50-95, FDIC, 8/89/95; PR-54, 9/5. 

On September 26 1995, the FDIC amended its regulation on assessments to 

delay the regular payment date for the first quarterly payment for the first 

semiannual period from December 30 of the prior year to January 2 (or the first 

business day thereafter). At the same time, insured institutions were given the 

option of making the first payment on December 30 (or the prior business day). 

The FDIC's purpose in making these changes was to relieve certain institutions of 

the regulatory burden of having to make an extra assessment payment in 1995, 

while also affording flexibility to other institutions to make such a payment if they 

so desired. 

The amendments approved in late September 1995, also give insured institutions 

the option of paying double the amount of any quarterly payment, when the 

payment is made on a payment date (regular or alternate) that comes before the 

start of the quarter to which the payment pertains on the March, June, September, 

and December payment dates. 

The interest rate to be applied to under payments and overpayments of 

assessments is replaced with a new, more sensitive rate derived from the 3­

month Treasury bill discount rate. Rates set under the prior standard have rapidly 

become obsolete in volatile interest-rate markets. 

The timetable for announcing the semiannual assessment rate schedule is 

shortened from 45 days to 15 days prior to the invoice date. This change enables 

the FDIC to use the most up-to-date information available for computing 

assessments, thereby benefitting both the agency and the depository institutions. 

The rule is effective September 29, 1995, except some amendments are effective 

October 30, 1995. FR, 9/29/95, p. 50400; 8/10, p. 40776; FIL-67-95, FDIC, 

10/6/95. 

The FDIC Board of Directors voted on May 14, 1996, to maintain the existing 

assessment rates on deposits by the BIF and the SAIF for the second semiannual 

assessment period of 1996. Insured institutions will continue to pay annual 

assessment rates of from zero to $.27 per $100 of BIF-assessable deposits, 

subject to a quarterly minimum of $500. Based upon year-end 1995 data, it is 

expected that these rates will result in an average annual BIF rate of 

approximately $.0029 per $100 of deposits and annual revenues of about $72 

million. The BIF reserve ratio was 1.30 percent as of December 31, 1995. 

Institutions insured by the Savings Association Insurance Fund (SAIF) will 
 

 

 

 

 

 

 

 

 

 

 

continue paying premiums on a risk-related basis of between $.23 per $100 to 

$.31 per $100 of assessable deposits. It is expected that these rates will result in 

an average annual SAIF rate of approximately $.234 per $100 in assessable 

deposits. SAIF-insured institutions will continue to pay higher rates than BIFinsured banks because the SAIF remains seriously undercapitalized. At 

December 31, 1995, the SAIF had reserves of approximately $3.4 billion and is 

not expected to reach the minimum reserve level of 1.25 percent until the year 

2002, given the current circumstances and reasonably optimistic assumptions. 

PR-70-95, FDIC, 11/14/95; FIL-40-96, 6/11/96. 

Thrifts Allowed to Transfer Deposits to Affiliates 

The FDIC has decided that thrifts may transfer deposits to newly chartered bank 

affiliates, if the deposit shift is initiated by the depositor. This decision will allow 

thrifts to take advantage of cheaper deposit insurance available to banks. The 

FDIC ruling is expected to accelerate the outflow of funds from the thrift industry, 

thereby reducing the FICO payment base. WSJ, 7/3/96. 

Assessments For Oakar Institutions 

On July 3, 1996, the FDIC proposed to amend its assessment regulations 

regarding the so-called Oakar institutions institutions that belong to one insurance 

fund, but hold deposits that are treated as insured by another insurance fund. The 

changes would affect particularly calculations of the Adjusted Attributable Deposit 

Amount (AADA). The AADA is used to determine the allocation of an Oakar 

institution's deposits between the BIF and the SAIF. 

The proposed amendments are intended to eliminate anomalies in the 

assessment of these institutions' deposits. One amendment would change the 

AADA adjustment for an institution's overall deposit growth. The FDIC has found 

that the current treatment of deposit sales for Oakar institutions has resulted in an 

increase in the total amount of primary fund deposits reported and assessed and 

a decrease in the total amount of secondary fund deposits reported. The 

proposed rule would correct this anomaly for all deposit sale transactions 

occurring after June 30, 1996; and would adjust the AADA for growth or shrinkage 

on a quarterly basis. The FDIC is also proposing to eliminate the requirement that 

Oakar institutions submit growth worksheets to adjust the AADAs. Finally, public 

comment is requested on two options for allocating funds to the BIF or the SAIF at 

the time of deposit sales. One option would treat deposit sales by Oakar 

institutions as sales of primary fund deposits only (unless the deposits sold 

exceeded the amount of primary fund deposits available); the second alternative 

would treat the deposits as a pro rata blend of the institutions' primary and 

secondary fund deposits. FIL-54-96, 7/19/96; FR,3/3/96, p. 34751. 

BIF and SAIF First-Quarter 1996 Financial Highlights 

The BIF earned $295 million in net income in the first quarter of 1996, significantly 

below the $1.3 billion earned the same period a year earlier. The decrease is 

primarily due to the reduction in premium rates. The fund's estimated liability for 

anticipated failures decreased to $240 million from $279 million at year-end 1995. 

The fund balance at the end of the quarter was $25.748 billion. One BIF-insured 

bank failed during the quarter. The SAIF earned $292 million in net income in the 

first quarter of 1996, $13 million more than it earned in the same quarter a year 

earlier. Net assessment revenue came to $251 million through the first quarter of 
 

 

 

 

 

 

 

 

 

 

 

 

1996 after payments of $393 million to service Financing Corporation (FICO) 

obligations. The fund balance at the end of the quarter rose to $3.650 billion. 

Federal Deposit Insurance Corporation, First-Quarter 1996 Financial Results, 

Bank Insurance Fund, 3/31/96. 

Capital Maintenance 

The FDIC adopted an interim rule and requested comments to implement Section 

208 of the Riegle Community Development and Regulatory Improvement Act of 

1994 which provides that a qualifying insured depository institution that transfers 

small-business loans and leases on personal property with recourse need include 

only the amount of retained recourse in its risk-weighted assets when calculating 

its capital ratios if certain conditions are met. The transaction must be treated as a 

sale under GAAP; and the transferring institution must establish a non-capital 

reserve sufficient to meet the reasonably estimated liability under the recourse 

arrangements. A qualifying institution is one that is well-capitalized or, with the 

approval of the appropriate federal banking agency, adequately capitalized. For 

these institutions, the rule, which is effective August 31, 1995, will result in lower 

capital requirements for affected loans and leases. PR-52-95, FDIC, 8/25/95; FR, 

8/31, p. 45606; p. 45612 (FRB notice); p. 45618 (OTS notice). 

Final Rules on Golden Parachutes, Internal Audits and Foreign Bank 

Deposits 

The FDIC issued a final rule, effective April 1, 1996, prohibiting with certain 

exceptions golden parachute payments to executives of troubled holding 

companies, banks and thrifts. Exceptions to the prohibition include payments to 

qualified pension and retirement plans. The rule provides guidance on what 

constitutes legitimate payments. The new rule also limits holding companies or 

FDIC-insured institutions from paying the legal expenses or liabilities of their 

employees or directors who are subject to enforcement proceedings. PR-8-96, 

FDIC, 2/6/96; BBR, 2/12/96, pp. 205-206. 

Court Supports Agency on Cross-Guaranty 

The U.S. Court of Appeals for the Second Circuit upheld the FDIC's power, 

granted to the agency by FIRREA in 1989, to charge losses from a bank failure to 

another bank in the same corporate organization (Meriden Trust and Safe Deposit 

Co. v. FDIC). It rejected claims that such action amounts to an unconstitutional 

taking under the Fifth Amendment. In 1994, a federal claims court judge held that 

the agency's use of the cross-guaranty power might be a violation of the takings 

clause (Branch v. U.S.). BBR, 8/14/95, p. 308. 

On July 24, 1996, First Coastal Corporation of Westbrook, Maine, paid the FDIC 

$9.75 million to settle a cross-guaranty assessment levied against its subsidiary, 

Coastal Savings Bank of Portland, Maine, in 1993. FDIC, PR-55-96. 7/24/96. 

Court Rules Government Breached Contracts With Savings-and-Loan 

Associations 

On July 1, 1996, the U. S. Supreme Court ruled in the United States v. Winstar 

Corp., No 95-865, that Congress erred in changing industry accounting rules 

concerning supervisory goodwill in 1989. The plaintiffs were Glendale Federal 

Bank of California, and two since-closed thrift companies, Statesman Savings 
 

 

 

 

 

 

 

 

 

 

Holding Corporation and Winstar Corporation, who acquired weak savings 

institutions at the government's behest in the 1980s and in return were given 

assurances that the supervisory goodwill created in the transactions could be 

counted as capital and written off over time. The regulators subsequently refused 

to honor the agreements that they claimed were repudiated under the Financial 

Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). 

The Federal Circuit Court of Appeals had previously ruled that the government 

violated contracts with the three plaintiffs. In this most recent ruling, the U.S. 

Supreme Court concluded that "it would have been madness" for the institutions 

to have taken over the weak institutions if they had known that the government 

could cancel the current accounting "gimmicks" at its will. The Court ruled that the 

government was liable for damages, and sent the case back to a lower court to 

determine those amounts. Breach-of-contract suits have been filed by at least one 

hundred thrifts. BBR, 9/11/95, p. 403; AB, 8/31, p. 1, AB, 7/26/96, WSJ, 7/2/96, 

NYT, 7/2/96. 

Subsequent to the Supreme Court ruling, the FDIC took steps to appear as 

plaintiff in two cases involving supervisory goodwill pending in the U.S. Court of 

Federal Claims, and is investigating other cases with possible goodwill claims to 

determine whether it will become a plaintiff. In these cases, the FDIC is acting as 

a receiver for the failed institutions. FDIC, PR-56-96, 7/24/96, AB, 7/26/96. 

D'Oench Duhme Doctrine Rulings 

The U.S. Court of Appeals for the District of Columbia ruled in August 1995, that 

the FDIC might use the D'Oench Duhme doctrine to void secret agreements that 

would cause a loss in a failed bank's assets, but could not use it as a protection 

against fraud claims. In this case, an investor in a bankrupt Florida resort sued the 

developers and Southeastern Bank, charging that the bank secretly controlled the 

development and was responsible for fraudulent statements about the project's 

financial condition. 

In another recent case, the U. S. Court of Appeals for Atlanta found that Congress 

did not eliminate the D'Oench Duhme doctrine in passing the thrift bailout law in 

1989. In this case, the 11th Circuit Court concurred with a May 1996, FDIC ruling 

that the D'Oench Duhme doctrine prevented a car dealership from suing for 

breach of contract against Southeast Bank of Florida. 

The D'Oench Duhme doctrine began with a 1942 Supreme Court decision and 

legislation enacted in 1950. It required that the FDIC recognize only written 

agreements by banks that subsequently fail and was intended to force bankers to 

put agreements in writing so that examiners could more accurately evaluate an 

institution's financial condition. AB, 8/9/95, p. 2; 5/31/96, p. 2. 

Court Rules Examination Reports Accessible During Discovery 

The U.S. Court of Appeals for the Sixth Circuit, rejecting an attempt by Bankers 

Trust Company to shield its examination results, ruled that parties to a lawsuit can 

seek examination reports from banks during the discovery process. As a result of 

the decision, which affects banks in Ohio, Michigan, Kentucky and Tennessee, a 

litigant can ask the bank for a report directly, and if refused can ask the trial judge 

to order the bank to comply. The judge must first give the regulator a chance to 

object. Previously, a litigant's request for an examination report had to be made 
 

 

 

 

through the bank's regulator, and if refused, which usually occurred in respect to 

the examiner's subjective comments, the plaintiff could seek compliance through 

the court. AB, 8/10/95, p. 3. 

Improvement in Real-Estate Markets Reported 

The FDIC's July 1996 Survey of Real Estate Trends reported continued 

improvements in both commercial and residential real-estate markets during the 

second quarter of 1996. The latest results represented the second consecutive 

quarter of reported improvements and were the most positive in over a year. 

The quarterly survey asks field personnel from all federal bank and thrift 

regulatory agencies about developments during the prior three months in their 

local real-estate markets. The survey reflected positive trends in market activity in 

many areas of the nation, with the Northeast and the West reporting the most 

gains. The proportion of respondents seeing better market conditions in the South 

and the Midwest remained the same or declined following reports in April of 

significant progress. 

The national composite index, summarizing assessments of real-estate markets, 

edged up to 68 in July from 67 in April. Values above 50 indicate that more 

examiners and asset managers at federal bank and thrift regulatory agencies 

thought conditions were improving than declining. The July report represents the 

second consecutive increase in the summary index from its recent low of 60 in 

January. Although the gains reported in the last three months were not as strong 

as those observed in the February-April period, the July composite index is the 

highest reading in two years. 

Survey respondents reported continued confidence in the residential markets. 

Forty-five percent observed better conditions in their local housing markets the 

same proportion reported previously. However, those noting worsening conditions 

in July fell to eight percent. The national summary index for residential markets 

inched up to 69 from 68 in April, with a substantial boost from gains in the West, 

where 66 percent of the respondents reported better housing conditions, up from 

54 in April. 

Overall assessments of commercial real-estate trends continued to be positive as 

well. An increasing proportion of survey participants observed improving 

conditions (38 percent) while reports of worsening conditions were very few (one 

percent). As a result, the composite index for commercial markets rose to 68 in 

July from 66 in April. Survey of Real Estate Trends, July 1996. 

Online Press Release Service Via Internet 

The FDIC has established an online subscription service that allows subscribers 

to receive over the Internet and World Wide Web press releases and copies of 

key Congressional testimony and major speeches by agency officials. The new 

service will send the material directly to subscribers via e-mail. Released 

materials will continue to be available via fax modem, postal service mail and from 

information racks in FDIC buildings. PR-59-95, FDIC, 10/4. 

Disclosure of Information 
 

 

 

 

 

 

The FDIC revised the procedures used by the public in requesting records under 

the Freedom of Information Act (FOIA) and the Freedom of Information Reform 

Act (FOIRA). Among its provisions, the final rule sets forth the conditions under 

which exempt records may be disclosed to third parties, including such conditions 

as are necessary to protect the confidentiality of the records. The rule contains 

procedures by which the agency would charge appropriate fees as required under 

FOIRA and guidelines established by the Office of Management and Budget. The 

FOIRA significantly amended the fee provisions of FOIA by establishing classes 

of FOIA requesters and a framework under which fees could be charged to the 

individual categories of requesters. FR, 7/6/95, p. 35148; 11/30, p. 61465. 

New FDIC Board Member 

Former Mississippi Banking Commissioner Joseph H. Neely was sworn in as a 

member of the five-person FDIC Board on January 29, 1996. As Mississippi's 

Banking Commissioner, a position he occupied since 1992, Mr. Neely served as 

the primary regulator and supervisor of state-chartered banking and thrift 

institutions. He was also responsible for supervising state-chartered credit unions 

and consumer finance companies. Additionally, Mr. Neely served on the faculty of 

the Mississippi School of Banking from 1993 to 1995. PR-6-96, FDIC, 1/29/96. 

Stored-Value Cards 

On July 16, 1996, the FDIC issued an opinion on whether federal deposit 

insurance applied to stored-value cards. Stored-value cards look like a credit card 

or ATM card and store electronic value on either a magnetic stripe or a computer 

chip, and can be used to pay for purchases. The FDIC concluded that in most 

cases stored-value cards are not protected by deposit insurance. However, if the 

funds represented by the card were maintained in the customer's own account, 

rather than a single pool, deposit insurance would apply. The FDIC scheduled a 

hearing for September 12, 1996, on stored-value cards, Internet banking and 

other electronic payment systems. FDIC PR-52-96, 7/16/96; PR-53-96, 7/16/96. 

FDIC Review of Regulations 

The FDIC is conducting a systematic review of its regulations and policies to 

identify and revise regulations that might be inefficient, cause unnecessary 

burden, or contain outmoded, duplicative or inconsistent provisions. In one action, 

the FDIC issued an inter-agency proposal to remove inconsistencies in the way 

regulators assign risk-based capital requirements to certain loans and other 

collateralized transactions. The agency also proposed that publicly traded FDICsupervised banks use Securities and Exchange Commission (SEC) rules for 

registration of securities and reporting instead of separate but similar FDIC rules. 

Final action was also taken eliminating outmoded policies on the submission of 

quarterly Reports of Condition and Income and the advertising of Negotiable 

Order of Withdrawal (NOW) accounts. FDIC, PR-44-96, 6/17/96; FIL-48-96, 

7/12/96; FR, 7/3/96, p. 34814. 

Resolution Trust Corporation Thrift Depositor Protection Oversight Board 

Will Continue 

The Thrift Depositor Protection Oversight Board (TDPOB) continues in operation 

following termination of the Resolution Trust Corporation (RTC) on December 31, 
 

 

 

 

 

 

 

 

 

 

1995. It is responsible for preparing final reports on the resolution of the thrift 

crisis and for overseeing the Resolution Funding Corporation, which between 

1989 and 1991 issued long-term bonds to finance the resolution. The Board's 

membership will be reduced to three the Secretary of the Treasury, Chairman of 

the Federal Reserve Board, and Secretary of the Department of Housing and 

Urban Development. AB, 12/6/95, p. 2. 

Last RTC Auction 

At its eighth and final national auction, the RTC sold performing and 

nonperforming loans with a book value of $577 million. It recovered $404 million 

on the sale, approximately 70 percent of book value. The three-day auction was 

held in Kansas City beginning December 13, 1995. National Mortgage News, 

1/2/96, pg. 3. 

Final Cost of Thrift Bailout 

The GAO reported that the thrift cleanup cost the taxpayer $160.1 billion in direct 

costs or $480.9 billion, if interest costs are included. Direct costs consist of $87.9 

billion spent by the RTC; $64.7 billion spent by the FSLIC; and $7.5 billion in tax 

breaks to acquirers of ailing institutions. Interest costs consist of $111.8 billion of 

interest expenses on two bond issues, and $209 billion in interest computed on 

Congressional appropriations. Interest costs are not generally counted in 

government allocations. The New York Times. 7/13/96; WSJ, 7/15/96; The 

Washington Post, 7/13/96. 

Federal Reserve Board Derivatives Transaction Standards 

The Federal Reserve Bank of New York and five securities industry groups 

released final transaction standards for derivatives market participants. The 

standards cover such issues as the definition of a participant, a client's reliance on 

a dealer's advice, confidentiality, valuation, distribution of the standards, 

information, and disputes, but do not include any provision for dealers to 

determine a client's suitability for a particular transaction. BBR, 8/28/95, p. 329. 

International Operations of Banks 

The FRB proposed to amend its Regulation K to provide additional general 

consent authority for de novo investments in foreign countries by U.S. banking 

organizations that are strongly capitalized and well-managed. Banks meeting 

these requirements would be permitted to make certain investments without the 

need for prior approval or review. In order to strike a reasonable balance between 

reduced regulatory burden and continued FRB oversight, limits would be imposed 

on the total amount of general consent investments that may be made in a year. 

In addition, certain investments or activities would not be eligible for the expanded 

authority. Investors making use of the expanded authority would be required to 

provide the FRB with a post-investment notice. The Board's proposal is part of an 

overall review of the regulation. FR, 9/25/95, p. 49350; Press Release, FRB, 9/22. 

Proposed Amendments to Leasing Regulation 

The FRB proposed amendments to its Regulation M, implementing the Consumer 

Leasing Act, which was enacted into law in 1976 as an amendment to the Truth in 
 

 

 

 

 

 

 

 

 

 

 

 

Lending Act (TILA). Generally, the CLA applies to consumer leases of personal 

property such as automobiles and furniture involving $25,000 or less, and a term 

of more than four months. Among the disclosures required of lessors are the 

amount of the initial charges to be paid, a payment schedule, the responsibilities 

for maintaining the leased property, and the liability for terminating a lease early. 

Among the proposed amendments are: additional disclosure requirements about 

early termination charges; disclosure of the gross costs of leases, the residual 

value, and the estimated lease charge; and, pursuant to a statutory change, new 

advertising provisions for radio and television. 

The Board also proposed changes to the official staff commentary on Regulation 

M. Press Release, FRB, 9/13/95; FR, 9/20, pp. 48752, 48769; BBR, 9/18, p. 438. 

Investment Advisory Powers Expanded 

The FRB granted authority for Credit Suisse of Zurich to provide discretionary 

portfolio management services for futures and options on nonfinancial 

commodities. The service, to be provided through a New York-based subsidiary, 

will be limited to institutional customers who specifically request it. The FRB said 

the approved activity is similar to other investment advisory services that bank 

holding company affiliates provide. AB, 7/7/95, p.2. 

Banks Permitted to Purchase Education Finance Firm 

The FRB granted approval for four North Carolina-based bank holding companies 

to purchase the shares of a company that will provide services to North Carolina 

and other state governments in programs to assist parents in financing higher 

education for their children. Among the firm's activities will be developing and 

managing an education savings and loan plan, designing and providing software, 

providing marketing materials, and training state employees. BBR, 10/2/95, p. 

532. 

Changes in Fedwire Access Policy 

The FRB has modified its Fedwire third-party access policy to clarify its 

applicability and to reduce the administrative burden of several provisions. Some 

depository institutions have entered into arrangements under which a third party 

provides operating facilities for their Fedwire services; under such arrangements, 

the third party's actions may result in a debit to the institution's reserve or clearing 

account at a Federal Reserve Bank. The policy provides important safeguards to 

both depository institutions participating in third-party access arrangements and to 

the Reserve Banks. Among other things, the policy requires depository institutions 

to impose prudent controls over Fedwire funds transfers and book-entry securities 

transfers initiated, received, or otherwise processed on their behalf by a thirdparty service provider. These policy modifications are on an interim basis pending 

the completion of a broader review of supervisory policies that should be 

applicable to outsourcing arrangements. The changes become effective August 

10, 1995; existing Fedwire third-party arrangements should be in compliance by 

March 1, 1996. Press Release, FRB, 8/10/95. 

Access to Automated Clearing House Service 

The FRB is requesting comment on the benefits and costs of adopting a policy to 

control access to the Federal Reserve Banks' automated clearing house (ACH) 
 

 

 

 

 

 

service by entities other than the depository institution whose Federal Reserve 

account will be debited. The controls would apply to ACH credit transactions sent 

by third-party processors (service providers) and respondent depository 

institutions directly to a Reserve Bank or a private ACH operator that exchanges 

transactions with a Federal Reserve Bank. Controlling access to the ACH service 

will help to ensure the safety and soundness of the ACH system. 

The FRB is requesting comment on the specific provisions of the proposed policy 

and the cost and operational impact of providing risk-monitoring capabilities for 

controlling access to the Federal Reserve Banks' ACH service. The riskmonitoring capabilities are intended to permit the depository institutions that are 

responsible for funding ACH credit transactions to control the potential credit risk 

and reduce the risk of fraud created by their customers and respondent 

depository institutions. The proposed policy provisions and monitoring alternatives 

do not cover ACH debit transactions. Press Release, FRB, 8/10/95; FR, 8/15, p. 

42413. 

Survey of Consumer Finances 

The FRB is sponsoring a statistical study of household finances that will provide 

information on the economic condition of a broad array of American families. The 

study, which is undertaken every three years, is being conducted by the National 

Opinion Research Center at the University of Chicago through November 1995. 

Participants in the study are chosen at random using a scientific sampling 

procedure in 100 areas across the U.S. Participation is voluntary. Summary 

results will be published in the Federal Reserve Bulletin. Press Release, FRB, 

8/7/95. 

Mortgage Loan Software Program 

The FRB announced the availability, free of charge, to member banks of a 

computer software program designed to serve as an analytic tool for financial 

institutions in offering affordable mortgage loans to low- and moderate-income 

applicants. The software program, entitled "Partners" can determine within 

seconds if potential home buyers can qualify, mathematically, for a home 

purchase loan, given the underwriting criteria and financial information provided. 

In addition to determining loan eligibility, "Partners" offers loan amortization 

schedules, equity build-up calculations, and secondary market analysis. The 

program also can be utilized by community groups, government agencies, and 

other community development practitioners who offer home purchase loans. 

Press Release, FRB, 10/19/95. 

Regulatory Review Timetable 

The FRB published a schedule for review of its major regulations, policy 

statements, and regulatory guidances as required under Section 303 of the Riegle 

Community Development and Regulatory Improvement Act of 1994. Section 303 

requires that each federal banking agency review its regulations and written 

policies to accomplish certain goals. These goals are to streamline and modify 

regulations and policies to improve efficiency, reduce unnecessary costs, and 

eliminate unwarranted constraints on credit availability; to remove inconsistencies 

and outmoded and duplicative requirements; and to work jointly with the other 

federal banking agencies to make uniform all regulations and guidelines 
 

 

 

 

 

 

 

 

 

 

 

 

implementing common statutory or supervisory policies. 

The FRB noted that it has undertaken over 20 separate measures since the 

passage of Section 303 to reduce the burden and simplify regulations, written 

policies and procedures. Additionally, several proposals were out for comment 

which will further these efforts. FR, 10/16/95, p. 53546. 

Federal Reserve Board Appointments 

President Clinton reappointed Federal Reserve Chairman Alan Greenspan to his 

third four-year term as Federal Reserve Board Chairman. White House Budget 

Director Alice M. Rivlin and Washington University professor Laurence H. Meyer 

were also nominated to fill the two remaining vacancies on the Board. John P. 

LaWare left the Board in April of 1995 and Alan Blinder in January of this year. All 

three individuals are economists. BBR, 2/26/96, p. 291; AB, 2/26/96, p 1-2. 

Office of the Comptroller of the Currency "Supervision by Risk" Program 

The OCC is expanding, enhancing and standardizing the way examiners evaluate 

risk in national banks. The agency has defined nine specific categories of risk it 

will use in assessing risks in bank activities. The program focuses on evaluating 

the quantity of risk exposure in an institution and determining the quality of the 

risk-management systems in place to control that risk. The nine definitions, 

among which are credit risk, interest-rate risk, liquidity risk, and price risk, will 

enable the agency to treat the same risks consistently in all banks and across 

various products and activities, and they clarify for bankers the kinds of risk the 

OCC will be assessing in their institutions. Risk profiles prepared for each bank 

will help focus examiner attention on the most serious concerns within a bank and 

direct the agency's resources to institutions where the need is greatest. News 

Release, OCC, 9/26/95. 

Examiner Guidance on Establishing Reserves 

The OCC released a new Comptroller's Handbook section "Allowance For Loan 

and Lease Losses" (ALLL). This new section replaces the ALLL examination 

section that has been in effect since 1992. It requires no changes in basic 

examination objectives and procedures but consolidates a number of ALLLrelated materials and identifies specific categories of risk. NR 96-75, OCC, 

6/19/96. 

Bank Examiner Guidance on Futures Brokerage 

The OCC issued to its examiners guidance on derivatives that is applicable to 

subsidiaries that operate as futures commission merchants (FCM) registered with 

the Commodity Futures Trading Commission. Among the several elements of the 

guidance are: a) FCMs are expected to have a risk control unit that is separate 

from the unit that trades in derivatives futures; b) the independent risk control unit 

is to report to executive management, the bank's board of directors or a 

designated management committee, and is to communicate findings periodically 

to senior management and the bank's board; and c) capital to support risk 

exposures of the futures brokerage subsidiary should reflect the level and 

complexity of the risk and not be limited to meeting regulatory requirements. An 

FCM's compliance program should include at least one designated compliance 

officer, and include also standards for disclosure of risk to customers, and a plan 
 

 

 

 

 

 

 

 

 

for ethics training for FCM employees. News Release, OCC, 11/9/95. 

Disclosure of Fair-Lending Self-Assessments 

The OCC issued interim policy guidelines on banks' disclosure of the results of 

fair-lending self-assessments, identifying two types of self-assessments that 

national banks will not be routinely required to report to the agency. The two types 

of assessments are 1) where a bank uses "testers" or "mystery shoppers" to pose 

as loan applicants ("self test"); and 2) where the bank reviews actual loan files or 

related information, internal policies and procedures, training materials or audit 

reports and makes assessments based on information about actual loan 

applicants ("self evaluation"). The OCC will generally not take enforcement action 

against a national bank that discovers a fair-lending violation through selfassessment, when the bank takes appropriate, timely and complete corrective 

action in response. OCC examiners will not require or request any information 

about a bank's self- assessments, unless the agency has independently 

determined that the bank has unlawfully discriminated and is using the results of 

the self tests to defend itself. 

Although the OCC will not take enforcement action in the situations outlined 

above, the agency will make referrals to the Department of Justice or notify the 

Department of Housing and Urban Development as required by statute or 

executive order. News Release, OCC, 9/28/95. 

Risk-Based Capital Model 

The OCC sent to all national banks a revised risk-based capital (RBC) planning 

model that can assist bank management in the calculation of, and planning for, 

supervisory capital. The revised model augments the previous version by 

highlighting the calculation of a bank's legal lending limit. The OCC notes that 

since the initial shift to the RBC framework in 1989, the supervisory role of the 

RBC has increased considerably. For example, the RBC ratio is a principal trigger 

under prompt corrective action for regulatory intervention into a bank's activities. It 

also is one of the two variables used in the FDIC's approach to deposit insurance 

premiums. In addition, the ratio is a component of other supervisory policies and 

statutory requirements, such as those relating to interbank liabilities, pass-through 

insurance, and brokered deposits. Bul. 95-62, OCC, 11/16/95. 

Small Banks' Compliance Examinations 

The OCC issued new streamlined examination procedures for assessing small 

banks' compliance with fair-lending laws, the Home Mortgage Disclosure Act, and 

a number of other banking-related consumer protection laws. The new 

procedures, effective January 1, 1996, apply to all community banks with total 

assets of less than $250 million and no regional or multinational affiliation, and 

under certain circumstances, may be used in banks with total assets of up to $1 

billion. News Release, OCC, 9/18/95. 

Income From Sales of Credit Life Insurance 

The OCC proposed to revise its regulation governing credit life insurance to 

eliminate unnecessarily detailed provisions, reorganize sections of the rule, and 

refocus the regulation to areas of greatest safety-and-soundness concerns. The 

rule would provide that directors, officers, employees, and shareholders owning 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

five percent or more of the bank's stock are not allowed to retain commissions or 

otherwise profit from the sale of credit life insurance to the bank's customers. 

Also, it would state for the first time that bank officials and insiders who sell credit 

life for personal profit are engaging in an unsafe and unsound banking practice. 

Banks would not be permitted to structure incentive or bonus programs in a way 

that creates incentives for bank officials to make inappropriate recommendations 

or sales to bank customers. Among other issues is whether dual employees who 

work for a bank and a non-bank company should be treated like bank employees, 

subject to the same limitations on bonuses and incentive arrangements, when 

they sell credit life insurance to bank customers. FR, 9/13/95, p. 47498; AB, 9/14, 

p. 4; News Release, OCC, 9/13/95. 

Lease Financing Transactions 

The OCC proposed to revise its regulation governing the personal property lease 

financing transactions of national banks, under the agency's Regulation Review 

Program. Comments are requested on allowing banks to rely more on the residual 

value of leased property, and less on the creditworthiness of the lessor, in 

deciding whether to enter into a lease. Another issue is the time period that banks 

have to dispose of property after the lease expires. FR, 9/6/95, p. 46246; News 

Release, OCC, 9/6; AB, 9/6, p. 2. 

Profits From Community Development Investments 

The OCC finalized a rule allowing national banks to keep profits from community 

development corporation and project investments. Previously, banks were 

required to reinvest dividends and other distributions received from community 

development investments into other activities that promoted the public welfare. 

The OCC found that this provision effectively discouraged investments in these 

types of projects. AB, 2/1/96. FR, 10/26/95, p. 54819. 

Lending Bias Charges Settled 

The U.S. Justice Department has gained settlements involving, for the first time, 

charges of bias in a bank's overage practices, and lending discrimination against 

Hispanics. Huntington Mortgage Co., a subsidiary of Huntington Bancshares Inc., 

agreed to pay $420,000 to settle charges that the company imposed higher upfront fees (overages) on loans to black borrowers than it charged other borrowers 

in the Cleveland area. Huntington denied past wrong-doing, but agreed to 

continue to limit its overages to one percent of the loan amount, and also it will 

make available all loan applications to Justice annually for the next three years. 

Security State Bank, Pecos, Texas, agreed to pay $510,000 in damages and 

penalties to resolve charges that a loan officer charged Hispanic borrowers higher 

interest rates on consumer loans than white customers paid. Security State said 

the officer involved in the charges has since left the bank, and that it does not 

discriminate in lending activities. The referral to Justice in the Huntington case 

resulted from an OCC fair-lending examination in 1993; in the Security State case 

the referral was made by the FRB from an examination by the Federal Reserve 

Bank of Dallas. AB, 10/19/95, p. 2. 

Supreme Court Upholds Expanded Bank Insurance Powers 

The U.S. Supreme Court ruled unanimously on March 26 in Barnett Bank of 

Marion County, N.A. v. Nelson (USSupCt No. 94-1837) that states must allow 
 

 

 

 

 

 

 

 

 

 

 

 

nationally-chartered banks to sell insurance as permitted under federal law. In a 

ruling on a case brought by Barnett Banks of Jacksonville against the state of 

Florida, the justices ruled that Section 92 of the 1916 National Bank Act, which 

allows banks in communities with less than 5,000 persons to sell insurance, 

preempted a Florida statute barring bank insurance activity. The ruling effectively 

voids bank insurance restrictions in 15 states. 

This Supreme Court decision upholds the 1986 interpretation by the OCC that 

Section 92 of the National Bank Act authorized banks to sell insurance through 

branches located in small towns. Since it issued that interpretation, about 200 

national banks have begun selling insurance. While the ruling only applies to 

nationally chartered banks, most states grant state-chartered banks the same 

powers as national banks. 

The justices did not decide who will regulate bank insurance sales the OCC or 

state officials. Currently, legislation is pending in the House that would require 

state regulation of bank insurance sales and would prohibit the OCC from 

expanding bank insurance powers for five years. 

Subsequent to the Barnett decision, the Supreme Court refused to hear an appeal 

from Kentucky's Insurance Commissioner, who had been overturned in barring 

Owensboro National Bank from selling insurance. The Court also overturned a 

Louisiana decision that prevented a subsidiary of First National Bank of Benham 

from selling insurance. AB, 3/27/96, 4/2/96; NYT, 3/27/96; WSJ, 3/27/96. 

The OCC is finishing guidelines for insurance sales by banks. The guidelines 

cover where insurance can be sold; disclosures; anti-tying regulations; use of 

customer information; handling of complaints; director and manager oversight; 

applicability of state law in appropriate sales recommendations; guidance on 

promotional and sales literature; employee compensation; employee qualification 

and training. AB, 2/1/96, 6/19/96. 

"30-Mile Rule" 

The OCC has allowed 59 national banks to branch into other states since January 

1994, under the authority of Section 30 of the National Bank Act (the so-called 

"30-mile rule"), which allows national banks to move their headquarters anywhere 

within a 30-mile radius. In May 1996, the U. S. District Court for the Northern 

District of Texas overturned an OCC decision to permit Commercial National 

Bank of Texarkana, Arkansas, to branch into Texas under the 30-mile rule. It 

ruled that the OCC, in relying on Section 30 of the Act, had ignored Section 36, 

which allows national banks only the same branching rights as state banks. The 

OCC is appealing the decision. 

Thirteen states, including Arkansas, Colorado, Connecticut, Delaware, Iowa, 

Maine, Massachusetts, Michigan, New Hampshire, North Dakota, Oklahoma, 

Virginia, West Virginia; the District of Columbia; and the Conference of State Bank 

Supervisors supported Texas in its challenge. 

Recent 30-mile rule approvals by the OCC include: The OCC granted approval for 

Embry National Bank, Atlanta, to move its main office across a county line under 

the 30-mile rule. The Community Bankers Association of Georgia had argued that 

the federal law did not apply and that the Embry branching decision violated state 

law and would result in state banks with restrictive charters converting to national 
 

 

 

 

 

 

 

 

 

 

charters. Some state banks in Georgia in recent years have converted to thrift 

charters that have nearly unlimited branching rights in the state. In February of 

1995, it approved the Bank Midwest of Kansas move to Missouri; in March 1995, 

it approved the American National Bank and Trust move from Wisconsin to 

Illinois, and the headquarters relocation of NationsBank from Maryland to Virginia; 

and in January of 1996, it approved the relocation of Society Bank of Michigan to 

Indiana. None of these approvals will be affected by the Texas decision, but state 

banking departments in Michigan and Connecticut are pursuing legal remedies 

similar to the Texas case against the OCC. AB 8/17/95, AB, 2/2/96, AB, 5/24/96, 

BBR, Vol. 66, No. 21, p. 948, 5/27/96, AB, 7/10/96. 

Revisions to Regulations 

The OCC has proposed and adopted revisions to its regulations to further the 

goals of the Regulation Review Program by updating, clarifying, reorganizing, and 

streamlining regulations where appropriate to promote better and more efficient 

interaction between the OCC and the banking industry and the public at large. 

The intent is to eliminate unnecessary regulatory burdens that do not contribute to 

the safety and soundness of national banks or to accomplishing the OCC's other 

statutory responsibilities. FR, 11/15/95, p. 57315. 

Interpretive Rules Updated, Codified in Regulation: The OCC issued a final 

regulation on February 9, codifying its interpretive letters in a single ruling. The 

final rule affirms that national banks may perform electronically all services that 

they are otherwise authorized to perform; adds new provisions clarifying the 

circumstances under which a main office or a branch office may be used for 

lending activities; and clarifies and codifies current OCC letters and case authority 

to include late fees, insufficient funds fees, annual fees and cash advance fees as 

components of interest. The final rule also clarifies rules regarding the lease or 

sharing of excess space with non-financial businesses; permits national banks to 

rely on corporate law, including state laws where the main office is located or 

incorporated; and updates letter of credit provisions. The OCC is continuing to 

study the issue of state licenses for national banks operating under federal law, 

and its prior rulings against this practice were therefore not codified in the final 

rule. News Release, OCC, NR 96-13, 2/9/96. 

Security Devices and Procedures: The OCC is proposing to revise its regulation 

on minimum security devices and procedures for banks, reports of crimes and 

suspected crimes, and the Bank Secrecy Act for compliance. This proposal 

implements the new inter-agency suspicious activity referral process and updates 

and clarifies various portions of the regulation. FR, 7/3/95, p. 34476; p. 34481 

(FRB notice). 

International Banking: The agency is proposing to revise its regulations governing 

the international operations of national banks and the operation of foreign banks 

through federal branches and federal agencies in the U.S. The proposal updates, 

streamlines and consolidates various provisions and simplifies certain 

requirements. The proposal implements a requirement of the Riegle-Neal 

Interstate Banking and Branching Efficiency Act of 1994 for reducing an existing 

exemption to the prohibition on the acceptance by U.S. federal branches and 

agencies of foreign banks of retail deposits under $100,000. The exemption that 

allows acceptance of certain minimal ("de minimis") deposits up to five percent of 

branch deposits would be reduced to one percent, which is consistent with a 

similar FDIC proposal. A five-year phaseout period would be applied to deposits 
 

 

 

 

 

 

 

 

 

held in existing five percent de minimis accounts. 

Real-Estate Lending and Appraisals: The OCC proposed to revise its rules 

governing real-estate lending, in order to modernize and clarify the real-estate 

lending rules and accomplish other objectives of the Regulation Review Program. 

FR, 7/5/95, p. 35353. 

New Appeal Procedures Finalized: The OCC published its final rule modifying and 

clarifying national bank appeal procedures to comply with the requirements of the 

Riegle Community Development and Regulatory Improvement Act of 1994, which 

requires that all federal financial institution regulatory agencies establish an 

independent appeals process. National banks may request reviews through their 

immediate supervisory office or the OCC's ombudsman. Appeals must be 

submitted in writing, and the supervisory office or ombudsman has 45 calendar 

days to respond. Matters not subject to appeal are the appointment of receivers 

and conservators; preliminary exam conclusions; enforcement-related decisions; 

Freedom of Information Act requests for agency records; and rulemakings subject 

to the Administrative Procedures Act. BBR, p. 294, 2/26/96. 

Proposal Allowing Banks to Exceed Loan Limits to One Borrower: The OCC has 

proposed that national banks be allowed to exceed the limits on loans to one 

borrower if two conditions are met. The loan must be secured by either personal 

property or real estate; and extension of additional credit puts the bank in a better 

position than foreclosing on the collateral. The proposal was published in the 

Federal Register on July 17, 1996, with comments due by September 16. AB, July 

17, 1996. 

New Bank Examinations Said to Reduce Regulatory Burden 

In a survey of 725 community banks examined under the OCC's streamlined 

examination procedures for noncomplex community national banks, 83 percent of 

bankers said that the new examinations reduced their regulatory burden from 

prior examinations. Three-fourths or more of the surveyed banks examined 

between October 1, 1994 and June 30, 1995, said that the time required to 

prepare requested materials in support of the examination was reduced, that the 

examiners took up less of the bank's staff time with discussions, and that 

examiners were more focused in their reviews. 

In a separate survey of Minnesota and North Dakota national banks, 95 percent 

strongly agreed that the exam scope and goals were clearly communicated prior 

to the exam, that the examination team acted professionally and provided useful 

information, and that their findings were clearly and effectively communicated at 

the completion of the exam. In this survey, 93 percent strongly agreed that 

examiners were responsive to bank needs over the past year without placing 

undue burden on banks, 88 percent strongly agreed that examiners presented 

accurate conclusions, their recommendations for corrective action were 

reasonable, and the report of examination was consistent with verbal discussions. 

Also, 82 percent strongly agreed that examination information requests were 

reasonable. The survey results are based on responses by 56 banks out of a total 

of 62 that were sent the questionnaire. Press Release, OCC, 8/21/95. 

Pilot Project For Bank Auditor/Examiner Cooperation 

Comptroller of the Currency Eugene A. Ludwig announced plans for a pilot 
 

 

 

 

 

 

 

 

 

program to test coordination of the respective review activities of national bank 

examiners and certified public accountants at ten large national banks. Once the 

banks are identified, examiners and auditors involved in each bank will share 

auditing and examination plans for the coming year. One possible outcome might 

be identification of a specific risk area upon which to focus and develop a plan for 

cooperation. The program is intended to generate: a) better coordination of 

procedures for reviewing common areas of concern to reduce examination and 

audit time; and b) opportunities to share information and data, which should assist 

in improving the efficiency of examinations and audits and in eliminating 

duplicative information requests. News Release, OCC, 11/16/95. 

Treasury Study of Consumer and Small-Business Credit 

The Department of the Treasury requested comment on the processes, and the 

effect of federal laws on those processes, by which credit is made available for 

consumers and small businesses. The request was issued pursuant to Section 

330 of the Riegle Community Development and Regulatory Improvement Act of 

1994, which requires the Treasury to conduct the study in consultation with the 

FRB, the Small Business Administration, the Department of Housing and Urban 

Development, OCC, OTS, FDIC, and NCUA, and submit a report to Congress. 

The purpose of the study is to identify procedures and federal laws that have the 

effect of reducing the availability of credit to consumers or small businesses, 

increasing the level of consumer inconvenience, cost, and time delays in 

connection with the extension of consumer and small-business credit, and the 

increasing costs and burdens on insured depository institutions, insured credit 

unions, and other lenders. FR, 8/22/95, p. 43647. 

Pacific Northwest Flood Damages 

The OCC is encouraging national banks to work with borrowers in the Pacific 

Northwest affected by floods by extending loan repayment terms, restucturing 

debt obligations, and easing loan documentation or credit extension terms for new 

loans, consistent with prudent banking policy. The OCC will also use expedited 

procedures to approve temporary facilities for national banks with branches that 

have been damaged by the flooding. The OCC district office in San Francisco has 

been designated the contact point for national banks in need of assistance. OCC 

NR 96-15, 2/12/96. 

Thrift Becomes National Bank 

On July 18, 1996, the OCC approved an application by the $7.5 billion 

Minneapolis thrift, TCF Financial Corp., to create four national banks to operate in 

the states of Minnesota, Illinois, Wisconsin, and Michigan. TCF stated that the 23­

cent difference between the premiums charged by the BIF and the SAIF forced 

this action. Six other thrifts have also applied to the OCC for bank charters. The 

OCC decision followed an earlier decision by the FDIC to allow thrifts to shift 

deposits out of the SAIF, if the action was initiated by the customer. AB, 7/19/96; 

FDIC PR-58-96, 7/31/96. 

Office of Thrift Supervision Review of OTS-Calculated Interest-Rate Risk 

The OTS adopted new procedures for eligible thrifts to request an adjustment to 

their interest-rate-risk (IRR) component, as calculated by the OTS, or calculate 

their IRR exposure using their own computer models. An eligible institution may 
 

 

 

 

 

 

 

 

request an adjustment to its capital requirement if it can demonstrate that the 

accuracy of OTS' estimate of IRR exposure can be materially improved through 

the use of more-refined data or more-appropriate assumptions tailored to the 

specific institution. To be eligible, an institution must show that imposition of the 

IRR capital requirement as calculated by the OTS would cause the institution to 

move to a lower prompt corrective action category. The OTS intends to process 

requests for IRR adjustments within 75 calendar days from the date of their 

receipt. To allow for the implementation and evaluation of the new procedures, 

the OTS will delay invoking its IRR rule requiring thrifts with above-normal IRR 

exposure to adjust their regulatory capital requirement. 

Thrift institutions with assets of more than $300 million, of which there are 

currently approximately 500, are required to file quarterly data with the OTS for 

calculation of their IRR exposure. They represent about one-third of the OTSregulated industry. Any institution in this group that is well-capitalized may request 

to use its own internal IRR model in place of the OTS model in calculating its IRR 

capital requirement. An internal model must meet certain standards; for example, 

the model must use reasonable assumptions regarding future interest rates, 

prepayment rates for assets, and attrition rates for liabilities. The OTS intends to 

process such requests within 20 calendar days of their receipt. For thrift 

institutions with assets of $300 million or less, filing the quarterly IRR is voluntary. 

More than 85 percent of the approximately 1,000 thrifts in this group are voluntary 

filers. NEWS, OTS, 8/23/95; Thrift Bulletin 67, 8/21/95. 

Regulatory Capital 

The OTS adopted a rule that substitutes the term "available-for-sale equity 

securities with readily determinable market values" used in Statement of Financial 

Accounting Standard No. 115 for the current reference to "marketable equity 

securities" in the OTS definition of "common stockholders' equity." The OTS, in 

consultation with the other federal banking agencies, decided not to adopt its 

June 1994, proposal to include the SFAS No. 115 equity component in computing 

regulatory capital (see this Review, Winter 1995, p. 47). Savings associations, 

however, must follow this Standard for regulatory reporting purposes, as required 

by statute. The decision leaves in effect the OTS' requirement that nontrading 

debt securities be valued at amortized cost and nontrading marketable equity 

securities be valued at the lower of fair value or amortized cost for computing 

regulatory capital. This decision is consistent with the recommendation of the 

Task Force on Supervision of the FFIEC and the policies of the other agencies. 

FR, 8/15/95, p. 42025. 

Policy on Independent Audits 

The OTS provided the first detailed guidance on independent audits since the 

agency revised its audit regulation in November 1994. That regulation, designed 

to make audit rules for savings associations more consistent with those for 

commercial banks, takes into account an FDIC rule requiring annual independent 

audits for thrifts and banks with assets of $500 million or more. OTS retained 

authority to require an independent audit of any savings association or thrift 

holding company, regardless of size, if an audit is needed to address safety-andsoundness concerns. Associations with an examination rating of CAMEL 3, 4, or 5 

are automatically required to obtain an independent audit. Otherwise, 

associations can expect to get a written notice from OTS when an independent 

audit is required for other safety-and-soundness purposes. An institution with the 
 

 

 

 

 

 

 

 

 

above ratings may request a waiver of the audit requirement. OTS will consider 

granting a waiver if the audit is not likely to help solve the problem that led to the 

poor rating. For those institutions not required to have an annual independent 

audit, the practice is encouraged by the OTS. Thrift holding companies must have 

an annual independent audit if the holding company controls subsidiaries that 

have aggregate consolidated assets of $500 million or more. Regulatory Bulletin 

32-1, OTS, 8/16/95; NEWS, 8/18/95. 

Examination Performance Evaluated 

The OTS surveyed the institutions it regulates to determine how well the agency 

is living up to standards of service that it adopted in September 1994, in response 

to the comments received from thrift institution managers and directors on areas 

where the OTS needed to improve the examination process. The agency scored 

almost a 90-percent success rate in meeting most of its targets. For example, 91 

percent of surveyed institutions said the OTS had met its goal of meeting with 

them at least semiannually between examinations and making a supervisory team 

available to meet on an as-needed basis. In other categories, 98 percent of 

surveyed institutions agreed that OTS' examiner-in-charge scheduled a meeting 

with the thrift's chief executive officer on the day the examination commenced, 

and that meetings were held at least weekly with institution personnel to convey 

findings and discuss concerns as the examination progressed. The lowest score a 

69-percent success rate related to examination staff continuity from one 

examination to the next. The OTS said the logistics of deploying examiners and 

the location of thrifts and examiners will make it hard to improve, but the agency 

will do its best to provide greater staff continuity. NEWS, OTS, 11/25/95. 

Examination Strategies Revised 

The OTS revised its examination strategy and work paper documentation, 

pursuant to the Riegle Community Development and Regulatory Improvement Act 

of 1994, to apply an 18-month cycle to smaller insured institutions that: a) are not 

currently subject to a formal enforcement proceeding or order by the OTS or the 

FDIC; b) have a composite 1-CAMEL rating and total assets of less than $250 

million, or a composite 2-CAMEL rating with total assets of $100 million or less; c) 

are well-capitalized; d) have a management component rating of 1 or 2; e) have 

had no change in control of the institution since completion of the last full-scope 

examination; and f) have had a full-scope safety-and-soundness examination or 

alternating state examination report submitted since November 1, 1994. The OTS 

will continue to conduct full-scope safety-and-soundness examinations in all other 

institutions on a 12-month examination cycle. Full-scope, on-site examinations 

conducted by state authorities may be accepted on an alternating basis in lieu of 

an OTS examination when such examinations meet OTS requirements. The 

Preliminary Examination Response Kit (PERK), which is sent to institutions prior 

to examinations, was revised in several respects to reduce regulatory burden, 

update references, and eliminate redundancies. Regulatory Bulletin 32-2, OTS, 

8/22/95. 

Actions to Reduce Regulatory Burden 

As part of an initiative to reduce regulatory burden and to implement the 

Community Development and Regulatory Improvement Act of 1994, the OTS 

proposed eliminating regulations that are either outdated or duplicative, these 

constituting eight percent of all OTS sections in the Code of Federal Regulations. 
 

 

 

 

 

 

 

 

 

 

Among the regulations and policy statements the agency proposes to eliminate 

are requirements for counter statements, which duplicate information available 

elsewhere; unnecessary procedures for savings withdrawal requests; and 

outdated limitations on the sale of merchandise in connection with soliciting 

savings accounts. The OTS expects to issue over the next year a series of 

proposals to make significant burden-reducing changes in a number of key areas 

of its regulations, including regulations governing lending, subsidiaries, insurance, 

preemption, and adjustable mortgages. NEWS, OTS, 8/28/95; FR, 8/28/95, p. 

44442. 

The OTS proposed streamlining the Thrift Financial Report (TFR), including a 40­

percent reduction in its content. The TFR is filed quarterly by 1,500 savings-andloan associations to report their financial condition. As proposed, the consolidated 

report that institutions presently file would be retained, but the separate reports for 

the parent institution and subsidiaries would be eliminated. Additionally, only data 

critical to meeting supervisory needs or statutory mandates would be collected. 

The proposed changes would also make the data more comparable to the 

information contained in the commercial bank Call Report. The agency would use 

the revised TFR beginning with the June 1996, reporting cycle. NEWS, OTS, 

8/24/95; FR, 8/24, p. 44116. 

The OTS is discontinuing an attorney letter that is used to obtain certain 

information prior to the examinations of thrift institutions. The OTS had been the 

only banking agency to use an attorney letter. Essential information on 

foreclosures, litigation, legal fees and documents and funds controlled by the 

attorney will be obtained directly from the institution during the examination 

process. The agency will continue to request information on contingent liabilities, 

such as the feasibility of settling law suits and the probable time of settlements, as 

part of its pre-examination package, but directly from the institution. NEWS, OTS, 

8/4/95. 

On June 25, 1996, the OTS proposed a rule to update, shorten and make more 

flexible the rules governing the charters and bylaws of federal associations. The 

proposal seeks to reduce charter and bylaw rules and policy statements on 

corporate governance from 33 to 24, a reduction of 27 percent. Comments are 

due by August 26, 1996. Transmittal 151, OTS, 7/9/96; FR, 6/25/96, pp. 32713 ­

32728. 

Electronic Banking Task Force 

The OTS created an Electronic Banking Task Force, which will look at "the whole 

range of electronic banking issues from the Internet to smart cards," an official 

said, and will identify the risks to financial institutions and to their customers. It is 

noted that the first financial institution to offer banking services on the Internet, 

Cardinal Bancshares, Inc., through its subsidiary, Security First Network Bank, 

Pineville, Ky., received approval from the OTS last May and began electronic 

operations on the Internet in October. Customers can open new accounts and 

transact business such as transferring funds between accounts and paying bills. 

Cardinal was not required to ask the OTS for permission to operate on the 

Internet, but did so as part of its application to set up the new subsidiary, Security 

First. In approving the application, the OTS stipulated that the thrift had to address 

a number of electronic security issues. NEWS, OTS, 11/20/95. 

Minority-Owned Thrifts 
 

 

 

 

 

 

 

 

 

Assets of minority-owned federal savings banks and savings-and-loan institutions 

rose 26 percent by $5.9 billion in 1995, according to the OTS. This compares with 

a decline of 0.4 percent for all 1,437 federal savings banks and savings-and-loans 

in 1995. The OTS attributes the rise to growth in consumer lending and smallbusiness lending in minority communities. AB, 5/24/96. 

Courts Restrict OTS' Ability to Enforce Net-Worth Agreements 

The Supreme Court refused to consider an OTS appeal of a U.S. Court of 

Appeals decision restricting the OTS' ability to enforce net-worth maintenance 

agreements against owners of thrifts. In this case, United States vs. Rapaport, the 

U. S. Court of Appeals for the District of Columbia ruled that the OTS could 

enforce net-worth agreements against only those thrift owners who recklessly 

disregarded the law or personally profited by signing net-worth agreements. AB, 

1/25/96. 

National Credit Union Administration Field of Membership and Chartering 

Policy 

The NCUA proposed amending its policies so that senior citizen and retiree 

groups will be required to meet the same conditions as other associational groups 

in order to qualify for a federal credit union charter or addition to an existing 

charter. In determining whether a group satisfies the normal common bond 

requirement, NCUA will consider the totality of the circumstances, such as 

whether the members pay dues, have voting rights, hold office, hold meetings, 

whether there is interaction among members and whether the group has its own 

bylaws. 

Until the Board approves a final policy, it is continuing its moratorium on FCUs 

adding self-created senior citizen/retiree groups to their field of membership. The 

moratorium has no effect on groups that are already in an FCU's field of 

membership and it does not apply to the addition of senior citizens groups that 

have the characteristics of an association. 

The Board proposes that FCUs continue to be allowed to add low-income groups 

formed solely for the purpose of seeking credit union service. FR, 10/4/95, p. 

51936. 

Investment and Deposit Activities 

The NCUA proposed a rule that would add restrictions on some securities that 

have been determined to be too risky for credit unions, broaden authority in 

certain areas, and require that a credit union's staff and board of directors fully 

understand the potential risk characteristics of its investment options. The agency 

has concluded that investment policies with well-defined parameters and 

enhanced monitoring and reporting of investment risks are needed to strengthen 

credit union investment-risk management. The proposed rule recognizes that 

credit union investment risk is largely interest-rate, rather than credit (default) risk, 

and that a regulation designed to prohibit particular securities can fail to reflect the 

changing financial environment. The proposed rule allows a credit union to 

operate on one of three levels. A credit union could invest in fully-insured CDs 

and shares and deposits in corporate credit unions, and, if limited to these 

investments, the institution would not have to meet certain requirements, among 
 

 

 

 

 

 

 

 

 

 

 

which are conducting collateralized mortgage obligations (CMO) testing, 

establishing a trading policy and reporting on these activities, reporting monthly 

on the fair value of each investment, and calculating the impact on its portfolio of 

a 300-basis point parallel shift in interest rates. At the next level, a credit union 

could invest in potentially more-risky securities in an amount up to capital and 

would have to comply with most of the proposed rule's policy and reporting 

requirements, but not the 300-basis-point shift analysis. Finally, at the most 

sophisticated level, a credit union investing in potentially more-risky securities in 

an amount exceeding capital would be subject to all of the policy and the reporting 

requirements. NCUA News, 11/16/95; FR, 11/29/95, p. 61219. 

Incentive Pay For Lending Activities 

To reduce regulatory burden, the NCUA is amending its regulations to give 

member-elected credit union boards more flexibility to determine compensation 

policies, including incentive pay, for certain activities related to credit union 

lending. Currently, the agency's rules prohibit officials and certain employees of 

federally insured credit unions from receiving either incentive pay or outside 

compensation for these activities. The final rule will allow federal credit unions to 

pay: 1) to any employee, including a senior management employee, an incentive 

or bonus based on the overall financial performance of the credit union; and 2) to 

any employee, except a senior management employee, an incentive based on a 

loan made by the credit union, provided that the board of the credit union has 

established written policies and internal controls in connection with the incentive 

or bonus and monitors compliance with them at least annually. In addition, a 

credit union's volunteer officials and non-senior management employees, and 

family members of officials and all employees, may receive compensation from an 

outside party for a service or activity performed outside the credit union, provided 

that neither the credit union nor the official, employee, or family member has 

"steered" anyone to the other party. 

The NCUA reserves the right to take exception to any compensation plan for 

safety-and-soundness reasons. The amendments are effective October 4, 1995. 

FR, 10/4/95, p. 51886. 

Supervisory Committee Audits 

The NCUA is proposing to amend its regulations governing credit union 

supervisory committee audits and verifications to clarify audit requirements in 

targeted risk areas. Most of the additional requirements are not applicable to 

credit unions that do not employ a compensated auditor. The expanded scope is 

intended to provide credit unions an enhanced audit product in several areas, 

among which are internal controls, cash, loans, related-party transactions, and the 

detection and reporting of errors and irregularities. The more definitive audit 

scope is designed to address and to reduce confusion that occurs when the 

supervisory committee and the compensated auditor agree that the audit 

engagement will consist of less than the full scope of a supervisory audit. For 

example, the supervisory committee may not realize that it remains responsible 

for performing the additional work needed to "fill the gaps" and produce a 

complete supervisory audit. Credit unions that employ compensated auditors 

would be required to memorialize the terms and conditions of the engagement in 

a comprehensive engagement letter that would constitute an enforceable 

contract. 
 

 

 

 

 

 

 

 

 

 

 

 

 

Along with the existing requirement for a written audit report would be a 

requirement for two additional written reports where applicable: 1) a report of 

internal control exceptions or reportable conditions noted, if any, and 2) a report of 

irregularities or illegal acts noted during the audit, if any. These requirements do 

not necessitate any additional work, as they report information already obtained in 

the normal course of the supervisory committee audit. FR, 11/2/95, p. 55663. 

Appraisals 

Pursuant to Title XI of the Financial Institutions Reform, Recovery, and 

Enforcement Act of 1989, the NCUA amended parts of its real-estate appraisal 

regulation that are concerned with minimum appraisal standards, safety and 

soundness, unavailable information, appraiser independence and other aspects. 

The aim was to simplify compliance and reduce costs. For example, credit unions 

will be permitted to use an appraisal that was prepared for a different type of 

financial institution, including a mortgage bank. The agency will continue to 

require credit unions to get appraisals on any residential real-estate loan of more 

than $100,000, while banking regulators have set a $250,000 minimum. FR, 

10/4/95, p. 51889; AB, 10/5/95, p.8. 

Truth in Savings 

The NCUA extended the compliance date to January 1, 1997, in respect to Part 

707 of its regulations for nonautomated and insufficiently automated credit unions 

that have assets of $2 million or less. The extension gives these credit unions 

continued immunity from compliance until Congress has acted on its 

contemplated regulatory relief initiatives, which might ultimately exempt their 

compliance with TIS. The agency has twice before extended the Part 707 

compliance date for certain small, underautomated credit unions. The compliance 

date for all other credit unions remained January 1, 1995. FR, 11/14/95, p. 57173; 

8/3/94, p. 39425. 

Management Interlock Rule Upheld 

A U.S. district court in Virginia upheld an NCUA rule approved last fall that 

prohibits shared management between the Credit Union National Association 

(CUNA), which is the industry's largest trade group, and corporate credit unions 

(see this Review, Spring 1995, p. 44). The decision cited conflicts of interest and 

deference to the NCUA's contention that such conflicts could threaten the safety 

and soundness of the nation's credit union system. About half of the 43 corporate 

credit unions across the country are affected by the NCUA's rule. AB, 10/2/95, p. 

8. 

Federal Housing Finance Board Affordable Housing Program 

The Federal Housing Finance Board (FHFB) adopted a rule, effective October 25, 

1995, to authorize a Federal Home Loan Bank (Bank) to set aside a portion of its 

Affordable Housing Program (AHP) contribution to assist low- and moderateincome, first-time home buyers to purchase homes. In addition, the final rule 

permits a Bank to establish a home ownership set-aside program, with other 

requirements, subject to prior approval of the Board. Section 10 of the Federal 

Home Loan Bank Act requires each Bank to establish a program to subsidize the 

interest rate on advances to members of the Federal Home Loan Bank System 

engaged in lending for long-term, low- and moderate-income, owner-occupied 
 

 

 

 

 

 

 

 

and affordable rental housing at subsidized interest rates. The Board's regulation 

requires each Bank to make a specified annual contribution to fund its AHP. 

During each calendar year, each Bank accepts applications for funds from its 

members during two of four quarterly funding periods. AHP funds are awarded to 

applicants through a competitive scoring process set forth in the AHP regulation. 

FR, 9/25/95, p. 49327. 

Mortgage Rates 

The FHFB reported that interest rates on conventional 30-year fixed-rate 

mortgages increased in April 1996, to 8.05 percent, and is higher than in any 

month since May 1995. Similarly, rates on 15-year fixed-rate loans increased to 

7.77 percent in April, 23 basis points higher than in the previous month. Thirty-one 

percent of conventional loans closed in May were adjustable-rate loans, the 

highest percentage since last May. 

The data were based on 12,839 reported loans from 245 lenders and excluded 

FHA-insured and VA-guaranteed mortgages, refinancing loans, and balloon 

loans. FHFB 96-28, 6/27/96. 

STATE LEGISLATION AND REGULATION Interstate Banking/Branching 

Alabama: A new law permits acquisitions of banks by out-of-state banks or bank 

holding companies, effective September 29, 1995. Interstate branching is allowed, 

effective March 31, 1997. Alabama banks may establish and operate one or more 

branches in another state. An out-of-state bank may branch into Alabama only by 

acquiring a bank in the state that has operated for five or more years. After entry, 

an out-of-state bank with branches in Alabama may branch de novo or by 

acquisitions to the same extent that in-state banks may branch. The bill also 

provides for licensing, application and other requirements for foreign bank 

branches, offices, or agencies operating in the state. BBR, 8/28/95, p. 344. 

California: Banks are permitted to branch through acquisitions into California 

under a law enacted in response to the Riegle-Neal Act. A bank must be at least 

five years old before it can be acquired by an out-of-state banking organization. 

BBR, 11/13/95, p. 795. 

Illinois: An opt-in law permits state banks to establish out-of-state branches, and 

out-of-state banks to branch in Illinois, beginning June 1, 1997. State banks will 

be permitted to merge with out-of-state banks; however, the law does not allow 

direct branch acquisitions or de novo branching. Several restrictions relating to 

the acquisition of Illinois banks by out-of-state bank holding companies are 

eliminated. Among other provisions, the state Commissioner of Banks is 

authorized to examine branches of out-of-state banks and to participate in 

reciprocal arrangements concerning examinations of banks. The law sets no age 

limit on banks being acquired and allows banks to act as agents for out-of-state 

affiliates. BBR, 8/7/95, p. 262; Northwestern Financial Review, 8/19/95, p. 15. 

New Hampshire: The Governor signed opt-in legislation permitting interstate 

branching, effective June 1, 1997, but not allowing de novo branching or partial 

bank acquisitions. As permitted under the Reigle-Neal Act, the law prohibits the 

interstate acquisition of banks in the state that are less than five years old. A 20­

percent cap on the portion of the market an institution may control through an 
 

 

 

 

 

 

 

 

 

 

acquisition is retained. BBR, 7/31/95, p. 209. 

Wisconsin: A new law allows out-of-state banking organizations to branch into the 

state by acquisition of existing banks and bank holding companies, but not by de 

novo branching. Only banks operating for five years or longer may be acquired by 

out-of-state firms. Previously, only banking firms within a nine- state region could 

acquire banks in Wisconsin. BBR, 11/6/95, p. 757. 

Intrastate Branching 

Nebraska: One bank has received regulatory approvals, and two others have filed 

applications, to branch within the state by means of creating a savings-and-loan 

charter and merging the proposed office or offices into the bank. The state's law 

allows banks to branch through the purchase of an existing bank that is at least 

18 months old, but not through de novo bank branches. Northwestern Financial 

Review, 8/5/95, p. 24. 

Court Rulings on Fee and Service Charges 

The U.S. Supreme Court ruled unanimously on June 3, 1996, that national banks 

can charge any late-payment fees permitted by their home state, regardless of the 

law of the state where the cardholder lives. The ruling, Smiley v. Citibank, upholds 

a 1995 ruling by the California Supreme Court dismissing a suit against Citibank 

by California residents charging that Citibank late fees were illegal under 

California law. Citibank conducts its credit-card operations from South Dakota, 

which has no cap on late fees or other credit-card charges. 

The U.S. Supreme Court ruling applies explicitly to nationally chartered banks 

regulated by the OCC, but it is expected to be applied to federally insured statechartered banks as well. Previous to this decision, the Comptroller of the 

Currency, the state of Delaware, and the Colorado Supreme Court had ruled that 

fees on credit cards represented interest and were therefore allowable. A 

Pennsylvania superior court in 1994 and the New Jersey Supreme Court in 

November 1995 had ruled otherwise. 

The California Supreme Court ruled that out-of-state credit-card banks are not 

governed by the state's restrictions on fee and service charges, because the 

National Bank Act gives a bank's home state the power to impose these 

restrictions. The ruling was based on the definition of "interest," which the Court 

said includes late fees and all other money paid to the creditor. AB, 9/6/95; 

11/22/95; Federal Reserve Bank of Philadelphia, Banking Legislation and Policy, 

Volume 14, Number 4, pp. 1-2; The New York Times, 6/4/96. 

Annuities Brokerage 

Connecticut: The Department of Insurance, in a partial settlement of a lawsuit 

challenging state restrictions, gave approval for Shawmut National Corp. to sell 

annuities throughout the state. The state Attorney General said his office will 

propose legislation to give state banks the same power. Under the settlement, 

Shawmut agreed that all employees who sell annuities will apply for licenses from 

the Department, and the state agreed that all currently licensed employees will 

not need to reapply. AB, 7/28/95, p.2. 
 

 

 

 

 

 

 

 

 

 

 

Florida: A proposed rule provides guidelines for insurance agents and deposittaking financial institutions in the sale of annuities. The rule would affect Floridachartered banks, savings-and-loan associations, and savings banks, and federally 

chartered savings-and-loan associations and savings banks. National banks 

already are permitted to sell annuities under federal law. Consumer protections 

include a requirement that institutions disclose orally, in writing, and with signs, 

that annuities are not insured by the FDIC or the Securities Investor Protection 

Corp. (SIPC), and are subject to investment risk. Sales could only be made by a 

licensed insurance agent, and employees would not be permitted to perform 

annuities services and banking services for a customer at the same time. BBR, 

8/28/95, p. 341. 

A state appeals court ruling that allows state-chartered banks to engage in any 

activity permitted to national banks opens the way for state banks to sell annuities 

in Florida. At least two national banks have started selling annuities in the state 

following the U.S. Supreme Court's ruling in January in the Valic case, in which 

the Court upheld a decision of the OCC that selling annuities is "incidental" to 

banking and a permissible activity under the National Bank Act (see this Review, 

Spring 1995, p. 39). AB, 8/25/95, p. 2. 

Compliance Self-Testing Privilege 

Illinois: Under a bill passed by the legislature, information obtained or discovered 

by a bank or thrift in the course of conducting an internal audit or review cannot 

be used as evidence against the bank or thrift in a civil action. Documents that are 

prepared in connection with a review conducted by a compliance review 

committee would remain confidential and would not be discoverable as evidence 

against a bank or thrift in any civil action, other than a civil action initiated by a 

state or federal regulator. Illinois Banker, 9/95, p. 17. 

EFT Networks 

Illinois: A bill passed by the legislature, amending a 1979 law, eliminates 

restrictions on the kinds of transactions and other banking-related activities that 

may be carried out by customers of financial institutions at various electronic 

funds transfer facilities, and authorizes EFT networks to process deposits on an 

interstate basis, consistent with the powers of brick-and-mortar branches and with 

other laws applicable to financial institutions. The revised law retains the right of 

the Banking Commissioner to audit networks but the networks no longer would be 

required to make quarterly and annual filings with the Commissioner. Illinois 

Banker, 9/95, p. 25. 

State Regulator Accredited 

Kansas: The Conference of State Bank Supervisors has issued its accreditation to 

the Office of the Bank Commissioner. The Office supervises 323 state-chartered 

financial institutions with assets of more than $14.8 billion, and over 80 trust 

departments and independent trust companies. Thirty-four state banking 

departments thus far have received CSBS accreditation. Bank News, July 1995, 

p. 45. 

Examination Cycle Extended 

New York: Effective January 1, 1996, the Banking Superintendent is permitted to 
 

 

 

 

 

 

 

 

examine certain state-chartered banks every 18 months, instead of once a year. 

To be eligible for the longer cycle, a bank's total assets must be less than $250 

million, and the institution must be well-capitalized and well-managed. These 

requirements parallel the criteria for the longer cycle applicable to federally 

examined banks under the Riegle Community Development and Regulatory 

Improvement Act of 1994, except that the state law applies also to safe deposit 

companies, uninsured limited-purpose trust companies, and other uninsured 

entities holding state banking charters. BBR, 8/7/95, p. 263. 

Feedback From Examinations 

New York: The Banking Department has developed a follow-up questionnaire by 

which banks can evaluate the examination process and identify problems. The 

feedback will assist the Department in monitoring the effectiveness of its 

communications with state-chartered banks, the reasonableness of its 

examination requests, and other aspects of the program. AB, 8/16/95, p. 7. 

Regulatory Reorganization 

Wisconsin: Government departments that regulate banking, savings-and-loans, 

and securities will be transferred to a new Department of Financial Institutions, 

beginning July 1, 1996. Among other changes, the new Department will take over 

regulation of mortgage banking, and will administer the Wisconsin Consumer Act. 

The Department also will have certain administrative responsibilities with respect 

to credit union regulation that otherwise will remain in a separate Office. Savings 

on salary costs alone from the consolidation are estimated at nearly $900,000 

annually. Northwestern Financial Review, 10/7/95, p. 36. 

State Legislative Activity on Mergers 

Kansas: The Kansas state legislature is considering legislation authorizing the 

state to block bank mergers that would result in the loss of jobs. Under the current 

bill, acquirers would be required to file a statement with the Banking 

Ccommissioner concerning likely job losses resulting from the merger. The 

Commissioner would be empowered to block the merger if job loss would be 

severe. AB, 2/1/96. 

Mississippi: The legislature is considering a bill that would provide tax credits to 

institutions that maintain banking jobs following a merger. AB, 2/1/96. 

Limits on Credit Union Membership 

Utah: The Utah State Supreme Court reversed a lower court's dismissal of a suit 

brought by the Utah Bankers Association against the Credit Union Service 

Centers of Utah and Utah's Commissioner of Financial Institutions. The suit 

sought to block credit unions from having members from more than one county of 

the state. The case has been remanded to District Court and will be refiled. AB, 

3/19/96. 

State Savings Bank Charter 

Michigan: Michigan became the 30th state to create a state savings bank charter. 

The new charter requires that at least 50 percent of the institution's assets be 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

concentrated in mortgage-related loans and investments. The new charter will 

permit the state's 27 federally chartered savings institutions to continue to operate 

as thrifts regardless of federal action, and removes the OTS as their primary 

regulator. Those thrifts operating under the new charter will have the state as their 

primary regulator with the FDIC as a secondary regulator. AB, 7/19/96. 

State Credit Union Deposit Insurance to End 

Washington: The Washington Credit Union Share Guaranty Association, a 

Washington state corporation providing deposit insurance for 74 state credit 

unions, voted to dissolve the insurance fund within the next three years. The 

affected credit unions must submit applications to the National Credit Union 

Administration for federal deposit insurance by the end of 1996. AB, 1/29/96. 

BANK AND THRIFT PERFORMANCE Commercial Banks' Earnings in 1995 

Insured commercial banks reported a record $48.8 billion in net income for 1995, 

an increase of 9.4 percent over 1994's previous record earnings of $44.6 billion. 

Fourth-quarter 1995 net income was $12.1 billion, the second-highest quarterly 

net income ever after third-quarter 1995 record net income of $13.8 billion. All but 

three percent of commercial banks reported positive earnings in 1995, and 68 

percent reported higher earnings than in the previous year. Industry 1995 ROA 

increased to 1.17 percent, a slight improvement over the 1.15 percent ROA 

reported in 1994. This was the third consecutive year that the ratio exceeded one 

percent. 

Contributing to the growth in earnings in 1995 were lower deposit insurance 

premiums, made possible by the recapitalization of the BIF. The higher earnings 

reflected the banks' emphasis on expanding their loans, particularly home 

mortgage loans and other loans to consumers, compared to other assets. The 

higher proportion of loans has given support to average yields and net interest 

margins. 

Contributing to 1995 record earnings was a 5.2-percent increase in net interest 

income over 1994 levels. The industry's 1995 seven-basis-point decline to 4.29 

percent in net interest margins was more than offset by a 7.7-percent increase in 

interest- earning assets. Additionally, 1995 results showed an increase in 

noninterest revenue of $6.2 billion over previous year revenues, an 8.1-percent 

increase, resulting from strong 1995 growth in fee income. Securities sales also 

contributed $545 million in gains in 1995, a $1.1-billion increase over 1994 net 

losses of $572 million. 

Delinquency measures overall showed improvement. Noncurrent assets and 

other real estate owned to assets fell to .85 percent in 1995 from a level of 1.01 

percent in 1994. This represented the fourth consecutive year of decline in this 

ratio. Noncurrent loans (more than 90 days past due or not accruing interest) fell 

by 1.1 percent and real estate owned fell by 36.6 percent in the fourth quarter of 

1995 from fourth-quarter 1994 levels. Short-term delinquencies (loans and leases 

30-89 days past due) rose during the same period, however, increasing 20.2 

percent over fourth-quarter 1994 levels. Net charge-offs increased 8.2 percent, 

and the provision for loan losses increased 14.5 percent in the fourth quarter of 

1995 over fourth-quarter 1994 levels. 

Banks' equity capital rose to 8.11 percent of total assets in 1995. Total assets 
 

 

 

 

 

 

grew to $4,313 billion in the fourth quarter of 1995, a 7.5-percent increase over 

the $4,011 billion in assets four quarters earlier. 

Six insured commercial banks failed in 1995, compared to 11 in 1994. The 

number of commercial banks on the FDIC's "Problem List" for 1995 dropped to 

144 institutions from 247 in 1994. Assets of "problem" banks fell by $16 billion 

during the year, to $17 billion in 1995. 

FDIC-insured savings institutions earned $1.8 billion in the fourth quarter of 1995, 

bringing full-year 1995 earnings to a record $7.6 billion. Net income for the quarter 

was $181 million higher than in the fourth quarter of 1994. Full-year average 

return on assets rose to .79 percent, the highest ratio since 1962. Profits were 

$1.3 billion higher in 1995 than in 1994. Net interest margins experienced their 

first quarterly increase since 1993, rising seven basis points to 3.12 percent in the 

fourth quarter. Thrift institutions' total assets increased by $1 billion during the 

quarter, and in the 12-month period grew by a modest 1.7 percent. The industry's 

equity capital as a percent of assets, 8.39 at quarter end, was the highest since 

1951. The number of "problem" institutions in 1995 dropped by 22 to 49, and their 

assets declined to $14 billion. The total number of insured savings associations in 

operation fell by 31 to 2,029 in the fourth quarter, a loss of 5.7 percent during the 

12-month period, and represented a continuation of the downtrend beginning in 

1990. The FDIC Quarterly Banking Profile, Third Quarter, 1995 and Fourth 

Quarter, 1995. 

First-Quarter 1996 Preliminary Earnings 

Insured commercial banks reported net income of $12.0 billion in the first quarter 

of 1996, an 8.2 percent increase over the first quarter of 1995. This was the third 

consecutive quarter that net earnings exceeded $12 billion. More than two-thirds 

of banks reported higher earnings than a year ago. Higher net interest income 

was primarily responsible for the increased earnings. Net interest income rose 

$2.2 billion over levels a year earlier, reflecting a significant increase in interestearning assets over the year. Higher noninterest revenues also contributed to the 

strong earnings. The average return on assets was 1.12 percent for the quarter. 

One negative, however, was that noncurrent loans rose for only the second time 

in the last five years, increasing $659 million during the quarter. 

Savings institutions reported net earnings of $2.5 billion in the first quarter of 1996 

and an annualized ROA of 1.01 percent. These results represented the highest 

quarterly net income and ROA ever reported by the industry, and the first time 

ROA has exceeded one percent. However, exluding gains on the sale of 

branches and securities, average ROA for the industry for the quarter declined to 

0.83 percent. This lower ratio still represents an improvement over previous 

quarters. Net interest margins rose to 3.19 percent from 3.12 percent the previous 

quarter, the second consecutive quarterly increase in margins. Almost 80 percent 

of thrifts with more than $1 billion in assets reported improved earnings over 

earnings a year ago. Less than half (49 percent) of smaller thrifts reported higher 

earnings. The FDIC Quarterly Banking Profile, First Quarter, 1996. 

Depository Institutions' Retail Fees Surveyed 

Few cases were found of statistically significant nationwide increases in fees in 

1993-1994 for either banks or savings associations, the FRB said in its fifth 

annual report to Congress on retail fees and services of depository institutions. 
 

 

 

 

 

With respect to individual services, the changes in the proportion of institutions 

that charge a fee were about equally divided between increases and decreases. 

The report was based on surveys of 1,050 institutions (650 banks and 400 

savings associations) in 1994, and 330 institutions in 1993. The fee and 

availability data from surveyed institutions covered noninterest checking accounts, 

NOW accounts, savings accounts, money orders involving insufficient funds, 

overdrafts and automated teller machines. 

Among the changes detailed in the report, the average minimum balance for the 

single-fee NOW account to avoid a monthly fee required by banks increased from 

$971 to $1,055. The proportion of savings associations offering no passbook 

accounts increased from just under 18 percent to 20 percent. The nationwide 

proportion of banks offering ATM services remained at approximately 70 percent, 

while the proportion of savings associations offering the service increased from 45 

percent to 61 percent. The proportion of banks charging an annual fee on credit 

cards increased from four percent to 13 percent, while savings associations 

levying an annual charge increased from nine percent to 18 percent. 

The report found that in most cases the average fees charged by out-of-state 

banks defined as banks headquartered or owned by an organization 

headquartered in a state different from that of the surveyed bank are significantly 

higher than those charged by in-state banks. In some cases, however, out-ofstate banks require lower minimum balances to open some types of accounts and 

are more likely to offer free checking. It is noted that out-of-state banks tend to be 

larger than in-state banks and are probably more concentrated in large urban 

areas, where costs can be higher. Annual Report to the Congress on Retail Fees 

and Services of Depository Institutions, FRB, 9/95. 

Consolidation in Banking 

Recent banking consolidation in California, a state whose banking structure is 

relatively free of restrictions on branching and other artificial barriers, may be an 

indicator of the consolidation that may eventually occur nationally after the 

elimination of these barriers. The number of banks in California rose sharply in the 

early 1980s and then remained relatively stable during the second half of the 

decade and into the early 1990s, largely because of the strong economy. But from 

mid-1990 through early 1993 the state experienced a severe recession, which 

affected in particular the smaller community banks in the southern part of the 

state. Fewer new banks, more failures, and a number of voluntary mergers 

caused the number of banks operating in California to fall from 516 at the end of 

1990 to 399 in 1994, or 23 percent. Banking offices in the state, totaling 5,555 in 

1991, declined by 20 percent to about 4,400 in the next two years. 

Nationally, the number of banking institutions decreased from approximately 

15,000 in 1984 to 10,740 in 1994, a 29-percent decline. There were failures 

during the period of about 1,300 banks, most of which were absorbed into other 

banking firms; however, the decrease resulted mostly from other voluntary 

mergers and acquisitions. The number of banks declined as the industry adjusted 

to changing competitive conditions, and in response to a changing regulatory 

environment including the liberalization of state branching laws. The number of 

banking offices continued to increase into the early 1990s. Over 65,500 banking 

offices were in operation at the end of 1992, nearly 9,000 more than in 1984, and 

the number per population unit was slightly higher in 1994 than ten years earlier. 

It is suggested that the contraction of the thrift industry, wherein from 1988 to 
 

 

 

 

 

 

 

 

1993 the number of savings-and-loan offices fell from about 26,000 to 16,000, 

may have temporarily eased pressures on some banks to trim branch networks. 

Bank employment nationally declined by about 6.3 percent between 1985 and 

1995, during a time of rapid advances in bank services automation. 

The California experience suggests that if interstate branching restrictions and 

other artificial barriers are eliminated, the number of U.S. banking institutions 

could eventually be further reduced by one-half or more; and demonstrates that 

substantial reductions in bank offices across a state can occur over a relatively 

short period of time, especially when large banks are involved. Weekly Letter, 

Federal Reserve Bank of San Francisco, 10/27/95. 

Boston Banks Increase Minority Lending 

Since the publication of several reports dating from about six years ago on banks' 

lending to minorities in the Boston area, there have been significant 

improvements in mortgage lending to black borrowers and to persons with lowand moderate-incomes, according to a recent study by J. T. Campen. The share 

of black borrowers grew from 16.2 percent of all loans in 1990 to 20.1 percent in 

1993. For Hispanic borrowers, the increase in the share of total loans was much 

less, from 5.1 percent to 5.7 percent. Denial rates for blacks and Hispanics were 

each reduced by almost half between 1990 and 1993: blacks, from 32.7 percent 

to 17.5 percent; and Hispanics, from 25.3 percent to 13.8 percent. Denial rate 

ratios for blacks and Hispanics, to whites, in the Boston area dropped from 2.00/1 

to 1.49/1, and from 1.55/1 to 1.18/1, respectively. The national black/white denial 

ratio in 1993 was 2.22/1, and the Hispanic ratio, 1.64/1. Loans to low- and 

moderate-income borrowers in the study area rose from 27.3 percent of all loans 

in 1990 to 38.9 percent in 1993. 

Among other results, the study found that virtually all of the increase in the 

mortgage lending to minority and low- and moderate-income borrowers came 

from Boston's six largest banks. It is noted that during the study period, the 

smaller banks in the area lost substantial total market share due to bank failures 

and intensified competition from the larger banks and unaffiliated mortgage 

companies. The increased lending to low- and moderate-income groups may 

have resulted in part, the report says, from the prevailing economic conditions 

during the study period, wherein housing prices fell, unemployment declined as 

the nation and region recovered from recession, and interest rates for 30-year, 

fixed-rate mortgages fell to less than seven percent, the lowest level in over 25 

years. The improved performance, however, by the large banks reflects their 

strong initiatives to increase lending to under served borrowers and 

neighborhoods. A Progress Report, Massachusetts Community and Banking 

Council, July 1995, pp. 60-67. 

Interstate Banking and Small-Business Lending 

A recent report issued by the OCC is concerned with whether subsidiaries of outof-state bank holding companies (OSHCs) will make fewer, possibly higher 

priced, small-business loans than other banks. The study also examines whether 

smaller independent banks are able to compete effectively against subsidiaries of 

larger out-of-state and in-state holding company organizations in this product line. 

Small-business lending levels, prices, and margins for a sample of 1,377 banks 

located in Illinois, Kentucky, and Montana are analyzed. 
 

 

 

 

 

 

 

The volume of small-business lending by out-of-state bank holding company 

subsidiaries was found to compare favorably with both independent banks and instate bank holding company subsidiaries. Out-of-state holding company 

subsidiaries do not systematically discourage small-business borrowing through 

their loan pricing. Small-loan rates at OSHC bank subsidiaries generally are lower 

than those at other types of banks. Although their marginal costs are higher, 

OSHC subsidiaries appear to be willing to accept lower margins on small 

commercial loans. The results also demonstrate that independents do not appear 

to be at a competitive disadvantage relative to OSHC subsidiaries, at least in this 

particular product line. Their marginal loan costs are typically below, and their 

margins typically exceed, those at either class of holding company subsidiary. 

Economic and Policy Analysis Working Paper 95-4, OCC, 9/95. 

Smaller Banks Less Affected in Banking Downturns 

From 1990 to the end of 1994, a decline occurred in the number of banking 

organizations in the U.S., from 12,385 to 7,998, concentrated in the smaller 

banks. In 1980, there were over 12,200 banking firms in the U.S. having assets 

under $1.3 billion, and as a group they controlled about one-third of the nation's 

banking assets, while in 1994 the number of organizations of this size (measured 

in 1980 dollars) had droppped to about 7,850 and their asset share had fallen to 

22 percent. In these trends there are differences between regions, and in the 

regions that experienced severe banking sector difficulties, small banks are seen 

to have more successfully maintained their market share. In the Eleventh Federal 

Reserve District which consists of Texas, southern New Mexico, and northern 

Louisiana nearly one-third of regional bank assets were controlled by banking 

organizations with under $220 million in total assets (in 1980 dollars) in both 1980 

and 1994. 

As an indication of the smaller banks' ability to operate under unfavorable 

economic conditions, the return on assets of organizations with assets under $1.3 

billion tended to remain above that for large banks in all except four years of the 

1980-94 period. In addition, the return on assets of large banks has fluctuated 

more over time than it has for small banks. These differences between small and 

large banks have been even greater in the Eleventh District, and also in the First 

Federal Reserve District (New England states) which experienced a severe 

regional banking downturn following the collapse of its real-estate market at the 

end of the 1980s. 

Recent cycles in bank profitability have tended to mirror cycles in asset quality, as 

measured by the troubled-asset ratio, ratio of past-due loans, nonaccrual loans 

and other real estate owned to gross assets. At the national level, from 1982 

through 1994 the troubled-asset ratio for small banks tended to remain below the 

ratio for large banks. Moreover, the large banks' ratio exhibits relatively wide 

fluctuations. These data support the impression that banking downturns have 

tended to take a relatively more severe toll on large banking organizations. And, 

more importantly, during periods of banking difficulties, when the troubled-asset 

ratio for large banks rose relatively to the ratio for small banks, declines in smallbank market share slowed or stabilized. It appears that large banks' relatively 

severe financial struggles mitigated the downward trend in the small-bank market 

share. The relationship between banking difficulties and small-bank market share 

observed at the national level is even more pronounced at the regional level. 

The article concludes that although the market share of small banks might 
 

 

 

 

 

 

continue to decline, the relative stability of their financial performance indicates 

that they should continue to prosper and grow along with the larger organizations 

in a dynamic banking economy. Financial Industry Issues, Federal Reserve Bank 

of Dallas, Second Quarter 1995. 

Bank Card Delinquencies Rise 

According to the American Bankers Association, 3.53 percent of credit-card 

accounts were past due for two or more months during the first quarter of 1996, 

the highest delinquency rate in 15 years, and preliminary second-quarter figures 

show a continuing problem. According to preliminary results of an OCC survey of 

large national banks, banks are responding by tightening credit-card criteria. BBR, 

p. 1073, 6/17/96; WSJ, 7/24/96. 

Derivatives Record Set 

The OCC reported that banks engaged in $17.85 trillion in derivative activity 

during the first quarter of 1996, a record level. Trading revenues were 

approximately $2 billion, and credit exposure declined $7 billion in the quarter. 

The notional amount of derivatives rose $987 billion during the quarter. Derivative 

activity continued to be concentrated in the largest banks. OCC News Release, 

NR96-67, 6/10/96. 

ABA Survey 

According to the 1995 Retail Banking Survey Report, a survey of 180 banks 

conducted by the American Bankers Association, the total number of bank 

branches grew by over 1,200 in 1994. Only banks with assets of $1 billion or more 

registered a decrease in the number of branches per bank. The survey also 

reported a significant increase in electronic banking services by small and midsize banks, with six percent of banks with less than $300 million in assets offering 

such services in 1994, compared to three percent a year earlier. Northwest 

Financial Review, p. 6, 1/27/96. 

RECENT ARTICLES AND STUDIES Retail Banking Will Restructure 

The study addresses the key factors, from a global perspective, behind changes 

observed in retail banking that foretell extensive restructuring of the industry. 

While many studies have concluded that banking economies of scale eventually 

reach limits, this report argues that retail banks will increasingly be susceptible to 

scale economies in the future. These banks currently experience scale economies 

in some activities, such as credit-card processing, check processing, consumerloan processing and statement preparation. They are subject to diseconomies in 

numerous other activities, for example, the banks' management costs as a 

percentage of income appear to rise as their branch networks increase in size. 

Also, unit management costs rise with increases in their different types of 

products, and given that the numbers of products offered by banks in many 

countries have been growing rapidly, management costs have been rising 

disproportionately from this source. 

The report draws comparisons between the future of retail banking and other 

industries, notably the airlines and communications industries, in which in many 

cases the activities that formerly were carried out by a single provider have been 

disaggregated to numerous different providers. These disaggregated activities are 
 

 

 

 

 

 

 

 

increasingly being performed in quasi-autonomous divisions of single companies, 

or by independent subcontractors. The report predicts similar trends in the retail 

banking industry. 

Under the scenario for the traditional retail bank foreseen here, these institutions 

will take on more of the appearance of a cluster of businesses, in which the 

holding company makes "portfolio" type decisions on such issues as whether to 

enter a new product area, close down a business, or outsource. The new 

alignment of activities is seen in the future role of branches. Reduced greatly in 

numbers, they will cease their role as "minibanks," and will be used mainly as 

gateway sales and counseling centers for upscale or high-net-worth customers. 

They will support product cross-selling to that minority of customers for which 

extensive cross-selling can be profitable. The Future of Retail Banking, A Global 

Perspective, Deloitte Touche Tohmatsu International, 1995. 

Changing Banking Activities and Regulatory Policies 

This article by F. R. Edwards and F. S. Mishkin discusses how banks have shifted 

from their "traditional" activities and more into off-balance-sheet operations, and 

the implications for financial stability and regulatory policies. Evidence of the 

decline in traditional banking is found in the shrinkage in commercial banks' share 

of funds provided to nonfinancial borrowers, from 35 percent in 1974 to 22 

percent at present, as well as the decline in their share of total financial 

intermediary assets from approximately 40 percent in 1960-1980 to below 30 

percent at year-end 1994. 

Banks have experienced growing competition that has diminished their cost 

advantage in acquiring funds, and also has undercut their position in loan 

markets. They have adjusted to the intensified market competition in part through 

attempting to maintain their traditional lending activities, but in more-risky types of 

lending. Examples include a higher percentage of their funds going into 

commercial real-estate loans, and increased lending for corporate takeovers and 

leveraged buyouts. As a result, banks' loan-loss provisions relative to assets rose 

substantially in the 1980s, peaking in 1987, and even in the strong economy of 

1994 had declined only to the level of the worst years of the 1970s. A second way 

banks have sought to maintain profit levels is through new, off-balance-sheet 

activities that are more profitable than traditional activities. 

The risk implications of banks' derivatives activities are examined in this article. 

Large banks, in particular, have moved aggressively to become worldwide dealers 

in over-the-counter derivatives, such as swaps. Overall, the authors do not see 

the risks from derivatives as so different from the other risks in banking as to 

render inadequate the supervisory policies and procedures that are available. 

Finally, banks should inform the public of their risks from trading activities, both 

derivatives and on-balance-sheet activities, and their ability to manage those 

risks. Reference is made to a discussion paper issued in 1994 by a committee of 

the G-10 Central Banks which recommended that estimates of financial risk 

generated by firms' own internal risk-management systems be adapted for public 

disclosure purposes. "The Decline of Traditional Banking: Implications For 

Financial Stability and Regulatory Policy," Economic Policy Review, Federal 

Reserve Bank of New York, July 1995, pp. 27-45. 

Multi-Office Bank Lending to Small Business 
 

 

 

 

 

 

 

With federal legislation having been enacted in the fall of 1994 authorizing full 

interstate banking, William R. Keeton examines the relationship between multioffice banking and small-business lending in the Tenth Federal Reserve District. 

This District includes: Colorado, Kansas, Missouri, Nebraska, New Mexico, 

Oklahoma, and Wyoming. There are several suggested reasons why large multioffice banks might lend less to small businesses than other banks. First, they do 

not have to rely as heavily on small borrowers to achieve a desired level and 

composition of commercial lending. In addition, there are structural factors, such 

as the fact that large multi-office organizations tend to give loan officers less 

autonomy than their counterparts have in smaller banks and are required to follow 

more rigid rules in lending, this suggesting fewer loans being granted to small 

businesses. From another viewpoint, multi-office banks might make more smallbusiness loans because their greater diversification and access to open-market 

borrowing enable these institutions to invest more of their funds in loans, in the 

aggregate and to small businesses, and less in safe, liquid investments such as 

government securities. Also, while previously existing restrictions on geographic 

expansion may have confined larger banks mainly to urban areas and making 

large loans, the relaxation of these limits on expansion will result in these 

institutions entering more of the smaller, rural markets and expanding their smallbusiness lending. 

A study of the Tenth District is of interest because these states have recently 

lessened their geographic restrictions on bank expansion. Since the mid-1980s all 

seven states have allowed statewide branching, and also they have laws allowing 

entry in some form by out-of-state holding companies. Because loan data are not 

available by branch, the impact of branching on small-business lending is 

examined by comparing the aggregate loan-deposit ratio of the bank with the 

average loan-deposit ratio of unit banks comparable to the branches. The data 

indicate that a moderate degree of branching does not, but a high degree of 

branching does, reduce small-business lending. In respect to the multi-bank 

holding companies, the lead banks of in-state firms tend to lend the same percent 

of deposits as comparable independent banks, but the other banks in in-state and 

out-of-state companies lend a smaller percent of deposits than their peers, and 

the differences are greater for banks in out-of-state companies. There are, it is 

noted, numerous individual bank exceptions to these aggregate patterns. 

The overall results of the analysis confirm the conclusions of earlier surveys that 

multi-office banks tend to lend less to small businesses than other banks. This 

finding does not suggest, however, that multi-office banking should be curtailed. 

The lending gap may, after a temporary period, be filled by other banks, and also, 

any disadvantages may be outweighed by benefits. For example, there is 

substantial evidence that multi-office banking improves service to depositors and 

increases competition in local markets. Multi-office banking also makes banks 

less vulnerable to downturns in the local economy by helping them diversify their 

loan portfolios. The article suggests, instead, that regulators should follow policies 

to promote competition by ensuring that multi-office banks do not dominate local 

markets by absorbing smaller banks, and they should continue progress in 

reducing regulatory burden, which tends to hurt small banks more than large 

banks. Economic Review, Federal Reserve Bank of Kansas City, Second Quarter 

1995, pp. 45-57. 

Banks' Disclosure of Derivatives Activities 
 

 

Banks' derivatives activities have become more apparent as institutions are 

disclosing more information needed by the public and regulators to make better 

judgments about companies' activities in this area, according to this study by FRB 

staff of the 1993 and 1994 annual reports of the top ten U.S. bank dealers in 

derivatives. The article summarizes the accounting standards and 

recommendations of industry groups and regulators, and reviews the 

improvements in qualitative and quantitative disclosures since 1993. 

Approximately 600 banks were involved in derivatives as of March 31, 1995, 

though the top 15 banks held more than 95 percent of the derivatives contracts of 

the banking industry. 

In 1994, banks expanded their managements' discussion and analysis of their 

derivatives activities and provided more quantitative information about these 

activities than in 1993. The experimentation encouraged by the FASB, regulators, 

and industry groups is reflected in the diversity of methods used by the top ten 

banks in presenting information about their derivatives activities. Further 

improvements in disclosure should be anticipated, including more extensive 

coordination in this area with national supervisors from other countries. Federal 

Reserve Bulletin, 9/95, pp. 817-831.