These studies generally have used bank balance sheet and income statement ratios as bank conduct proxies. Moreover, prior studies have approximated local banking markets with county or SMSA boundaries. This study develops a methodology for delineating the geographic boundaries of local banking markets through the use of secondary economic and demographic data. This methodology is utilized to delineate rural banking markets in the states of Iowa, Minnesota, and Wisconsin. The relationship between those markets and rural bank conduct is investigated.
Conduct is measured with explicit price and nonprice information generated by telephone survey.
The market determination methodology is based on the assumption that people will bank where they live, work, or obtain goods and services. Using a classification system which categorizes communities according to variety and amount of retail business transactions, a gradient concept is developed which initially approximates market boundaries according to local minima in the gradient. This procedure, which determines where residents are likely to shop, is supplemented with commuting data based on minor civil divisions to determine where residents work. The resulting areas of convenience designate the locale where local customers will ordinarily select banking services. The natural banking markets determined for the entire state of Minnesota are compared with banking markets approximated by county or SMSA boundaries.