BIRTHS, DEATHS, AND MARRIAGES IN THE U.S. COMMERCIAL BANKING INDUSTRY

I. INTRODUCTION The twentieth century witnessed two periods of dramatic regulatory and structural change in the U.S. banking industry--the Great Depression and the events of the 1980s and 1990s. While many important regulations were enacted during the Great Depression, the 1980s and 1990s experienced the repeal or reversal of most Depression-era financial regulations. The 1980s and early 1990s experienced severe financial turbulence the savings and loan crisis followed by another crisis in the commercial banking industry. Those crises led to failure rates among financial institutions not seen since the Great Depression. As a consequence, the 1980s and 1990s saw deregulation that transformed the banking industry from one with much geographic limitation on banking and branching to one now characterized by interstate banking and branching. (1) The theory of industrial organization addresses several stylized facts or empirical regularities of industry dynamics: (1) entry is common, (2) entry is small scale, (3) survival is low-probability, and (4) entry and exit are highly correlated. Dunne et al. (1988) and Pepall et al. (2002, chap. 6) provide more details. Moreover, the fourth empirical regularity contradicts standard microeconomic theory where entry associates with high-performing, profitable, expanding industries and exit associates with low-performing, unprofitable, contracting industries. The empirical evidence implies that the process resembles a lottery where many firms buy tickets (i.e., enter the market), most firms eventually lose (i.e., exit the market), and only a few firms win (i.e., stay in the market). In other words, long-term, permanent penetration into an existing market presents significant barriers, and thus few new firms succeed, because incumbent firms possess significant advantages. Urban et al. (1984) and Pepall et al. (2002, chap. 6) provide additional discussion. The commercial banking industry during the recent two-decade period of deregulation experienced those standard empirical regularities with some variations. That is, entry occurred frequently and involved small banks generally. Only a minority of those banks survived. The number of entries and exits both increased dramatically during the past two decades, although exits typically exceeded entries as the number of banks traversed a downward trend. In addition, exits in the regulated banking industry mostly involve mergers, even for failing banks. (2) The U.S. commercial banking industry possessed institutional characteristics that affect how the industry dynamics corresponded to and differed from those empirical regularities. First, the founding fathers exhibited much concern about preventing concentrations of power. They adopted rules and regulations, in an attempt to prevent such concentrations of power from emerging. That concern bore fruit in the banking industry in the peculiar pattern of bank charters a dual banking system and the regulation of banking activity on a geographic basis. Thus, as we entered the last two decades of the twentieth century, the United States possessed many more banks per capita than most other countries in the world. (3) The deregulation of geographic restrictions on banking activity expectedly led to a decline in the number of banks. Thus, although both entries and exits played a significant role over the past two decades, exits exceeded entries so that the total number of banks fell, as noted. Second, the banking industry plays a critical role in any nation's economy. The loss of confidence in the banking industry that led to subsequent bank panics and runs provided the typical scenario for recession and depression throughout the nineteenth century. (4) Consequently, the banking industry in the twentieth century exhibited significant control on entry and exit by the various banking regulators. That is, the number of bank entries and exits fell below those that would have naturally occurred in an unregulated banking industry. …