Merger Activity as a Determinant of De Novo Entry into Urban 

Banking Markets 

Working Paper 2003-01 

REVISED April 2003 

Steven A. Seelig 

International Monetary Fund 

Tim Critchfield 

Federal Deposit Insurance Corporation 

Washington, D.C. 20429 

Phone: 202-898-8557 

Fax: 202-898-7222 

E-mail: TCritchfield@fdic.gov 

The views stated here are those of the authors and do not necessarily reflect those of the 

Federal Deposit Insurance Corporation. The authors would like to thank Christopher 

Richardson, Robert DeYoung, and Larry Wall for their helpful comments, Robert Avery 

for help with branch-office deposit data, Robin Heider for research assistance and 

Lawrence Goldberg for bringing a programming error to the attention of the authors. 
Merger Activity as a Determinant of De Novo Entry into Urban Banking Markets 

Steven A. Seelig and Tim Critchfield 

Correction to 1999 Draft 

This paper reflects revisions made for a programming error and to reflect articles 

published subsequent to the original draft in early 1999. A programming error reversed 

the signs on all the variables used in our original logit analysis. As a result the 1999 draft 

of this paper concluded that in-market acquisitions discouraged de novo entry, while this 

revision concludes just the opposite: in-market acquisitions encourage de novo entry. 

However, the original draft conclusion that out-of-market acquisition activity does not 

significantly encourage de novo entry still holds after correcting the programming error. 

The complex economic variables used in the draft from 1999 were simplified in this 

version and data for 1998 were added. 

Abstract 

The increase in both the number of bank (and thrift) mergers and the number of 

de novo entries has led the press to speculate that these trends are interrelated. 

Specifically, the media have suggested that out-of-market acquisitions encourage de novo 

entry. This paper examines the determinants of de novo entry at the individual market 

level and specifically tests the hypothesis that "out-of-market acquisitions lead to de novo 

entry into that market." This study differs from the earlier literature on the determinants 

of de novo entry in several respects: (1) Banks and thrifts are treated as full competitors 

and included in the empirical work. (2) The time frame examined is 1995-1998, a period 

of record earnings for banks and thrifts. (3) The data for new charters have been scrubbed 

so that only "true" de novo entrants are included in the empirical work. A theoretical 

framework for de novo entry is developed, and logit analysis is applied to all MSAs for 

the four-year period. 

JEL Classification: 

Keywords: De novo entry, New charters, Mergers leading to new charters 

1 
I. Introduction 

During the 1980s and early 1990s the financial services industry underwent a 

major restructuring. With the steady rise in bank and thrift failures, the annual number of 

new bank and thrift charters declined steadily, going from a peak of 415 in 1984 to a low 

of 40 in 1992. During the past several years, however, new charters for banks and thrifts 

have risen significantly; 664 banks and thrifts, with initial quarter-end assets of $37.8 

billion, were chartered from 1995 through 1998. This dramatic increase in new charters 

has occurred during a period when there has been considerable consolidation in the 

banking industry. With the enactment in 1994 of the Riegle-Neal Interstate Banking and 

Branching Efficiency Act, the barriers to interstate banking all but disappeared. This has 

given rise to a spate of acquisitions by large regional banking organizations of banks in 

states other than those where the acquirers were based. 

The confluence of the increase in the aggregate number of de novo banks and the 

merger wave sweeping the financial services sector has given rise to speculation in the 

popular press that the two trends are related. Some commentators have speculated that 

borrower hostility toward large out-of-market acquirers has led to the creation of new 

banks, while others have attributed the trend to a surplus of executives who have been 

displaced by cost cutting resulting from merger transactions. (Examples of the latter type 

of press are Zellner [1998], Murray [1998], and Gillan [1998].) While these arguments 

may be intuitively appealing, they are not based on rigorous analysis, nor are they market 

specific. A more fully-specified model of entry must be developed to test for the effect 

of merger activity on entry behavior. 

Prior studies have looked at de novo banks from various perspectives. In the 

early 1970s, several empirical studies examined de novo entry from the perspective of the 

2 
 

issues surrounding merger analysis and bank holding company expansion (and 

specifically looked at the likelihood of potential competition).1 Other studies, such as 

those by DeYoung and Hasan (1997, 1998), Hunter and Srinivasan (1990), McCall and 

Peterson (1977), and Rose and Savage (1983), have focused on the performance of de 

novo banks.2 Recently researchers have looked at specific credit allocation issues (e.g., 

small business lending) as they relate to de novo banks.3 The most contemporaneous 

study is one by Berger, Bonime, Goldberg, and White (1999) which examines the impact 

of merger and acquisition activity on de novo entry and on small business lending. 

This study of the determinants of de novo entry differs from previous ones in 

several key respects. First, since the competitive overlap between commercial banks and 

thrift institutions has grown to the point that they are effective competitors in local 

markets for depositors and retail customers, entry by both banks and savings and loan 

associations is included. Second, the period from 1995 through 1998 is selected for study 

since it covers a time frame after the bank and thrift crisesa period in which banks and 

thrifts enjoyed record earnings. Third, while other researchers have used the number of 

newly chartered banks as a measure of the number of de novo institutions, a close 

examination of the data indicates this is not appropriate. A number of newly chartered 

institutions are special-purpose affiliates of existing institutions. Specifically, a large 

number are credit-card banks or finance company operations. In addition, some of the 

newly chartered institutions were created by existing institutions to purchase branches of 

failed savings and loans from the Resolution Trust Corporation or from other banking 

1

 See, for example, Gilbert (1974) and Hanweck (1971).

2

 Similar studies of the performance of de novo savings and loans were done by Hunter, Verbrugge, and 

Whidbee (1996) and Lindley, Verbrugge, McNulty, and Gup (1992).

3

 Examples of this literature are Goldberg and White (1997) and DeYoung, Goldberg, and White (1999). 

3 
organizations. Hence, the de novo entry data used in this analysis separate data on true 

de novo entry from other structure data. Last, this study specifically tests the hypothesis 

that merger activity encourages de novo entry by newly formed financial institutions. 

The following section examines recent trends in de novo expansion. The third 

section reviews the prior literature on the determinants of de novo entry in banking. The 

fourth and fifth sections present (1) the basic model that serves as the framework for the 

empirical work and (2) the results and the empirical techniques used. We present 

conclusions in the last section. 

II. Recent Trends in Bank and Thrift De Novo Expansion 

In the early 1980s, new entrants into the bank and thrift industries encountered 

markets undergoing rapid change. As the conditions of the industries weakened in the 

mid-1980s, the number of newly chartered institutions peaked at 415 in 1984 (see 

table 1), primarily because of the conversion of uninsured state-chartered institutions to 

federally insured thrifts. While aggregate data portrayed an industry with a return on 

equity in excess of 10 percent, there were signs of trouble. Several large banks either 

failed or received federal assistance, and some thrifts were just beginning to recover from 

the effects of high interest rates earlier in the decade. As the banking and thrift crises 

deepened later in the 1980s and early 1990s, both the number of newly chartered entrants 

4 
Table 1 

FDIC-Insured Institution New Charters and Mergers 

1980-2001 

Year 

Count of All 

De Novo 

Institutions: 

True & Remaining 

All New Charters Unassisted Mergers 

All De Novo Institutions 

Other

 New 

Charters 

Unassisted 

Bank Holding

 Company 

Consolidations 

Unassisted 

Acquisitions 

True 

De Novo 

Institutions 

Remaining 

De Novo 

Institutions 

1980 

1981 

1982 

259 

235 

325 

NA 

NA 

NA 

259

235

325

 6 

32 

32 

NA 

NA 

NA 

222 

446 

674 

1983 

1984 

1985 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

368 

415 

386 

267 

220 

210 

176 

143 

77 

40 

52 

53 

106 

150 

193 

215 

262 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

NA

 93 

139 

186 

201 

NA 

368 

415 

386 

267 

220 

210 

176 

143

 77

 40

 52

 53

 13

 11

 7

 14

 262 

40

 83 

208 

162

 95 

107

 41

 55

 45

 41

 16

 16

 6

 10

 10

 11

 12 

NA 

NA 

118 

130 

265 

284 

220 

244 

276 

218 

181 

190 

302 

243 

276 

194 

132 

485 

396 

272 

253 

370 

389 

240 

209 

239 

290 

431 

468 

420 

417 

449 

477 

365 

2000 

2001 

218 

140 

NA

NA

 218

 140

 15 

7 

223 

157 

312 

264 

Note: NA means that a measure of true de novo institutions was not available, and all were included in 

remaining de novo institutions. Holding company data were not available before 1985. Holding company 

consolidations were defined as mergers when the two individual depository institutions had had the same 

bank holding company for one year or more. Unassisted acquisitions for 1984 and earlier include bank 

holding company consolidations. Other new charters include institutions that acquired FDIC insurance or 

when a charter was issued to absorb another charter(s). 

5 
and the number of unassisted mergers declined. In 1992, after the failure of Bank of New 

England and the collapse of real estate markets in New England, only 40 new institutions 

started operations. This was the lowest number in over a decade. 

In the early stages of the financial institution crises, a number of institutions 

attempted to improve their performance by cutting costs or growing rapidly through 

mergers. This manifested itself in a significant rise in unassisted mergers in 1987 and 

1988. With the recognition of the depth of the crises, and the creation and funding of the 

Resolution Trust Corporation in 1989, came a dramatic decline in the number of 

unassisted mergers to 460 (240 acquisitions and 220 bank holding company 

consolidations). As the resolution of the bank and thrift crises began to wind down in 

1993 (failures had declined to 50), mergers and de novo entry began to rise. The addition 

of more liberalized regulations regarding both intra- and interstate banking gave the 

consolidation movement extra impetus. From 1995 through 1998, both industry 

consolidation and new charters gained momentum, with unassisted mergers at around 700 

each year and the rate of de novo entry growing by about 50 institutions each year. By 

1999 new charters peaked at 262 and unassisted mergers declined to less than 500 

mergers. 

III. Review of the Literature 

Some of the early studies looked at entry in banking from a capital investment 

perspective and within this framework tested for the effect of regulatory barriers (see, for 

example, Peltzman [1965]). However, these studies used data aggregated over a large 

number of local banking markets instead of analyzing individual markets. One of the 

limitations of this approach is that it does not allow for the examination of the effect of 

6 
 

local market structure on the entry decision. Moreover, the demographic and potential 

profitability characteristics of specific markets are excluded from the analysis. 

In 1971 Gilbert and Hanweck each presented a study of de novo entry at the 

Federal Reserve Bank of Chicago’s Conference on Bank Structure and Competition. 

Both papers were concerned with the issue of potential competition and with developing 

an empirical approach to assess the likelihood of entry by firms seeking to enter a market 

by merger. Both authors used cross-section data in their analyses. 

Hanweck (1971), using a multiple regression model on a cross-section of 230 

SMSAs for the years 1968 and 1969, attempted to explain the number of new bank 

formations (the dependent variable). He found that the more highly concentrated a 

market, the less likely there would be subsequent entry. He also found the expected 

profitability of the market (as measured by proxies for the expected growth in personal 

income or deposits) to be a significant factor in determining de novo entry. As a proxy 

for product differentiation barriers to entry, he included the population-to-banking office 

ratio and dummies for branching laws as independent variables. The insignificance of 

these variables led him to the conclusion that “these are not important sources of barriers 

to entry in local commercial banking markets.”4 

Gilbert (1974), in a subsequent article expanding on his conference paper, sought 

“to establish objective operational guidelines for predicting de novo expansion in bank 

merger cases.”5 He developed a multivariate discriminant model to distinguish between 

decisions of banks to open or not to open de novo branch offices in the markets in which 

a federal regulatory agency had denied them entry via merger. His sample was composed 

of 55 merger cases decided between 1960 and 1967. He tested for the significance of 

variables that reflected the following: the expansion capacity of an applicant bank, the 

4

 Hanweck (1971), 168.

5

 Gilbert (1974), 151. 

7 
 

expansion history of the applicant bank, the economic and demographic characteristics of 

the market, the growth prospects of the market (expected profits), regulations on bank 

expansion, and the competitive structure of the market. He found variables that represent 

the economic characteristics of a market, its growth prospects for bank services, and its 

banking structure to be statistically significant. He also concluded: “No single factor is 

particularly noteworthy in explaining bank expansion behavior. However, as a category, 

bank market structure indicators appear to weigh most heavily in eventual decisions to 

branch de novo.”6 Like Hanweck, Gilbert found no significance to variables representing 

statutory limitations on branching. 

A third study, by Rose (1977), examined the attractiveness of individual markets 

for de novo entry. Rose developed a model where entry is explained by market 

profitability, market size, market growth, per capita personal income, market 

concentration, and acquisitions of banks within the market. He tested his model using a 

sample of 20 Texas secondary SMSA banking markets over the time period 1962–73.7 

He subdivided his data into three four-year subperiods and used Tobit analysis. He found 

that before 1970, intermarket variations in new bank formations were difficult to explain. 

For the period 1970–73, he found a significant positive relationship between de novo 

entry and market profitability and size, and a weak negative relationship to market 

concentration. Because of the limited geographic scope of the sample,8 it is difficult to 

generalize from the empirical results to the nation as a whole. 

Berger, Bonime, Goldberg, and White (1999) find a positive relationship between 

merger and acquisition activity and de novo entry. However, their study does not 

6

 Ibid., 159. 

7

 To arrive at his definition of secondary market, he excludes Dallas, Fort Worth, Houston, and San 

Antonio. The Midland and Odessa SMSAs are also treated as one banking market. 

8

 Since Texas was a unit banking state, it is uncertain as to how much the inability of banks to merge, 

outside of holding company acquisitions, biased the sample used. 

8 
π

π

π

distinguish between markets containing targets and acquirers and included bank holding 

company purchases as merger activity when no charter was lost. Hence, they examined a 

different hypothesis than the one examined here. Moreover, they used state level data as 

compared to market specific data to reflect economic conditions in each banking market. 

IV. Theoretical Framework 

Economic theory has traditionally recognized that free entry into a market is a 

critical component of the competitive process. Amel and Liang (1997) examined 

“whether a competitive process limits the persistence of above-normal profits in local 

geographic banking markets” and whether entry into a local banking market is dependent 

on the profits of existing firms and on other market characteristics. While their study did 

not focus specifically on de novo entry, it provides a basic framework for examining de 

novo entry. 

The decision to enter a market de novo is in some ways no different from the 

decision to enter by acquisition or by branching. Specifically, entry decisions are based 

on the expectations of the profits to be earned from entry into a market. In the case of de 

novo entry, investors must factor in the costs of obtaining a charter and the market’s 

receptivity to a new institution. Following Amel and Liang (1997), we assume entry is a 

positive function of the difference between the bank’s expected profits, π e, and entryforestalling profits, π f . Entry-forestalling profits are the level of economic profits below 

which no firm will enter a market and are a function of entry barriers and market 

characteristics. In the absence of barriers to entry or changes in market characteristics, 

entry-forestalling profits are equal to the institution’s cost of capital. Higher entry 

barriers raise the cost of entry and thus raise π f . These barriers can take legal form, such 

as restrictions on branching or policies by chartering bodies. Market characteristics can 

9 
 

π

π

π π

φ π π π ≥ π

π π

π

π

π

π

also affect π f. For example, if the market is growing so rapidly that the existing market 

participants cannot meet market demand, then the benefit of increasing demand for 

banking services accrues to new entrants, and π f falls. 

The entry decision is expressed as 

E* = 0 whenπ e < π f 

or 

E* = φ (π e -π f) when π e ≥ π f 

where 

π e = f1(B, X, H, π , A) 

π f = f2(B, X). 

E* is expected de novo entry, π e are the profits that an institution expects to earn after 

entry and should be negatively related to observed entry, and π f are entry-forestalling 

profits. B represents legal barriers to entry and should be negatively related to observed 

entry; X are exogenous market characteristics (these may be either positively or 

negatively related to entry). H is the expected future market concentration; since 

concentration serves as a barrier to entry, where current concentration is a proxy for 

future concentration one would expect a negative sign. π are pre-entry profits (higher 

economic profits should induce entry and expectations of higher future profits). A 

represents the opportunities for future profits resulting from customer attitudes toward 

out-of-territory acquirers and from merger activity within a market. 

V. Empirical Work 

We estimated the determinants of de novo entry for bank and thrift entry into 

urban markets during calendar years 1995 through 1998. We used logit analysis to 

examine Metropolitan Statistical Areas to identify those factors that determine why de 

10 
 

 

φ π

π ≥ π

novo entry occurs in some markets but not in others.9 Besides focusing the analysis 

specifically on de novo entry, we also tested the hypothesis that out-of-territory 

acquisitions encourage de novo entry. A general form of the model tested is 

E* 

it = φ (Bi,t, Xi,t-1, Hi,t-1,π i,t-1, Ai,t-1) 

where E* 

it is de novo entry into market i in year t when π e ≥ π f 

. 

To examine the determinants of de novo entry, we specified the dependent 

variable as a dummy variable to indicate whether de novo entry into a market has 

occurred. Markets are defined as metropolitan statistical areas (MSAs). A measure for 

expected profitability is the past profitability of banks headquartered in the market 

(ði,t-1).10 As with other measures, a prospective entrant typically has access only to data 

that are lagged relative to the final entry decision. Hence, the proxy for expected 

profitability was the median return on assets for banks and thrifts for each market one 

year before the year of entry. A serious limitation to this approach is the assumption that 

the sole determinant of profit expectations of potential de novo entrants is the past 

profitability of firms already in the market. Moreover, it assumes that one can measure 

past profitability of firms competing in the market. However, published data are 

available only by institution and thus profits cannot be attributed to specific markets. An 

alternative is to examine profit potential by seeing whether a market is over- or underbanked and the economic characteristics of a market as revealed by income and 

population measures. Variables that capture this measure of profit potential are discussed 

below. 

9

 Some MSAs were excluded from the study because they did not contain the headquarters of any bank or 

thrift, and others were excluded because data for certain variables were unavailable. 

10 Since economic profits are not readily available, accounting profits are used as a proxy. The use of 

accounting profits may bias the results because they will understate economic profits, since accounting 

profits are short-run measures and are managed so as to minimize tax liabilities. 

11 
Similarly, we measured merger activity (Ai,t-1) as the number of merger targets 

acquired in an MSA over a two-year period ending one year before the year of de novo 

entry. Merger activity was separated into “in-market” mergers, those between 

institutions in the same market, and “out-of-market” mergers, the acquisition by a bank or 

thrift not already represented in the market. Because a subset of in-market and out-ofmarket activity resulted from bank holding companies consolidating their banks, these 

mergers are captured separately from mergers between unaffiliated banks. 

As a proxy for barriers to entry caused by market concentration (Hi,t-1), we 

calculated a Herfindahl-Hirschman Index (HHI) for each MSA, using branch office 

deposit data for all banks and thrifts operating in the MSA. Following standard practice, 

branch data were aggregated by organizational owner, with the owner being the topmost 

institution in a chain (a bank, a thrift, or a bank holding company). Legal restrictions on 

branching (Bi,t) apply to an entire state. A dummy variable, to reflect restrictions on 

branching for each market, was created from data provided by the Conference of State 

Bank Supervisors. For those MSAs that are located in more than one state, the state 

where the majority of banking offices are located was viewed as the one determining 

whether branching restrictions applied to the market. 

The size of the market as measured by its population may serve as a proxy for its 

potential demand for the services of a new bank. Another measure of potential demand 

for banking services that also reflects the economic condition of the market is the relative 

wealth of the population, as measured by income per capita. Other measures of the 

relative attractiveness of a market may be captured by economic variables such as the 

unemployment rate and the growth in population. One would expect that a market whose 

economy is both strengthening and growing in size would be more attractive to entrants 

12 
than one that is stagnating. All or some of these exogenous factors (Xi,t-1) may influence 

a firm’s decision to enter a market de novo. 

To test the hypothesis that acquisitions encourage de novo entry, as well as the 

importance of other factors in determining de novo entry into specific geographic 

markets, we estimated a bivariate logit model for a pooled time-series cross-section data 

set. To capture any time effects over the four years studied, we included dummy 

variables for 1996, 1997, and 1998. Data on 322 MSAs for the four years 1995–98 were 

used, yielding a sample of 1,276 observations. Since entry decisions are typically made 

at least a year before a charter is granted, most of the independent variables were lagged 

at least a year. Table 2 describes each of the variables included in the various scenarios. 

The dependent variable is a dummy that equals one if the MSA had any de novo entrants 

during each of the years from 1995 through 1998. It should be noted that of the 664 de 

novo institutions reported in the first two columns of table 1, we excluded from the study 

45 that were affiliates of larger organizations and 128 that were de novo entrants into 

rural (non-MSA) markets. To better test the hypothesis regarding merger activity and de 

novo entry, three equations were estimated, each containing a different measure of 

merger activity along with other independent variables, and maximum likelihood 

estimates of the coefficients were obtained. 

The 1999 draft of this paper concluded that in-market acquisitions discouraged de 

novo entry. A programming error reversed the signs on all the variables used in our 

original logit analysis. For this 2002 draft, we corrected the programming error and to 

reflect articles published subsequent to the original draft in early 1999. Thus, this 

revision concludes just the opposite of our 1999 draft: in-market acquisitions encourage 

de novo entry. However, the original draft conclusion that out-of-market acquisition 

activity does not significantly encourage de novo entry still holds after correcting the 

13 
 

programming error. The complex economic variables used in the draft from 1999 were 

simplified in this version and data for 1998 were added. 

The results of the first equation are shown in column (a) of table 3. In this 

specification, per capita income (YPP), population (POPPERM), and population growth 

(POPGROW) were statistically significant and positively correlated with de novo entry; 

as one would expect the unemployment rate (UNEMPLR) had a significant negative 

coefficient and market concentration (SQSHARE) had a weak negative coefficient. In 

this specification the variables used to represent prior merger activity were the number of 

in-market mergers and holding company consolidations (LAGINA and LAGINC, 

respectively), and the number of out-of-market mergers and consolidations (LAGOUTA 

and LAGOUTC, respectively), that occurred two years before the year before de novo 

entry. For example, we hypothesize that entry into a market in 1997 was influenced by 

merger counts for 1994 and 1995. In all instances, consolidation activity resulted in a 

loss of a charter and the number of mergers includes mergers of any FDIC insured 

institution (both banks and thrifts) but not parent holding companies. Only the variable 

representing in-market merger activity (LAGINA) was statistically significant with a 

positive sign, indicating that the greater the merger activity in a local market the more 

likely there will be de novo entry, all other things being equal. Variables representing 

branching restrictions (BRANCHES) and average earnings (ROAAVG) were 

insignificant.11 The finding that economic variables related to potential profitability are 

significant is consistent with earlier studies that found market profitability to be 

positively related to de novo entry. The change in the significance of branching 

restrictions found in this study as compared to earlier ones probably reflect changes in 

banking laws during the past 20 years. 

11 As an alternative to ROA we also tested lagged return on equity (ROE) for all specifications and found 

the variable to be insignificant. 

14 
Table 2 

Name of 

Variable 

Description Mean Standard 

Deviation 

NEWANY De novo entry dummy variable for any bank or thrift 0.23 0.42 

YPP Per capita personal income 22,202.3 4313.7 

POPPERM Population in millions 0.66221 1.08829 

BRANCHES Branching restriction dummy variable 0.18 0.38 

LAGINA Two-year total of in-MSA acquisitions through prior year 3.31 5.13 

LAGINC Two-year total of in-MSA consolidations through prior 

year 

2.94 6.52 

LAGOUTA Two-year total of out-of-MSA acquisitions through prior 

year 

4.03 6.74 

LAGOUTC Two-year total of out-of-MSA consolidations through 

prior year 

6.23 12.36 

LAGINOUT In-MSA or out-of-MSA merger dummy variable 0.88 0.32 

LAGINAD In-MSA acquisitions dummy variable 0.58 0.49 

LAGINCD In-MSA consolidations dummy variable 0.37 0.48 

LAGOUTAD Out-of-MSA acquisitions dummy variable 0.55 0.50 

LAGOUTCD Out-of-MSA consolidations dummy variable 0.43 0.49 

UNEMPLR Unemployment rate for prior year 5.13529 2.741388 

POPGROW Percentage change in population for prior year 0.93 1.07 

ROAAVG Median ROA of all banks and thrifts for prior 3 years 1.08 0.33 

SQSHARE Herfindahl-Hirschman Index for midyear branches 1,986.34 807.71 

DUM1996 Dummy variable for the year 1996 0.43 1.16 

DUM1997 Dummy variable for the year 1997 0.25 0.44 

DUM1998 Dummy variable for the year 1998 0.25 0.43 

PCTINA Two-year total of deposits of acquired institutions by inmarket acquirers through the prior year as a percentage 

of total market deposits 

3.30 5.11 

PCTINC Two-year total of deposits of consolidated institutions by 

in-market affiliates through the prior year as a percentage 

of total market deposits 

2.94 6.52 

PCTOUTA Two-year total of deposits of acquired institutions by 

out-of-market acquirers through the prior year as a 

percentage of total market deposits 

4.02 6.75 

PCTOUTC Two-year total of deposits of consolidated institutions by 

out-of-market affiliates through the prior year as a 

percentage of total market deposits 

6.24 12.36 

15 
Table 3 

Dependent variable: De novo entry dummy variable 

Variable First Equation

 a 

Second Equation 

b 

Third Equation 

c 

Intercept -3.1977 

(0.0001)*** 

-3.609 

(0.0001)*** 

-3.3873 

(0.0001)*** 

YPP 0.000046 

(0.0235)** 

0.000048 

(0.0156)** 

0.000037 

(0.0745)* 

POPPERM 0.6767 

(0.0001)*** 

0.6672 

(0.0001)*** 

0.5837 

(0.0001)*** 

BRANCHES 0.2928 

(0.1337) 

0.3526 

(0.0674)* 

0.3339 

(0.0887)* 

UNEMPLR -0.1295 

(0.002)*** 

-0.1213 

(0.0033)*** 

-0.1295 

(0.0019)*** 

LAGINA 0.0319 

(0.0260)** 

LAGINC 0.00981 

(0.3764) 

LAGOUTA 0.00960 

(0.3925) 

LAGOUTC 0.00944 

(0.1018) 

LAGINOUT 0.6467 

(0.0556)* 

LAGINAD 0.3514 

(0.0426)** 

LAGINCD 0.2651 

(0.0913)* 

LAGOUTAD 0.3168 

(0.0578)* 

LAGOUTCD 0.0131 

(0.9361) 

POPGROW 0.4568 

(0.0001)*** 

0.4748 

(0.0001)*** 

0.4565 

(0.0001)*** 

ROAAVG 0.2759 

(0.2497) 

0.2678 

(0.2569) 

0.3150 

(0.1915) 

SQSHARE -0.00021 

(0.0630)* 

-0.0002 

(0.0784)* 

-0.00017 

(0.1337) 

DUM1996 0.3359 

(0.1462) 

0.3036 

(0.1823) 

0.3354 

(0.1424) 

DUM1997 0.5266 

(0.0215)** 

0.5357 

(0.0173)** 

0.5960 

(0.0087)*** 

DUM1998 0.6439 

(0.0075)*** 

0.6993 

(0.0019)*** 

0.7863 

(0.0008)*** 

Number of 

Observations 1,276 1,276 1,276 

Chi-square 

Statistic 

178.0551 

(0.0001)*** 

173.2022 

(0.0001)*** 

182.4671 

(0.0001)*** 

Pseudo R-square 

Statistic 0.1880 0.1844 0.1897 

Note: The dependent variable (NEWANY) equals one if the MSA has any de novo entrants during a year 

for 1995 to 1998. Statistics for the probability greater than Chi-square are in parentheses, with *, **, or *** 

to denote an estimate significantly different from zero at the 10%, 5%, and 1% levels of significance, 

respectively, using a two-tailed test. 

16 
The specification of the model discussed above examines the effect of the amount 

(or intensity) of merger activity, while the specifications in columns (b) and (c) in table 3 

present the findings with variables substituted to measure the effect of the existence of 

prior merger activity. In the second equation (column (b)), a dummy variable representing 

merger activity (including holding company consolidation) over a two-year period, ending 

one year before the granting of a new charter, is substituted for the merger count variables 

in the first equation. The dummy variable, LAGINOUT, was barely significant (90 

percent level) and provides weak support for the finding that mergers encourage de novo 

entry. 

A third specification was estimated (column (c)) with dummy variables 

LAGINAD, LAGOUTAD, LAGINCD, and LOGOUTCD to indicate whether there had 

been in-market or out-of-market mergers or holding company consolidations during the 

two years, ending one year before entry. The results indicate a positive and significant 

relationship between de novo entry and the existence of prior in-market mergers. The 

results also showed a positive, but marginally significant, relationship between in-market 

consolidations and out-of-market mergers. The dummy variable representing the 

incidence of out-of-market consolidations was insignificant. The branching restriction 

variable was positive and barely significant in this specification, but the market 

concentration variable was insignificant. 

To further test the robustness of the results and to attempt to reconcile the findings 

with those of Berger, et. al. (1999), a specification of the model was tested that measured 

the degree of merger and consolidation activity by the share of market deposits involved 

in merger or consolidation activity. Similar to the earlier analysis we differentiated in 

market activity from out of market merger activity. (See table 2.) The specification 

tested is similar to the first one presented above. As is shown in table 4, the economic 

17 
variables, for income per capita, unemployment rate, population, and population growth, 

had the same signs and were statistically significant. In this specification, the measure of 

market concentration was more significant and a deterrent to de novo entry. More 

importantly, the variable for the share of in-market mergers (PCTINA) was positive and 

statistically significant again. The other measures of merger or consolidation activity 

were either statistically insignificant or weakly significant. These results lend support to 

the finding that in-market acquisitions encourage de novo entry, but out-of-market 

acquisitions do not encourage de novo entry into urban banking markets. 

Table 4 

Variable 

Dependent variable: 

De novo entry dummy variable 

Intercept -3.0276 (0.0021)*** 

YPP 0.00004 (0.0565)** 

POPPERM 0.7006 (0.0001)*** 

BRANCHES 0.2699 (0.1671) 

UNEMPLR -0.1275 (0.0024)*** 

PCTINA 0.0114 (0.0131)** 

PCTINC 0.00728 (0.4024) 

PCTOUTA -0.00007 (0.9927) 

PCTOUTC 0.00816 (0.0863)* 

POPGROW 0.4618 (0.0001)*** 

ROAAVG 0.3256 (0.1731) 

SQSHARE -0.00027 (0.0183)** 

DUM1996 0.3269 (0.1542) 

DUM1997 0.5226 (0.0218)** 

DUM1998 0.6403 (0.0073)*** 

Number of 

Observations 1,276 

Chi-square 

Statistic 178.1168 (0.0001)*** 

Pseudo Rsquare 

Statistic .1878 

Note: The dependent variable (NEWANY) equals one if the MSA has any de novo

entrants during a year for 1995-1998. Statistics for the probability greater than Chisquare are in parentheses, with *, **, or *** to denote an estimate significantly different

from zero at the 10%, 5%, and 1% levels of significance, respectively, using a two-tailed

test. 

18 
 

VI. Conclusion 

This study identifies some of the determinants of de novo entry into urban 

banking markets by examining data on most of the nation’s urban banking markets and 

differentiating between those that had true de novo entry and those that did not. Data for 

the four years from 1995 through 1998 were examined and, for the first time, banks and 

thrifts were viewed as full competitors. The principal hypothesis tested was one 

frequently mentioned in the popular press, namely, that merger activity, and in particular 

out-of-market acquisitions, triggers de novo entry. 12 

Economic theory suggests that the primary impetus for de novo entry should be 

expected future profitability of the entrant. The results of this study indicate that the 

measures of expected future profitability for a de novo institution are significantly related 

to entry. The proxy variables for expected future profitability are income per capita, 

unemployment rate, and population growth. Of interest is the fact that these were 

significant in all specifications of the model tested. This contrasts with average return on 

assets, which reflects performance of banks in the market. The results on branching 

restrictions suggest a weak positive relationship between these legal constraints and de 

novo entry, which is different than found in earlier studies. However, it should be noted 

that these barriers have eroded significantly during the past decade. 

The results presented above lead us to accept the hypothesis that merger activity 

causes de novo entry in urban markets. These results are similar to with those of Berger, 

et. al. (1999). Analysis of recent data shows a positive relationship between merger 

activity among market participants and de novo entry. However, the existence of 

acquisitions by firms from outside the market was not significantly related to de novo 

entry. Hence, one can not accept the hypothesis that out-of-market merger activity 

19 
causes de novo entry. While these results differ from those found by Berger, et. al., their 

results appear to be driven by a broader definition of merger and acquisition activity, one 

that treats the markets of acquirers and targets the same. Moreover, because this study 

focuses on urban markets we were able to use market specific economic data. The results 

presented above indicate that the clear determinant of de novo entry is the attractiveness 

of a market in terms of likely future profitability for the entrant and not out-of-market 

merger and acquisition activity. 

20 
References 

Amel, Dean F., and J. Nellie Liang. 1997. Determinants of Entry and Profits in 

Local Banking Markets. Review of Industrial Organization 12, no. 1:59–78. 

Berger, Allen N., Seth D. Bonime, Lawrence Goldberg, and Lawrence J. White. 

1999. The Dynamics of Market Entry: The Effects of Mergers and Acquisitions 

on De Novo Entry in Banking. In Proceedings of the 35th Annual Conference on 

Bank Structure and Competition, 345–362. Federal Reserve Bank of Chicago. 

DeYoung, Robert, Lawrence G. Goldberg, and Lawrence J. White. 1999. Youth, 

Adolescence, and Maturity of Banks: Credit Availability to Small Business in an 

Era of Banking Consolidations. Journal of Banking and Finance (forthcoming). 

DeYoung, Robert, and Iftekhar Hasan. 1997. The Performance of De Novo 

Commercial Banks. Economics Working Paper 97-3. Office of the Comptroller 

of the Currency. 

_______. 1998. The Performance of De Novo Commercial Banks: A Profit 

Efficiency Approach. Journal of Banking and Finance 22:565–87. 

Gilbert, Gary G. 1974. Predicting De Novo Expansion in Bank Merger Cases. 

The Journal of Finance 29, no. 1:151–62. 

21 
Gillan, Carey. 1998. Investor: Banks Are Disappearing But Not Start-up 

Opportunities. American Banker, 13 November. 

Goldberg, Lawrence G., and Lawrence J. White. 1997. De Novo Banks and 

Lending to Small Business: An Empirical Analysis. Working Paper Series S-97-

8. New York University Salomon Center, Leonard N. Stern School of Business. 

Hanweck, Gerald. 1971. Bank Entry into Local Markets: An Empirical 

Assessment of the Degree of Potential Competition via New Bank Formation. In 

Proceedings of a Conference on Bank Structure and Competition, 161–72. 

Federal Reserve Bank of Chicago. 

Hunter, William C., and Aruna Srinivasan. 1990. Determinants of De Novo 

Bank Performance. Federal Reserve bank of Atlanta Economic Review 75, no. 

2:14–25. 

Hunter, William C., James A. Verbrugge, and David A. Whidbee. 1996. Risk 

Taking and Failure in De Novo Savings and Loans in the 1980s. Journal of 

Financial Services Research 10, no. 3:235–71. 

Lindley, James T., James A. Verbrugge, James E. McNulty, and Benton E. Gup. 

1992. Investment Policy, Financing Policy, and Performance Characteristics of 

De Novo Savings and Loan Associations. Journal of Banking and Finance 16, 

no. 2:313–30. 

22 
McCall, Alan S., and Manferd Peterson. 1977. The Impact of De Novo 

Commercial Bank Entry. The Journal of Finance 32, no. 5:1587–1604. 

Murray, Matt. 1998. Bank with a Giant, or Bank with Merton Corn. The Wall 

Street Journal, 25 August. 

Peltzman, Sam. 1965. Bank Entry Regulation: Its Impact and Purposes. The 

National Banking Review, December: 163–77. 

Rose, John T. 1977. The Attractiveness of Banking Markets for De Novo Entry: 

The Evidence from Texas. Journal of Bank Research 7, no. 4:284–93. 

Rose, John T., and Donald T. Savage. 1983. Bank Holding Company De Novo 

Entry, Bank Performance, and Holding Company Size. Quarterly Review of 

Economics and Business 23, no. 4:54–62. 

White, E.N. 1992. The Comptroller and the Transformation of American 

Banking, 1960–1990. Office of the Comptroller of the Currency. 

Zellner, Wendy. 1998. Little Banks Are Sprouting in the Shadow of Giants. 

Business Week, 4 May: 44. 

23