AN EVALUATION OF THE POLICIES OF THE COMPTROLLER 
OF CURRENC Y, MR. JAMES J. SAXON, REGARDING 
THE MERGER OF COMMERCIAL BANKS 
by 
KHALIDA HAQUE 
A THESIS 
Presente d to t};le Department of E c onomics 
and the Graduate School of the University of Oregon 
in partial fulfillment 
of the requirements for the degree of 
M aster of Arts 
August, 1964 

To: Ali Nasir 
VITA 
NAME: Khalida Haque 
AGE: 29 
DATE OF BIRTH: December 27 , 1934 
PLACE OF BIRTH: Bhopal, India 
EDUCATION: a . Primary School: 
Hamidya Primary School, Bhopal, India 
b . High School: 
Islamia Girls High School 
Lahore, W. Pakistan - Graduated 1949 
c. College: 
Presentation Convent College 
Sargodha, W. Pakistan - 1949-1951 
Lahore College for Women 
Lahore, W. Pakistan - 1951-1953 
Graduated Degree of B. A. in 19 5 3 
Fields of Specialization: 
1. History 
2. Political Science 
3. English 
4 . Economics 
Univ ersity of the Punjab 
Lahore, w. Pakistan - 1953-1955 
Granted M. A. Degree in 19 5 5 
Fields of Specialization: 
1. Monetary Theory 
2. Public Finance 
3 . History of Economic Doctrine 
4 . Economic Development in Under-
developed Countries . 
JOB EXPERIENCE: Junior Accountant 
State Bank of Pakistan 
Lahore, W. Paki stan - 1958-1962 
LEISURE INTERESTS: Urdu Literature, Swimming, Foreign 
Travel, Politics and Liberating 
Pakistani Women 
TABLE OF CONTENTS 
CHAPTER PAGE 
I. MERGER MOVEMENT l 
Importance of Movement 1 
Definition of Terms 3 
Changes in Commercial Bank Structures 5 
Economic Environment of Commercial Banks 10 
Causes of Merger 12 
Summary 23 
II. COMMERCIAL BANK MERGERS AND COMPETITION . 26 
Introduction 26 
Competition 27 
Market 30 
Banking Market 31 
Banks and Competition 42 
Merger and Competition 47 
Summary 53 
LEGAL IMPLICATIONS . . . . . . . . . . . . . . . . 55 
Introduction 55 
Sherman Act 5 7 
Clayton Act 61 
Bank Merger Act 68 
Summary 75 
IV. BRANCH BANKING AND THE MERGER MOVEMENT 
IN U. S. BANKING • • • . • • • • • • • • • • • • • • 78 
Introduction 7 8 
Historical Trends 79 
Mr. Saxon a nd Branch Banking 80 
Opposition to the Growth of Branch Banking 83 
St ructural Factors Influencing Bank Competition 
and Structural Change 88 
Advantages of the Branch Form of Structure 96 
Branching and Competition 9 8 
Summary 99 
V. SUMMARY AND EVALUATION. . . . . . . . . . . . . 102 
Mr. Saxon 103 
Department of Justice 106 
State Banking Authorities 108 
Evaluation 109 
BIBLIOGRAPHY 114 
LIST OF TABLES 
1 Number of Banking Offices, Banks and Branches 
in United States from 1953-1962 .••.•••• 7 
2 Number of National Banking Offices, Banks, 
and Branches in the United States from 
1953-1962 ................ ·• ••••• 8 
3 Number of Absorption, Consolidation, and 
Mergers, Voluntary and Involuntary, 
1953-1962 .••.......•••..• 9 
4 Interest Paid on Time and Savings Deposits by 
Insured Commercial Banks of Various Sizes 50 
5 Services Charges on Demand Deposits by Insured 
Commercial Banks of Various Sizes ...•.••• 52 
6 Mergers, Consolidations, and Purchases of Assets 
Approved by the Comptroller of the Currency 
From November 16, 1961 through April 19, 1963. 74 
7 Classification of States of Branching Law • 94 
LIST OF CHARTS 
1 Growth in Population of the U. S. Control 
City Population and Urban Population 
Outside Control Cities or S. M. S. A. 's 91 
2 Gross National Product 1930-1960 
Total and Commercial Banks' Share of 
Consumer Indebtedness •...•••• 93 
CHAPTER I 
MERGER MOVEMENT 
Importance of Mov ement 
Commercial banks play a very important rol e in a country 1 s 
economy. They are the heart of the financial structure , sinc e 
they have the ability, in cooperation with Federal Reserve Banks, 
to add to the money supply of the nation and thus create additional 
purchasing power. This characteristic sets commercial banks 
apart from other financial institutions . Although banks create no 
new wealth, their lending, investing and related activit_ies fac ili -
tate the economic process of production, distribution and con-
sumpti on . 
A multiplicity of laws, rules and regulations shape bank 
activiti es. There are two types of banks: Nationa l and Sta t e banks . 
National banks are incorporated under Federal Law and ar e regu -
lated by the Comptroller of Currency. About one-thfrd of com-
mercial banks are National banks; they hav e more than half of 
total assets and deposits. The Comptroller examine s Nat i onal 
banks , allows charters, consolidations and mergers . Hi s 
policies play a great part in forming the financia l conditi ons of 
the country. He is an important figure in Finance. 
The merger movement in banking in the last decade , due i n 
2 
part to the lenient policies of comptrollers of currency, has become 
a controversial issue. In addition to other objections, the Anti-
trust Department holds the view that the merger movement lessens 
competition and increases concentration. In our dis-cussion, we 
will examine the effect of the merger movement on competition. 
Mr. James J. Saxon, Comptroller of Currency, in his term of 
office from November 16, 1961 through April 19, 1963 approved 
139 mergers, consolidations and purchases of assets. He is in 
favor of expansion of banks -- whether through new charters, new 
branches, mergers or holding companies. 
The issues of banking concentration and monopoly were once 
brought to the forefront of political discussion through the delib-
erations of the Congressional Committee on the Judiciary and the 
antitrust action by the Board of Governors of the Federal Reserve 
System against the Transamerica Corporation. 1 The Committee 
reported that the problem of bank concentration is an urgent one, 
because "concentration of financial resources and credit facilit i es 
are even more ominous to a competitive economy than concentration 
on an industry-wide basis. 11 2 Monopoly power and the consequences 
of monopoly are widely held to be inimical to the public interest. 
1The Transamerica Corporation was charged on June 24, 
1948, with violation of Section 7 of the Clayton Act by acquiring 
controlling stock interest in various independent banks, which 
were at the time of such acquisition in competition with one or 
more of the banks already controlled by Transamerica Corporation. 
2 
Bank Mergers and Concentration of Banking Faciliti es. 
Staff Report of Subcommittee No. 5 of the Committee on the 
Judiciary, H . R. 82nd Congress, 2d Sess. ( 1952). 
3 
It is the purpose of this study to develop the economic analy sis 
of the m e rger movement in this regulated i ndustry. We wiH a lso 
study, in addi tion to the regulations imposi ng diffe rent rest rictions 
of entry and restrictions by State laws, other mean s by which the 
industry could be expanded to meet the needs of the c o mmuni ty . 
Definition of the Terms 
No sound discussion can take place unless the m e a ning s of 
the basic terms are explai ned. It is desirable at thi s tim e tha t w e 
supply definition of our major terms . 
Merger: 
Much could be written to define the word " merger" a nd 
to d i stinguish between it and words that have similar c o nnota tions. 
Warr e n G. Hayes devotes more than two pages of his thes i s to a d i s -
cussion of this point. 1 His conclusion is that, for m a ny pur po s e s in -
volving consolidation procedures, there is no ne e d t o d i s tinguish 
b e twee n mergers and consolidations. 
Another writer, in analyzi ng the growth of co r poraU.ons , has 
this to s ay: 
External growth may take p lace by the purcha se of assets , 
by consolidati on, by merge r, by lease o r by h old i ng c om-
pany d e vice. T e chni cal diffe r e nc e s betwe en the s e typ es 
o f ex te rnal acquisition are ordinarily observed. I n c o n -
solidation all the participating firms los e their i d entity 
1Warr e n G . Hayes, A Study of the Procedure i n the 
~solidation of National Banks Graduate School of Ba nking, 
1955, pp . 9-12. ' 
4 
and a new firm is created. In mergers, the absorbing 
firm retains its identity. In holding company arrange -
m e nts, the parent and each subsidiary retain their 
s e parate identities, but usually not independently of 
managerial control. Hence, external acquisitions may 
include a wide variety of forms. In general usage, 
"merger" covers all these types. 1 
The term "by lease" as used by Weston above, does not appear 
applicable to banking. There is also disagreement as to the pro-
priety of treating the holding company device as a means of merging. 
Because by holding company device each subsidiary retai n their 
separate identity and thus could not enjoy the merger benefits. For 
the purpose of this thesis, "merger" will include legal merge r, the 
purchase of assets, the assumption of deposits, liabilities and con-
solidations. 
Unit Banking: 
By unit banking we mean banking services offered by a 
single bank corporation. A unit bank operates with a single office 
or place of business; it is not controlled by another bank or by a 
corporation or individual that controls another bank. 
Bra nch Banking: 
By branch banking we mean that a singl e banking 
business conducts banking operations at two or mor e places. The 
branches are controlled from one location referred to as h e ad 
office. The h ead office and all the branches are controUed by the 
same board of directors and owned by the same stockholders. 
1J . F. Weston, The Role of Mer er in the Growth of Large 
Firms (Berkeley: University of alifornia ress, 1953 , p. 3. 
5 
Chain Banking: 
When two or more banks are controlled by one or more 
individuals, other than a holding company, the situation is referred 
to as chain banking. 
Changes in Commercial Bank Structures 
United States banking structure has changed considerably 
since the 1920 1 s. In 1920 there were nearly 30,000 commercial 
banks in the United States, with 31,500 offices. Since then both 
the number of banks and banking offices have declined. After 
reaching a low point in the 1940 1 s, the number of banking 
offices has had an upward trend; many banks have expanded their 
operations by establishing new branches when permitted by 
State banking laws. In contrast, ever since the 1920 1s the number 
of independent banks has declined with amazing con s i stency. I n 
37 of the 42 years between 1920 and 1962, the number of banks 
has dropped. Today there are slightly more than 13,400 
banks. 1 
1see Tables 1 and 2, pp. 6 and 7. 
6 
TABLE 1 
NUMBER OF BANKING OFFICES, BANKS, AND 
BRANCHES IN THE UNITED STATES 
FROM 1953-1962 
. . - - - . - - . - . - - - - .. .. . - - . ,. . .. - . .. - . . - . - .- -- - .. - - ... - -- - -· 
Number of Population 
Banking Number of Number of per Banking 
Year Offices Banks Branches Office 
19 5 3 19,981 14,024 5,957 7,923 
1954 20,324 13, 88 1 6,443 7,931 
1955 20,818 13,756 7,062 7, 892 
1956 21,420 13,680 7,740 7, 809 
1957 21,979 13,607 8,372 7,748 
195 8 22,608 13,540 9,068 7,653 
1959 23,276 13,486 9,790 7,583 
1960 24, 103 13,484 10,619 7,467 
1961 24,943 13,444 11,499 7,342 
1962 25,930 13,439 12,461 7, 166 
Source: Annual reports of Federal Deposit Insuranc e 
Corporation and Statistical Abstract of the United States. 
8 
The slow d ecline in the number of banks in 1940 was 
accelerated by the revival of merger activity in the 1950 1 s . 
Between 1953 and 1962 1 there were 1,661 mergers. The 
movement gained speed i n 195 3. There was a net dec line 
of about 670 banks over the decade. Though the decline i n 
number of ban.ks was not as great as it was in 1920, it is stiU 
of concern to many. The number of banks dec lined only four 
perc ent from 1953 to 1962, compared with an eighteen percent 
decline in the 1920 1 s. 
In the 1920 1 s, the number of banks per person in the United 
States fell twenty-five percent; from 1953 to 1962, eighteen p er -
cent. 
Banking structure, the n , has changed before; current 
developments should be kept in perspective. Our case study of the 
merger movement, therefore, will begin w ith a brief consideratio:'l 
of the b a ckground against which curren t changes are tak lri.g place. 
We shall then look at the nature of the chan ges , particularly 
the characteristics of the banks involved, a nd reason s fo:r th e 
movement' s gaining speed during the last d ecad e . F inally, we 
shall discuss some ge ne r al principles to use when examining t h e 
bank mov ement. 
1 See Table 3, p. 9. 
9 
TABLE 3 
NUMBER OF A BSORPTION, CONSOLIDATION, AND 
MERGERS, VO LUNT A R Y AND INVOLUNTARY 
1953-1962 
National State Non-men1ber Non - ins ured 
Year Total Banks Banks Ban.k s B a nk s 
1953 115 63 18 28 6 
1954 207 93 26 83 5 
1955 231 124 38 60 9 
19 56 189 75 39 69 6 
1957 156 52 32 63 9 
195 8 150 65 30 52 3 
1959 16 7 71 30 62 4 
1960 129 49 24 53 3 
1961 137 49 29 57 2 
1962 180 80 35 61 4 
Total 1,661 721 301 5 88 5 1 
Source: Ann ual Reports of F e d eral Depo s it lrrJ.surance 
C orporat ion. 
10 
Economic Environment of Comme rcial Banks 
Banks, if they are to survive, must adapt the mselves to thei r 
environme nt. As the United States e conomy has c hange d over the 
y ears, so has the banking structure. During approximate ly the firs t 
two decades of this century, the picture is one of " ext ensiven ex-
pansion i n banking. This was a per i od of economic growth. 
Farmi ng was especially prosperous . 
Most of the banks of this period wer e unit banks , Branch 
banking had not been uncommon before the Civil War, but wi t h the 
e stablishment of the national banking system, branches w e r e 
generally frowned upon. 
While banks were heading in one direc tion, various strong 
forces in the economy w e r e heading in th_e other. Peop l e were 
moving to large cities and busine s s conc e rns wer e m erging or in 
other ways building hug e organizations to produc e and d i stri but e 
goods on a mass basis. The b anki ng str ucture was due fo r change . 
B e ginning in the early 1920 1 s, and e nding w i t h the b a nking 
holiday, March, 1933, banks suffered through their next pha s e - -
a p eriod of retrenchment. The number of banks w a s cut i n half a s 
a result of three main things: fewer new banks b eing est a b li she d, 
failur e, and merger. Earnings were poor and there were too m a ny 
banks. 
Loans were the major comme rcia l bank asset dur i ng t h i s 
interwar period. But during World War I, banks had bought govern-
11 
ment bonds on a large scale, and after the war their ho ld i ng s of b onds 
of other types outgrew their loans. Within the loan port fo lio, the 
most rapid growth was in loans on securities (helping t o fina nce the 
great stock market boom of the 1920 1 s) and on real e state. By 19 29, 
whe n production, employment, and prices made their sharp d own-
turn, old fashioned loans were no longer dominant. 
We shall never know to what extent the mergers in the 1920 1 s 
eased or aggravated problems. Many mergers were outright life -
saving operations, strong banks taking over weak ones. Many m ergers 
we re made in an effort to better meet the needs of the economy, to 
increase lending capacity, and to acquire branches in growing areas. 
From 1933 to 1935 a number of new banks were estab li she d 
1 
to meet the needs of areas left without banks; and again in the m id-
1940 1 s new banks were set up in response to the expansion of the 
economy in World War II. But, generally spea k ing , the numb er of 
new banks has held fairly st eady. 
Failure and mergers have b een very few, partic ularly whe n 
compared to the 1920 1 s. 
The most significant developme nt of the 1940 1 s has b een the 
steady growth in number and importance of branches , the two 
important factors being economic development and legal provisi ons . 
In many ways the centralization movement in the economy at work 
earlier in the country is being reversed; people have b een m oving to 
111 Changes in Banking Structure, 1953-1962, 11 F ederal 
B:_e serve Bulletin, (September, 1963), p. 1191. 
12 
suburbs and industry is decentralizing. Laws have been further 
liberalized facilitating mergers, the creation of new branches , and 
the conversion of chain and group banking systems .to branc h banki ng 
systems. 
Mergers in the last decade differ from the m e rgers of. t he 
Twenties, which were life-saving operations . Mergers dur i ng the 
1953-62 period were mostly in larger cities and , on the whole, d i d 
not make the services of big banks available to small banks . In 
many cases they were inspired chiefly by profitable prospec ts of a 
trust or securities business or simply by a desire to b e bigger , in 
order to be of optimal size and enjoy larger scal e e conomies. 
Causes of Merger 
There are two parties to the merger -- the acquiring b ank 
a nd the absorbed bank. In attempti ng to eval uat e the r elative 
importance of the various caus es of mergers, we ar e p rimarily con -
c e rned with the initiating caus es. The major initiating causes can 
originate either with the acquiring bank or the abso.rbed bank, 
The principle motives for bank m ergers are discussed 
below: 
1. on the supply side -- a bsorbi ng bank 
2 . on the demand side -- acquiring bank 
3. on the regulator 1 s side -- Comptroller of the Currenc y . 
1. Management problems are often cited as a cause of b ank 
me7gers . Prof_essor. Marcus Nadle r, for example , ha s i ndicated 
that bankers must attach suitable p e rsons to avoid managerial diffi-
13 
culties; failure to do so "will accelerate the merger movement among 
banks. 111 The 92nd report of the Comptroller of the Currency sug-
gests that problems of top management have been among the most 
important reasons. In many banks the advancing age of officers and 
failure to provide suitable replacement has resulted in merger. In 
others tl'ie managing owners have wished to retire from the b a nking 
business. There are differences of opinion regarding the weight 
which should be assigned to management problems in causing bank 
mergers. A study of bank mergers in the Third Federal R eserve 
District concluded in 1955 that: "As a conservative estimate ... 
management problems have played a part in bringing about at least 
one half of the mergers included in our study. 112 On the oth er hand, 
tf-ie then Comptroller of the Currency, Mr. R. Gidney, has stat ed 
that the problem of aging management with no sui tab le rep lacement 
available is "far from being the primary cause" of recent m ergers. 3 
Management problems would appear to be sufficiently unam big uou s 
to permit direct testing of their importance in causi ng m ergers ; i n 
fact they are not. More then one consideration i s usuaHy invo_ve d 
1New York Times, June 4, 1952, p. 42. 
2Federal Reserve Bank of Philadel phia, Busi n e ss R eview , 
January, 1955, p. 6. 
3
Comptroller of the Currency, Nineteenth Ann ual R e port , 
1952, p. 4 . In his 1952 and 1953 Annual R eports, the ComptroHe r 
reported management problems as one of the s ix reaso n s for 
mergers inv olving National Banks. 
14 
i n a bank merger. 
Mr. James J. Saxon, Comptroller of the Currency i n h i s 
recent interview with a member of U. S. News and Wor ld Report, 
stated that the lack of enough managerial talent is one of the reasons 
for a bank merger. However, "banks are realizing the necess ity fo r 
bidding for the best men available. 11 l It is, therefore, reasonab l e to 
conclude that the management problem may have contributed to the 
recent upsurge of mergers, but it is not the major initiati ng factor. 
2. Higher costs and lower profits also help in accelerati ng 
the merger movement. Bank costs, earnings and compositi on ar e 
significantly conditioned by bank size and bank structure. Since the 
United States is still predominantly a unit banking country, bank 
size is employed as an important classifying variable. 2 Bankers 
and economists have emphasized the economies of large-scale 
operations and the savings in labor and other expenses that come 
with larger banking units as an explanation. There are substantial 
economies of scale in banking. Were the banking i ndust r y i d ent/ c a l 
to a single product manufacturing firm the concept would b e reason-
ably clear. But banking is a multi-product industry, and the m a jor 
difficulty we will encounter here is the measurement of cos t s. No n -
current transactions complicate cost det ermi nation. Eve n the 
1u. S. News and World Report, November 25, 1963, 
pp . 90-93. 
2D • A . Alhadeff, Monopoly and Competition i n B a nki ng 
Berkeley: Uni versity of California Press, 1954. 
15 
measurement of current expenses is not complet ely satisfactory, 
because certain non-current tra ns a c tions often i nvo lve c ur r ent ex-
penses. Non-current transa c tions affect i ncome taxes , sinc e some 
current income (interest on municipal securitie s) is tax exempt . 
We face the sarne difficulty in defining or measuring the outp ut of 
a bank b e cause of the multi-product nature of the i ndust ry . 
Lyle E. Gramley, in a study prepared for the F e d eral R e -
serve Bank of Kansas City , found the large scale ec onomies in 
banking industry, which he attributed to "the advantages of large 
scale o peration in banking are not adequately expressed i n com-
parative net rates of return on assets . . . [but) associated wi t h 
reduced risk of enterprise . II 1 
In discussion of costs of m:anufacturing the point is often 
made that economies of scale are due to s i ze of plant rather t han 
siz e of firm. The multi-plant oper ation in banki ng refers to 
branch banking -- which means lower cost with t h e inc rease of 
the size of banks. 
The first s t udy of bank cos t s to make extensive us e of 
e mpirical data was Professor Alhadeff's Mono poly and Com-
petiti on in Banking. H e. compared costs of California unit and 
branch banks of various sizes for t h e period from 1938-1950. 
In spi t e of the limitations imposed by the data, h e was a b le to 
F 1Lyle E. Gramley, A Scale Economi es i n Banking, 
ederal R e serve Bank of Kans as C ity , 1962, p. 59. 
16 
derive some interesting results. Alhadeff found that branch bank 
costs were higher than costs of the largest unit banks. They wer e 
lower than the costs of the smaller unit banks. As he s tates : 
Branch bank costs are actually higher than those of the 
largest unit banks. Even when intere st costs are i g-
nored in the comparison, the remaining costs of b r anch 
banks are at best only equal to those of the large st unit 
banks. 1 
A merger to create branches for the purpos e of r e ducing 
c osts is an unprofitable reason for merger, due to the fact t hat 
profitability varies with the particular measure of profitabili ty 
employed. 
Higher operating costs and lower earnings have not exerte d 
systematic pressure upon banks to merge. Even though costs and 
profit pressure were important in actual mergers; the merged 
banks succumbed because of individual weaknesses, and not as 
representatives of their economic class. 2 
3. Prices or terms have been offered which the sha re-
holders have found most att r active. These price terms have b een 
a particularly strong factor because the stocks of .many bank s have 
a limited market and sell at prices below book value. The y ie ld 
from dividends has not been very attractive, and t his has a dversely 
affected the market price of the shares. Thi s has b een c a u sed not 
1
Ibid., p. 106. 
2 
Q C. P. Alhadeff and D. A. Alhadeff, "Recent Bank Mergers , 11 
_uarterly Journal of Economics, 1955 .. 
17 
so much by poor earnings as by need to augment capital. 
4. Small banks have joined forces in order to compete more 
effectively with nearby large institutions. 
5. An analysis of earlier consolidation movements among 
banks ascribed an importance to lending restrictions as a motive 
for merger. This point has been described by Steiner and Shapiro: 
bank mergers have been consummated in order to 
increase a bank's capitalization and deposits, thereby 
enabling the institution to furnish more adequate service 
to its customers, The growth in size of business enter-
prises increased the credit needs of these firms. Since 
the maximum unsecured loan to one borrower is limited 
to 10 percent of a bank's capital and surplus, an increase 
in the bank's capital base permits a larger maximum loan 
limit. The increased resources of the merged bank en-
able it to grant the larger loans made permissible by 
the increased capitalization. 1 
Similar, in reference to the current merger movement, it 
has been stated that"· .. banks have to keep pace with dev elop-
ment of U. S. economy. If industrial agglomerations of capital 
get bigger, the banks serving them must do the same. 112 Clear ly 
the increased lending limits which often accompany a merge r m ust 
be listed as an advantage in weighing the merits of the pr oposed 
merger, But to what extent banks utilize their increased lim i t s a nd 
serve the community's increasing needs, is still an unanswered 
question. 
1w. H. Steiner and Eli Shapiro,, Money and Banking (New 
York: H. Holt and Company, 1964), pp. 105-106. 
2B usi. ness Week, February 12, 1955, p. 126. Vi ews of J. 
8C tewart Baker, Chairman of the Board, Bank of Manhat tan 
ompany. 
18 
Increases in a community's needs are not just an increase of 
one group, but an increase of all: large, medium, and small size 
borrowers. The large borrowers are usually few and enjoy an un-
limited market. Medium and small borrowers, who have a limited 
market, can only approach banks in their immediate community. 
The banks in a given area could hardly justify a merger for the 
reason of better serving the community. 
This would seem to support those who argue that banks have 
been most restricted by lendi ng limits in competing for big custo-
mers with life insurance companies. The major loan competition 
between commercial banks and insurance companies is term loans. 
However, since banks have a comparative advantage over insurance 
companies in any form of lending as against investing, term loans 
are mostly negotiated by commercial banks. Indeed, term lending 
by insurance companies is often complementary rather than com-
petitive with commercial banks, Term loans have been syndicated 
between banks and insurance companies, particular ly whe n t h e 
maturity of the loan is greater than that desired by the bank. The 
insurance company then takes the l onger part of maturity a nd the 
1 
banks the shorter. It is unlikely that the remaining a r ea of 
genuine competition between banks and insurance compani es, fo r 
the limited part of the banking system which is involved, is 
1E. W. Reed, Commercial Bank Management (New Yor k: 
Harper and Row, Publishers, 1963), p. 309, 
19 
important enough to explain the sharp increase in bank merger s 
during the period from 1953-1962. 
Larger banks acquiring comparatively small bank s , instead 
of large banks, 1 has been the chief characteristic of the merge r 
movement in recent years. It would be more efficient and 
certainly more effective to merge two large banks directly, with a 
correspondingly sizable increase in capital. Since the pres sure of 
l e nding limits is great on both, both parties would be impelled to 
s eek each other out; thus the merger would be mut ually b eneficia l . 
It is not d e nie d that lend,ing restrictions are important in indi vi dual 
cases. For the majority of the participati ng banks, however, the 
available data do not support the 10 percent hypothesis as a majo r 
i niti ating factor in the upswing of mergers. 2 
6. In many cases, local busine ss e s or i ndus t r ial c o ncer ns 
which were of major importance to a small town b ank ha v e b een sold 
to large concerns which have their banking t ie s i n big cities . In 
these cases the small banks usually recei ve a smaller perc entag e of 
the banking business of the concer n , and someti m e s fi nd i t adva n-
tag e ous to combine with a larger bank. 
1see list of mergers, conso lidations, and purcha s e s of assets 
approved by the Comptro ller of the Currency, M r . James J. Saxon 
from November 16, 1961 to April 19, 1963, fur ni shed by the Comp-
troller's office to the Committee on Banki ng and Currency, H o use of 
Representatives, 88th Congress, 1st Session . Conflict of F e d eral" 
~State Banking Laws~ 1963, p. 482. • 
2 See Table 6, where it is evident that lar ge bank s a r e no t 
the main merging banks. 
20 
7. Fringe welfare benefits and increased compensation 
available for officers and employees from the potential a b sorbing 
bank have caused management to back many m ergers. 
8. Uneven growth of different banks is also o ne of t h e reason s 
for the growing merger movement of 1953 to 1963. The bank ing 
system as a whole expanded tr e mendous ly during the period from 
1941 to 1952. During this period depos it s increased 240 pe r cent. 1 
This tremendous growth was not uniform for a ll b anks in the s y stem, 
however . In the economy as a who le during the expansion phas e of 
t he busines s cycle, different rates of growth in different sectors, or 
even within a sector, create structural maladjustment a nd thus in-
stability. Similarly, in banking the very rapid expansion from 194 1 
t o 1952 created stresses owing to uneven rates of growt h of different 
banks. 
It is also necessary to exami ne the motive s o f the bank s co12-
sidering these transaction s -- the reasons why some banks have 
desired or considered it necessary to co n solidate or m erge with or 
purchase other banks. To some extent thes e motives overi.ap with 
the reasons given for the banks whi ch are selling or m erging th eir 
businesses into the continuing bank. The rea sons we consid er most 
important for the purchas ing or acquiring of b anks are : 
A. The need to obtain banking offices in adj oining areas 
in order to enjoy to a fuller extent the benefits of vo_um e 
1
Federal Reserve Bulletin, May, 1954, p. 477. 
2 1 
o f r e tail banki ng; that is , ser vi ng a large n umb er of indi-
v i d uals and s mall busi ness e s th r ough b r anc h es. B ranch 
b ank s ha v e s how n a sp e ctac ula r r a te of g r owth i n the past 
tw o dec a d es. I t is not n e c e ssar y to r eview h ere the 
rela t ive a d vantage s of b ranch b a nking ; it i s sufficie n t for 
our purpos e only t o note the rapi d growth of bra nc h b ank ing. 
B . The growi ng importanc e of branch banking dur i ng t h e 
last two d e cades is p r oducing a striking change in the fo r-
mal structur e of the comme rcial banki ng syste m i n th e 
United State s . Many b a nks in branch re stricte d states 
m erg e to create bra nche s . Thi s eas e s th e bank 's mo st 
d i ffic ult c urrent problem , t hat of a la r g e m igratio n of the 
po pulation fr om m etropo litan t o subur b an ar ea s . This 
s h ift has a ffe c ted t h e b a nk ' s ear n i ng s i n two ways: first, 
its drain o n d e posi ts whic h raises t h e capital-d e posit ratio; 
and s e c o nd , t he s h ift of th e l oa n b us ine ss of the de positors 
t o t h e local bank s o f t h eir dom i c ile. 
In b r a nc h restricte d state s it i s d ifficult t o g e t a p proval 
fr om r e g ulatory a uthorities for d e nov a b ranc h e s . In o r d e r 
to ex pand in th ese a reas th e b ank s will s ettle fo r a m erger . 
Of a ll th e m ergers, c o ns o lidati o n s and purchas e s of assets 
a pprove d by th e Comptro ller o f t h e C urrency , M r . J a m e s J . 
Saxon , during his t e nure of office fro m November 16, 1961 
through December 31 , 196 3, seventy -six percent of th e 
m erger s t ook p lac e i n s tate s wi th lim ited areas of b ranch 
22 
banking; nineteen percent in states with statewid e 
branch banking; and only fi v e percent in state s which 
strictly prohibited branch banki ng. 
C. The need for larger loaning limits and more avail-
able deposits to loan. This need has been caus ed by the 
general growth of industry as a whole. 
D. Keen competition with other banks and non-bank 
financial institutions and the normal urge to exc el in 
expansion, growth and earnings. 
E. Desire for earnings. The above four factors ar e 
related to this point. 
F. Professor Weston's reason for a bank's "de s ire to 
limit competition. 111 This point wi ll be taken up in d e tail 
in the following chapter. 
The foregoing are the reasons of banks fo r merger s. As 
banking is a highly regulated indus t ry, the merger s c annot b e 
effected without the approval of the Comptr o ller of the C urrenc y in 
the case of national banks, the Feder a l R e s erv e Boa rd in the c a se 
of state member banks, and the Federal Deposit I ns uranc e C orpo r -
ation in the case of non-member insur ed banks. The most c ommo n _y 
given reason for approval by r e gulatory authoriti e s is p ub lic interest . 
1
J. Fred Weston 's t e sti mony in the Reports of t h e Committee 
ondthe Judiciary of the United States Senate, .=:orporate M erg ers 
~ Acquisitions. A staff study of the Subcommittee on A ntitr u st 
a ncl Monopoly, 85th Congress, 1s t Sess i on. 
-
23 
Other reasons which indirectly influence mergers are summarized 
below. 
1. Favor of expansion of the banking industry to meet the 
needs of an expanding economy. National banks are required to 
comply with the state -laws of their domicile-, and in branch re-
stricted states the only means of expansion is a merger. 
2. To create more banking offices in an underbanked area. 
3, The Comptroller of the Currency's favorable attitude 
toward branch banking. 
Summary 
There are two parties involved in the merger movement, the 
acquiring banks and the absorbed banks; A few of the many reasons 
for the mutual benefit of the acquiring banks and the absorbed banks 
resulting frotn a merger are discussed above. The main purpose 
for acquiring banks to merge with small country banks is thei r 
desire for expansion to meet the needs of their depositors who a re 
moving to suburban areas, to increase profitability by i ncr ea s i ng 
deposits, and to acquire more market area for business. R easo n s 
for external acquisition rather than internal growth for the 
accomplishment of business goals are: 
1. New facilities may be acquired more quickly through 
mergers. 
2. The desired facilities may be obtained more cheaply by 
purchasing the ownership stock of an existing company. 
24 
3, It is sometimes possible to finance an acquisition where 
it would not be possible to finance internal growth. 
4. The development of new products and market areas may 
be accomplished through mergers, thereby avoiding the necess ity 
for combating difficult competition in early stages of development. 
5. Market control may be obtained more rapidly and with 
less risk through mergers than by internal expansion. 
6. Competition could be limited by mergers rather than by 
internal expansion, 
Mr. R. M. Gidney was appointed Comptroller of the Cur-
rency on April 16, 1953. Following his appointment the merg e r 
movement accelerated, bringing the subject of bank mergers to 
the attention of the Antitrust Department. The Antitrust Department 
brought suit to block several of the mergers approved by the Comp-
troller of the Currency. The rift between the Comptro ller's offi c e 
and the Antitrust Department resulted in the resignation of 
Mr. R. M. Gidney and the appoi ntment of Mr. James J. Saxon in 
November, 1961. 
Mr. Saxon also favors expansion of banks, whatev er form it 
may take: new charters, new branches, mergers, or holdi n g 
companies. He approv ed 80 mer gers in 1962, as compar e d with 
Mr. Gidney' s average of 74 . Mr. Saxon expressed the need fo r 
expansion in his address before the National Credit Conference 
of the American Banker's Association, Chicago, Illinoi s, on 
January 22, 1963: 
25 
As our e conomy has grown , i t has become i ncreas i ngly 
evide nt that the comme rcial banking s y stem occupies a c e n -
tral role in i ts progress . . .. A defici e ncy i n that fi nan-
cial mechanism will critically affect the ro le of our 
e conomic growth. 
As new branches and new charters a re restricted by state laws i n 
most of the states , the merge r device is being us e d to expand the 
banking industry. 
The following two chapters will b e devot ed to the devic e us e d 
by Mr. Sa xon and its effe ct upon the financia l m ark e t and th u s the 
e conomy as a whole . 
CHAPTER II 
COMMERCIAL BANK MERGERS AND COMPETITION 
Introduction 
The upswing of the merger movement since 1953 aroused the 
interest of the Justice Department. In their opinion, the Comp-
troller of the Currency has been approving bank mergers too 
freely. The Justice Department for several years has sought to 
obtain from Congress specific authority which would permit it to 
institute antitrust proceedings to enjoin bank mergers. Finally a 
law was enacted in May, 1960, the Bank Merger Act, which gave 
the Antitrust Division of the Justice Department an advisory role 
in bank merger cases. The banking agency authorized to approve 
a contemplated merger must request from the two other Federal 
banking agencies and from the Justice Department a written 
opinion on the competitive factors involved. The law requires the 
banking agencies to consider not only the competitive facto rs , but 
six other banking criteria, such as history, condition, capital , 
management, and the community's needs, whereas the Justi ce 
Department is required to report only as to the effect on com-
petition. The law of 1960, therefore, did not give the Justice 
Department the final word in bank mergers. Even though the 
Justice Department's report on the competitive effect is stron g ly 
27 
adv erse in any given case, its v i ews may be overridden. The A nti -
trust Department was v igorous in applyi ng the antitrust laws a nd 
stopped sev e r al mergers approved by the Comptroller. The cour t s 
in many instances had to decide whether competitio n w a s t h e final 
criterion. 1 
Competition 
There are no precise defini tions of competition and mo nopo ly. 
Neither economics nor law has produced a uniform class ific atio n. 
of competitiv e and monopolistic situations. There are well accepted 
concepts of the two conditions in their theoretical form s . Howev e r, 
none of these fits the real world . One of the common ly used 
definitions of competition in the th eoretical and analytical 
literature is pure competiti on. According to Chamber la i n, w ho 
establi shed the modern formula tion , pure competi tion in an industry 
is characterized by a large number of buyers and s eller s who d eal 
in homogeneous, or standardized commodities . The s e b uyers a nd 
se llers have no influence on selling pri c e s. Any ind ividual can 
ea s ily e nter the market as a selle r or a buyer , and h e can have t h e 
market just as easily without any outward s a c rifice. A U buyers 
and s eller s have e qual knowledg e of current mar k et cond itions - -
prices paid, volume and cost. No buyer-seller loya l t ies exist . 
No supplier ha s any trade advantage through reputation, patents , 
1
The legal aspects w il l be di scussed in Cha pter III in d etail. 
28 
or financial and family connections. The world of pure competition 
is completely deterministic. Factor prices and product prices are 
determined exogenously to the firm. Profit levels are zero and all 
firms in a given industry tend to be of the same size. 
The opposite pole is equally clear. The perfect monopolist 
is the only one seller in a market, and a monopsonist is the sole 
buyer, Competing ·with no one, the monopolist has full freedom 
of choice over his price. After estimating his volume of sales at 
various prices and his total costs for such volume, the seller sets 
the price which will give him the largest profit attainable. 
These concepts were developed in traditional economic theory. 
They were not conceived as literal descriptions of the economy. 1 
Rather they were used to support the thesis that a competitive 
economy would allocate the use of resources most efficiently. They 
were employed to show that such an economy would be most sensi-
tive to consumer demands and would attain the greatest consumer 
satisfaction. 
Later came empirical studies of industrial practices, which 
revealed the shortcomings of these theories and pointed up the 
need for changes in theoretical analysis. Modifications were 
developed, still within the framework of a general, rounded 
pet· . l"W e have not and probably never had perfect market com-
Co iti~>n of the kind described by the classical economists ... ", 
M rwin D. Edwards, "Preserving Competition vs. Regulating 
onopoly, 11 American Economic Review, 1940, pp. 164-170. 
29 
theoretical pattern. "Imperfect competition" 1 was offered by Joan 
Robinson as a v~:ria~ioq .9f original theories. Professor Edward H. 
Chamberlain developed the theory of "monopolistic competition112 
to accommodate such forces as the market advantage of brands in 
a competitive framework. These and other works produced broad 
market theories in the tradition of previous economic theory. How-
ever, they suggested the desirability and possibility of bringing 
economic analysis closer to the market place. 
A basic weakness of the theory of pure competition is its un-
realistic assumption of homogeneous (or standardized) products. 
No matter how alike some products may appear, if they differ in 
the minds of the consumers they are different. Each firm wi ll have 
a partial monopoly of its own product, so that no matter how m any 
sellers there may be the sales curve facing each seller will not be 
perfectly elastic. This is not to say that because each seller is a 
monopolist he will necessarily make monopoly profits by re stric t ing 
his output and selling at a higher price. There can be many firms 
offering closely competing substitutes. A large number of closely 
competing products will insure a much smaller share of the total 
market than if there were only a few firms or if subs titutes were 
more remote. 
-----------
1
(L Joan Robinson, The Economics of Imperfect Competiti on 
ondon: Macmillan and Co., Ltd., 1938). 
2 • 
p . . E. H. Chamberlain, The Theory of Monopolistic Com-
~ ( Cambridge: Harvard University Press, 1939). 
30 
Mere number, however, can never alone reveal how much 
rivalry exists or how effective competition is, For the rivalry that 
counts is the economic rivalry that takes place in markets, i, e., 
the loci of space and time where buyers and sellers meet. 
Market 
The finding of monopoly or competition always hi nge s on the 
definition of the "market, 11 a concept difficult to define. It includes 
those sellers who compete with one another in offering a specific 
product to a given group of customers. However, market can be 
defined narrowly to exclude many sellers who transact business on 
the fringe of the market; when such a definition is used, the market 
may seem to be dominated by only a few sellers. If, on the other 
hand, the market is defined broadly to include sellers on the fringe, 
it will usually appear more competitive. 
There are several kinds of fringe sellers who m ight be 
thought of as "not quite" or "just about" bel onging to a particular 
market, There are those, first of all, whose products are slight ly 
different. 1 In most markets, each seller's product tends to b e a 
little different, if only because of different brand names and trade 
marks. The practical question which frequently arises is how t o 
distinguish between products that purchasers feel they can easily 
lJ oe S. Bain, Industrial Organization ( Berkeley: Univers i ty 
of California, 1959), p. 8. 
31 
substitute for one another -- and which therefore are competitiv e 
and products which they do not feel are close substitutes. 
Another kind of line must frequently be drawn. Some producers 
may be geographically remote from the principal market. Their 
remoteness may reflect the high cost of transporting their product. 
It follows that these producers are only partially, if at all, com-
petitive with others even though they may sell identical products. 
The market is the crucial concept in evaluating the forces of 
competition, The effective rivalry a firm faces comes from other 
firms that produce the same or similar products and sell to the 
same group of custpmers. It is in the crucible of the market that 
the forces of competition must be examined. 
Banking Market 
Before we proceed to the discussion of competition in the 
banking industry, it is helpful to define the market structure of 
commercial banks with the following classification: 
1. Supply side 
A. Alternative sources of supply. 
B. Differentiated products. 
C. Problem of entry. 
2. Demand side 
A. Alternative sources. 
B. Geographical location. 
C. Frie e determination. 
32 
A. Alternative Sources of Supply 
The traditional and semi-unique products that banks supply to 
their customers are short-term business loans. Commercial banks, 
however, are not the only institutions which supply short term 
business credit to the community. Short term business credit is 
supplied also by commercial finance companies, businesses which 
extend trade credit, the Small Business Administration, Federal 
Reserve Banks, and, in some cases, by private individuals. 
Lending by private individuals is a source of funds to small 
business. Also, it does not exist in a formal institutional frame- ·, 
work. Therefore, loans by private individuals cannot be regarded 
as a substitute for bank loans by the majority of business borrowers. 
Federal Reserve Banks are qualified to make limited industrial 
loans only in cases where the industry is needed but where it is not 
possible to obtain requisite financial assistance. This restricted 
lending activity of Federal Reserve Banks cannot qualify as a suit-
able substitute to the ordinary business loan of the commercial bank. 
The Small Business Administration is also not an important 
supplier of business in relation to commercial banks . They only 
supplement their resources to commercial banks to extend to t h eir 
cust0mers in return. Small Business Administration is not com-
petitive but complementary to commercial bank short-term 
business loans. 
Trade credit is undoubtedly an important source of credit to 
33 
small business. It is commonly granted by wholesalers and manu-
facturers to retailers and other distributors and by suppliers to 
processors who themselves obtain bank credit terms not d i rectly 
available to the small business. 
Specialized finance companies are i n significant alternative 
sources of supply for most borrowers. 
Trade credit is the only important example of an alternative 
source of supply of short term bank business loans which can meet 
at least some of the tests of a reasonable substitute. Trade credi t 
i s at best only a highly imperfect substitute for bank loans a nd 
under most conditions does not constitute a competitive alternative 
source of supply. 
Commercial banks, therefore, compete only amo ng t hem -
selves and the market of these different banks is highly localized. 
B. Differentiated Products 
As was mentioned earlier, no matter how a like s o m e p roducts 
may appear, they differ in the minds of customers. T h ere m a y b e 
more than one bank in a community, but some customers a re bound 
to those bankers with whom they have historically t rar..sac t ed 
business, and their credi t facilities and servi ces may be unique 
in the minds of the customers. 
Sometimes bankers in a community specialize in d iffere nt 
forms of credit. Some bankers mostly deal in mortgage bank ing, 
some i n wholesale or retail banking, some in consum e r credit , a nd 
others in business credit, etc. All of these banks are engag ed in 
the lending business, but each of them has a partial monopo ly of i ts 
own product. Even if two or more banks in a community deal with 
the same type of business or product, their service or banker-
customer relationship makes their product different in the m inds 
of customers. 
C. Problem of Entry 
The government relies heavily on business competition to 
protect the public interest in most economic matters. Thi s po licy 
is based on the view that "under a free enterprise system, com-
petition acts as a constant safeguard of the public inter e st . . . 
a nd the need for Government regulation and contro l i s m inimiz e d, 
where competition thus automatically safeguards a nd promote s the 
public interest. 111 In the case of banking, however , public po lic y 
s e eks to protect the public interest by preventing u ndue competitio n . 
To enha nce the safety of the banking system and to m inim i z e b a nk 
failures, public policy restricts entr y into banking . R estricted 
entry limits the number of competitors in the produc t ma r k et . 
Entry restriction has a non-uniform impact on the mar k ets for 
loans. Large, medium, a nd small sized borrowers cons tit ute 
important, partially separate submarkets of the banking industr y . 
1
(N M. Nadler and J~ , B.oget1 , ,T,h e ' Bankt hlo ld iagi. C om.paqy: · 
9
y e~ York: Graduate School of Business Admini stration, N ew 
or Uni versity, 1959); . p. 40. 
·,;•;;·. 
35 
Entry restriction is completely ineffective for business loans to 
large borrowers. 
The large borrower deals with the national market and the 
largest banks dominate this market, 1 but many small banks 
directly or indirectly participate in the market. The large number 
of suppliers assures effective competition. Entry restriction can-
not significantly alter the character of bank rivalry in this market. 
The credit extended by a commercial bank depends on the amount 
of its deposit and only to a limited extent on the amount of its 
ca pital. New banks might secure a large paid in capital, they 
could not immediately attract adequate deposits to become important 
suppliers in this market. Accordingly, entry barriers are un-
necessary to keep new banks out of the national market. As far as 
medium sized borrowers are concerned, entry barriers restr i ct 
some efficient banks from this market. New banks through superior 
efficiency might · e v entually grow large enough to enter thi s market 
or may eventually enter the larger, national market. I n t h e smaH 
size borrowers I market, the banking structure is large ly o ligo-
polistic or quasi-monopolistic in character. Entry r e stri c tion s i n 
this market hav e an adverse effect on competiti on, as more a nd 
more banks in this market will increase the rivalry among seHers 
1 
b ~or the purpose of explaining the effect of entry restriction s 
0 
p: fnking market, we made use of the classification developed by 
ma° ;ssor Alhadeff in which large, medium and small borrowe r 
r ets are distinguished. 
36 
and small borrowers will have more alternative sources of loanable 
funds to approach. 
Restriction of entry on the commercial banks' raw material 
market is also ineffectiv e. There are two types of raw materials: 
1) Demand deposits. Here commercial banks face no 
inter-institution competition; they compete only amongst 
themselves. In this market entry would not hav e any effect, 
as the law prohibits interest on demand deposit and there 
would be no question of price competition; rather it would 
help in increasing service competition, resulting in more 
efficient banks. 
2) Savings or time deposits. Public policy to prev ent 
undue competition sets ceiling rates on time deposits with the 
result that depositors hav e found savings and loan sha res a l -
most perfect substitutes for commercial bank time depos its. 
Entry in this market would only enhance the sourc e s a va il -
able to the public and would hav e no effect on competitiv e 
aspects of the market. This ceiling rate on time d eposit s, 
however, failed to protect commercial banks from very 
vigorous competition by saving s and loan associations. 
If the lev el of prices charged by existing banks is high enough 
and there is no restriction to the entry , there is incentive for new 
banks to enter the market. Fear of new entry can lead existi ng 
banks to charge less than their market power would a llow. In this 
way low barriers to entry can be important factors in producing 
37 
more competitive results, even if, over a long period of time, 
actual entry is small. 
The banking industry of the United States should be allowed to 
operate as freely and competitively as all the elements of the free 
enterprise economy that it serves and of which it is a part. T he 
restrictions on branch formation and o n new entry seem to disregard 
the workings of the free market. The weight is· usually give n on the 
criteria of "convenience and needs of the community," an.d to many 
banks these criteria may lead to undue competition and thus to 
failure of some banks, considered to be a community tragedy. 
We do not know, hoever, what weight is given to the initiative 
and judgment of those private individuals who stand waiting and 
willing to risk their capital and reputation in the undertaking. 
It is odd that bankers, who give advice to businessmen, are them-
selves restrained from acting on their own advice, a n.cl that banks 
which furnish the lubricant for all other businesses to grow and ex .. 
pand are themselves impeded from growing at a rate consonant 
with the growth of the economy. 
2. A. Alternative Sources of Supply 
As we have discussed earlier regarding alternative sourc es 
of supply we want here to see whether a prospective b orrow e r w h o 
want s to negotiate a loan and i s dissati sfied with the price or term 
of sale offered by one bank, or is denied a loan by one bank, can 
turn to another bank in his community. In a lim ited sense, the 
-
38 
natural market area of a bank is the city in which it is located. A 11 
but the largest borrowers will typically borrow funds from banks 
in their respective cities or towns. 
Metropolitan areas usually have more than one bank for the 
customer to approach. However, in a small community there ar e 
still many cases to be cited where we have only one bank. 
In a recent study, made by Dean Carson and Paul Cootner, 
11 The Structure of Competition in Commercial Banking in the 
United States, 11 it is found that the one bank town is prevalent in the 
United States. It has been estimated that some 11, 000 communities 
are served by one commercial bank; these compri se 45 percent of 
all banking offices in the United States. In addition, of all com-
munities in the United States that have at least one bank, ha lf are 
one bank towns. In these towns reside approximately 40 m illion 
people. 1 
In areas of more than one bank, the customers still have 
limited choice, as these banks are usually specialized in o n.e type 
of business to enjoy partial monopoly of their own p r oduc t . 
B. Geographical Location 
Borrowers in a somewhat arbitrary way are geographically 
. 1D. Carson and P. Cootner, "The Structure of Competition 
t C_om~ercial Banking in the United States," in Private F inancial 
:-!;st1tutions, a series of research studie s prepared for the Gom-
~ l ssi?n on Money and Credit, (Englewood Cliffs, New J ersey: 
rentice-Ball, Inc., 1963). 
39 
limited. The large number of banks scattered throughout the United 
States, 13,400, is still significant despite the recent declines. 
These banks are not all competitive with one another in any meaning-
ful sense. These banks transact most of their business in a patch-
work quilt of small local and regional areas. In any one area, a 
bank tends to be isolated from the rivalry of other banks locate d in 
other areas. 
There are several principal reasons for this. Bank depositors 
are generally limited by th e co st of inconvenience to banks in the 
immediate v icinity of these daily journeys from home to work and 
back hom e again. A bank borrower whose principal asset when he 
goes to borrow is his character , is frequently limited by his 
friendship and ac quaintance with local bankers. 
While it is difficult for many bank customers to go to banks 
outside their local area, it is often impossible for a bank outside 
the local area to go to the potential customer. Banking offices , even 
of national banks, are confined within state borders and subj ect to 
state laws. There are 51 jurisdictions, each with a different set 
of banking regulations. In practi c e this means that a bank in 
California may not open a branch in any other state; a b ank i n 
Pennsylva nia may not ope n a bra nch i n a county o utsid e those 
contiguous to the county in which it has its main office; and a bank 
in Ill·1 nois may not have any branch es at all. The relative 
immob·11 ·1 ty of both banks and many types of bank customers serves 
to break up the Uni ted States into a series of geographic sub-areas. 
40 
The geographic limit of the market is not necessarily the same for 
all in a given locality. Some, perhaps most, will be restricted to 
local sources of credit. Others may hav e broader and more distant 
alternatives. We may say that a bank may deal with locally lim i ted 
customers, regionally limited customers, and geographically un-
limited customers. 1 By dealing in different markets, it may be 
able to exercise monopoly power in some and may have to compete 
v igorously in others, i.e., the possibility of price discrimination 
for services rendered is often present. 
C. • Determination of Prices 
An analytical treatment of the commercial marke t must i n-
clude information of determination of price and its effect on pro s -
pectiv e customers. The degree of freedom possessed by a bank 
in determining the amount of service charges which it will attach 
to checking deposits and its freedom in determining the rates of 
interest which it will pay for time and savings deposits (of course 
within the limit imposed by Regulation Q, the legal p r ohib ition 
embodied in the Banking Acts of 19 33 and 19 35, which set a ceiling 
-- now 4 percent -- on the commercial bank saving rates) d epend 
upon the e lasticity of the supply of such d e posit s wi th respect to 
the interest rate. This elasticity of supply in tur n depends largely 
1
B . D. A. Alhadeff, 11 Bank Mergers: Competition versus 
ank1ng Factors, 11 Southern Economic Journal, January, 1963. 
41 
upon the alternatives available to depositors. Several factors -affect 
the availability of these alternatives: ( 1) the size of individual de-
posits, and (2) the degree of superiority of the bank's pres tige and 
of its location and the number of its competitors. 
Individual banks also possess a degree of freedom i n deter-
mining the interest rate to be charged on their loans to cust omer s. 1 
To each bank the demand curve for its loans does not appear to b e 
a horizontal line at the ruling market rate. In fixi ng rates on l oan s 
each banker encounters wide variations in the elasticities of dif-
fer ent customers' demands for loans from him. Amon g la r ge 
borrowers who deal in national markets, demands for loan s at a ny 
bank are usually highly elastic. On the other hand, small borrower s 
who are restricted to local markets may have an i nela s t i c dema nd 
for loans. 
The wide differential in the e lasticities of d i ffe r ent cus-
tomers' demands for loans and supply of deposits a t a n ind ividual 
bank makes rate discrimination possible. The inte r e s t rate charged 
or paid varies by only a small amount, but di scriminator y prac tic es 
of banks are not confined to the interest rates on loans a nd d e posits . 
A bank may lower the actual cost of the loan by rendering fr ee 
services or by computing interest in a manner mor e favo r ab le t o 
1Iq most of the state usury laws set the maxi mum rate bank s 
can charge for loans. The freedom banks have in the s e s tat e s are 
;ithin the prescribed rate by law. E. W. ·Reed ; Gommerc:lal 
~nk Management (New York: Harper and Row, Publishers , 
63). 
the customer. On the other hand, it may raise the cost of the Loan 
by computing interest in a way unfavorable to the customer by re-
1 
quiring maintenance of a large deposit balance, by exacting a fee 
for granting the loan, or by levying a charge ostensibly to cover 
the cost of credit investigations. These practices make the actual 
amount of rate discrimination greater than would be indicated by 
nominal interest rates. Only the borrower in a strong competitive 
position can refuse to pay extra charges or carry large deposit 
balances. 
Banks and Competition 
The above discussion of the market structure of banking re-
veals that the forces of competition in the market are complicated 
by the unique characteristics of banking. These special charac ter-
istics tend to veil the true extent of inter-bank rivalry. 
As already mentioned, banks deal in many markets. The ex-
tent of their involvement means that we must study the numbers, 
sizes, and locations of financial institutions, not only commercial 
banks, in the sale of a variety of products to many different classes 
of customers. In reaching decisions, we cannot simply determine 
the intensity of competition in one product market; for we are 
1
. J. J. Balles and D. A. Eastburn, 11 Bank Lend ing Policie s 
~ Pe_riod of Monetary Restraint, 11 Money and Economic Activity: 
~ading in Money and Banking, (Boston : Houghton-Miffin 
ornpany, 1961). 
43 
concerned with the intensity faced by the institution as a whole. 
Regulation tends to conceal the ·potential as well as limi t 
the actual forces of competition in the market. All states regulat e 
new entry into the market. Branching is also regulated and a U 
states prohibit banks from having branches that straddle state 
lines. A market might potentially be highly competitive and yet 
show little evidence of this rivalry because of supervisory policie s 
established to meet other objectiyes. 
There are other ways, in addition to looking at the structure 
of banking markets, however, to observe the forces of competition. 
We expect effective competition to result, for the most part, in 
certain kinds of performance; we expect the lack of competition to 
result in a different kind of performance. For example, we would 
normally expect competitive sellers to charge lower prices a nd 
have smaller profits than non-competitive sellers. But in b a nking 
markets, no matter how intense the rivalry, the extent of thes e 
differences are restricted in various ways. Regulations and the 
character of the business are great homogenizing forces that make 
it difficult to distinguish between competitive and non-competitive 
results. 
In most states, usury laws set the maximum rate banks can 
charge for loans. Federal regulations prescribe maximum inter est 
rates on time deposits and prohibit the payment of interes t on de-
mand deposits. Within the limits set by these regulatio n s, 
monetary policy has an influence on the level of rates a nd on chang es 
44 
in rates in all financial markets; for the monetary authority has an 
• influence over the total amount of banking resources through bank 
reserves. 
There is still another reason why profit differences between 
competitive and non-competitive banks might not reflect com-
petitive difference·s: while banks, like other enterprises, seek 
profit, they have higher liquidity requirements than most; they 
have obligations to their depositors as well as to their stock-
1 
holders. It is conceivable that banks not really challenged by 
intense rivalry will have exaggerated notions of their liquidity re-
quirements. These are the ones who can "afford to play it safe. 11 
In other words, the non-competitive bankers may choose to "re s t 
easier" rather than "live better. 11 The non-competitive banker 
may actually have lower profits than the competitive banke r. 
It is not in banking that the non-compet i t ive banks a re 
charging high monopoly prices; they are, rather, di s criminating 
prices. Commercial banks cannot charge high monopo ly pri c es 
because of several regulations. If a bank customer ha s acc es s to 
many alternative sources of credit -- and this occurs when a bank 
is faced with competition -- his bank would have to char ge h i m no 
higher price for credit than justified by costs, or run the d a nger 
of losing his patronage to a rival bank. If all customer s have acce s s 
1 R. I. Robins on, 11 Priority in the Use of Bank Funds, 11 
roney and Economic Activity: Readin in Money and Bankin , 
oston: ompany, 9 1 . 
45 
to alternative sources of credit, all must be dealt with e q uaUy and 
in accordance to the costs of doing business with them; when, o n th e 
other hand, some have alternative sources and others do no t , pri c e 
differences and perhaps unjustified exclusion from credit b ec ome 
possible and at times profitable, as in the banki ng discussed abov e. 
This price discrimination is a serious injury to competi tion by 
hampering prospective businessmen whose deficiency i s not in-
competence or lack of foresight but only lack of a lterna t ive s our c es 
of credit. The extent of price discriminati on ,is, perhaps, one 
measure of the degree of monopoly power in banking mar k ets . 
Competition may be measured in another way. I t i s . c on-
ceivable that competitive banks are more responsive to change s 
in monetary policy than non-competitiv e banks. For monetary 
policy works through the supply of rese r v es a bank ha s at its 
di sposal. Competitive banks would tend to adjus t t h eir prices 
interest rates -- quickly, perhaps automat i c ally , t o chang es in 
supply conditions as well as to changes in demand; no n - competitive 
banks might well react more slowly, particular ly when th e supp ly 
of funds increases and free market rates tend to faH. 1 
In raw material markets the competition is more i nter -
institutional than amongst themselves, In this m ark et als o, the 
intensity of rivalry cannot be measured becaus e of greater dif-
E 1" Banking Structure and Reactions to Monetary Stringenc y o r 
Mase," Monthly Review, Federal Res e rve Bank of Kansas City , 
arch-April, 1964. 
46 
ferences in regulatory treatment. This market among commercial 
banks is highly localized. The depositors because of their con-
venience will do business at the place of their domicile. Here 
again big depositors, accounts of big corporations having know-
ledge of the market will hunt for profitable yield. 
Commercial banks face no inter-institutional competition in 
demand deposits, their unique service to the public's demand for a 
means of payment which ·qomp:r~Sfl 51 percent of the total bank 
deposits. They compete only amongst themselves. The latitude 
of price variation here is highly limited. Interest payments are 
prescribed by law; the price inducement only rests upon reduction 
of service charges. Aside from the fact that the demand for deposit 
service is highly inelastic, such reductions are not feas ib le for 
many banks, small unit banks. 
CLASSIFICATION OF DEPOSITS AT THE 
END OF YEAR 1962 1
(ib.: billions..,0f do llars) 
Demand T i me 
All banks 148. 2 139.9 
Commercial Bank 14 7. 9 97 0 7 
Mutual Savings Bank 41. 2 
1Source: The Economic Almanac, 1964, The Conference 
Board Business Tact Book, p. 344-345. 
4:7 
Banks are not competitive even in the savings deposit market. 
Two major limiting factors exist here. First the Federal Reserve 
and Federal Deposit Insurance Corporation authorities enforce 
maximum allowable rates on such deposits. On the other hand, 
the earning capacity of assets based on time deposits ,imposes 
a limit which a bank can afford to pay to depositors within the 
regulatory maximum. Because of the law covering yields on 
time deposit-based assets which have prevailed until recent years, 
many banks have been unable to raise deposit rates to the regulated 
level. Recent improvement in open market yields on investment 
assets has, however, resulted in a significant increase in time 
/!-- '!",;.~?),. ' - • 
deposit rates. It would thus appear that the range of price com-
petition in this area is strongly influenced by factors outside the 
control of individual bank competitors. 
From the above discussion it can be seen that the banking 
industry is not in a purely competitive condition. In its product 
market small borrowers who could not go to regional or nationa l 
markets face a monopolistic supplier position. In the case of 
intermediate borrowers, the banks may face a situation of mo nop-
olistic competition or of oligopoly and with large borrowers th e 
situation could be highly competitive. 
Merger and Competition 
The increased number of mergers in this highly regulated 
and localized industry caused many to believe that the decline in 
48 
the aggregate number of banks in the country is a definite trend to-
wards monopoly and concentration. The number of banks is- a very 
poor criterion for measuring competition. We have seen in Table 1 
that, although the number of banks has decreased, the number of 
banking services is increasing and today the ratio of banks to 
population is higher than it was twenty years ago. It is very poor 
economics to conclude that a decline in the number of banks i n the 
country necessarily and inev itably reduces the strength of com-
pet,itive forces. Concentration ratios, even when derived for the 
relevant market area, are poor indicators of the state of com-
petition. 
By concentration we mean the number of banks :as sellers of 
diffe·rent services occupying the dominant position in a market . As 
Bain put it, 11 seller 1 s concentration [is] described by the number and 
the size distribution of sellers in the market. 111 It refers to whethe :r 
the ·seller in the market is one, few, or many, a nd to the n umber of 
sellers controlling a given percentage of the total market. 
Economic theory suggests that existence of just a few c om-
peting units leads to resource misallocation, higher pri c es to c on -
sumers and discriminatory practices. This leads to the b elief t ha t 
concentration of banking units in a community means monop oly. On 
the other hand, it is argued, particularly wit hin the commercial 
Loe, cit., p. 5. 
49 
banking industry itself, that competition is as keen today as i t has 
1 
been for many years . 
We have concluded earlier that a single bank has a consider-
able degree of monopoly power, in a theoretical sense , limite d only 
by the ability of borrowers and depositors to shift their business 
to banks in contiguous areas. Now we will see how they exp loit 
their monop·oly power and charge excessive prices. We will see 
the difference in interest rates offered by large and small banks 
to savings deposits, the different rates charged to borrowing 
customers, and the different service charges levied on depos itors ' 
accounts. 
Table 4 compares the rates of interest paid to time deposito r s 
by various sizes of commercial banks. In the years 1960 and 196 1 
the difference between the smallest and largest sizes was in-
significant; in 1959 the difference was slightly more than o ne 
quarter of one percent; in 1962 the difference was less than three 
quarters of one percent. The data, therefore, do not l e nd much 
support to the view that monopoly power is exercised in o ne bank 
towns, but if small banks are in one bank towns and they pa y le ss, 
this is evidence albeit weak. 
The service charges levied in 1962 by banks (per $100 of 
1Mr. R . Gidney, Comptroller of the Currency ' s T e s timony , 
U. S. House of Representatives, Committee on Banking a nd Cur -
rency, Regulation of Bank Mergers, 86th Congress , 2nd 
Se ssion, 196"0, pp . l34-f37. 
TABLE 4 
INTEREST PAID ON TIME AND SAVINGS DEPOSITS BY 
INSURED COMMERCIAL BANKS OF VARIOUS SIZES 
Banks with Total Deposits of 
Less than 500 or 
1 million 1-2 2-5 5-10 10-25 25-50 50-100 100-500 More 
Interest 1959 2.22 2.20 2.18 2. 18 2.20 2.25 2. 28 2.33 2. 54 
paid per 
$100 1960 2.45 2.43 2.44 2.42 2.40 2.28 2. 39 2. 39 2.47 
savings 
deposits 1961 2.46 2.49 2.49 2.49 2.49 2. 52 2. 51 2.49 2. 60 
1962 2.34 2. 39 2. 51 2. 64 2. 74 2.84 2.88 2. 90 3. 08 
Source: F. n I. c., Annual Report, 1959-1962, PP· 134, 151. 
\.Jl 
0 
51 
demand deposit) rise with increasing bank size from the smallest 
class up to and including $10 to $25 million category. They then 
decline with increases in size. These data also do not indicate 
1 
the exercis e of monopoly power by banks in single bank towns. 
As far as rates charged to borrowers are concerned , small 
banks receive higher interest than do their larger counterparts . 
Whereas the smallest banks in 1962 averaged 6. 39 percen t on loans , 
the largest average d 5 . 16 percent. 2 This is mainly due to small 
banks making small l oans, to small borrowers where risk a nd 
administrative costs are high. The opposite is true of th e 
largest banks , whose loans tend to be relatively large and 
granted to borrowers with the highest credit ratings . 
The mo nopoly power is further reduced by non- fi nancial 
bank competition and secondly by improved transportation and 
c oncentration of fa cilities . These factors have undoubt e d y h elped 
to reduce mon opoly pow e r . 
A study of resourc e concentration in 46 major bankiP..g 
3 
mar k ets in the United States in the p eriod from 19 39 to 1959 
s how e d a stronger tendency towards reduction in bank concent:ration 
than toward s increased concentration. The results of t hi s study 
1see Table 5 , p. 52 . 
2 F e d eral D eposit I n surance Corporation, A nnual R epo r t , 
19 6 2 , pr,"7-r.f'ancfT5 r . 
3Car son and Cootner, lac . cit. 
TABLE 5 
SER VICES CHARGES ON DEMAND DEPOSITS BY INSURED 
COMMERCIAL BANKS OF VARIOUS SIZES 
Less than 
1 million 1-2 2-5 5-10 10-25 25-50 50-100 100-500 500 or more 
Services charges 
per $100 demand 
deposit $. 32 . 36 . 46 . 59 . 69 . 62 . 50 . 39 . 28 
Source: F. D. I. C. Annual Report, 1962, p. 134, 151. 
53 
run counte r to the notions hel d by the Anti trust Department. 
According to this study, increases in concentration occ urred 
i n 14 areas, while decreases w e re observed in 31. The market 
share of the two largest banks in the 46 areas studied i ncreased 
substantially in 9 cases, declined markedly in 25 cases, a nd 
s h owed nominal change in the remaining 12. 
The distribution of largest banks controlling various per -
centages of total metropolitan area bank assets i s summarize d 
b elow. 
1. In three areas the largest bank controlled more than 70 
percent of the area assets in 1939. By 1959, nore of the s e a reas 
had this degree of concentration. 
2. In 1939, the largest bank held mor e than 16 perc ent of 
total bank assets in seven metropolitan areas. In 1959, o nly o ne 
area had a bank of this size r elative to the total bank assets. 
3. In thirteen metropolitan. areas the largest bank cont ro lled 
more than 50 percent of the ar ea bank assets in 19 39. T we1"cty years 
lat e r thi s was the case in only eight. ,:::, 
4. The number of areas in which the largest bank contro Ued 
les s than 40 percent, of total assets increased during the p e r ~:;,d 
from 21 to 64. 
Summary 
The present structure of commercial bank competition in 
the United State s is the result of the interaction of ec onom ic fo r ces 
54 
and governmental regulation. Examination of the structure of com-
mercial banking reveals two predominant industry patterns. 
The first is found in rural regions where the market area is 
usually limited. In market areas which are narrowly circumsc ribed, 
potential monopoly power is generated from the demand side of the 
market. 
The second type of market structure is found i n large metro- ...l  
politan centers with ·pronounced industrial concentration. H ere the 
banking market structure conforms to the economist's concept of 
oligopoly or monopolistic competition. 
The banks in monopolistic situations do not exploit their 
positions. Regulations and the character of the business pr eve nt 
abuses of market power. 
From the statistical data available, we can conclud e that 
mergers do not necessarily increase concentration ratios. E v e n 
if concentration ratios were increased, it might make possible a n 
extension of an individual bank's activities into market s no t 
accessible to it prior to the merger and consequently i ncrease 
competition. The banking industry does not have pric e competi t io n 
and therefore it should not be treated as other business enter -
prises. 
CHAPTER III 
LEGAL IMPLICATIONS 
Introduction 
In the prev ious chapter competition is viewed as an i mpo r tant 
force encouraging the banking industry to operate efficiently . 
Competition is desirable not just for its own sake, but fo r the re-
sults it produces -- an efficient allocation of resources with 
production carried on at minimum cost and with minimum sus -
tainable prices charged to consumers. 
Unfortunately, encouragi ng competition in banking is no t a 
simple matter . We cannot rely as completely on fre e m arket 
forces as we do in other industries because competiti on in bank ing 
is interrelated with problem~ of banking safety and ot her uni que 
a spects of banking. If an enterpreneur sees an oppo r tunity t o prof -
it by manufacturing steel, automobiles or cigare ttes,, h e is free 
to do so. This is not the case in the banking industry . . E stab lish -
ment of new banking offices ( unit bank, branch or con solidati o n ) 
requires the approval of regulatory authoritie s who will ta k e i n.to 
accoun t i n making their decision the effect on competiti o n and 
sev eral "banking factors." 
The justification for limiting e nt r y int o the banking business 
lies in need for a stable mon etary system. Commercial b a nk s a r e 
56 
holders of a large fraction of community savings and mean s of pay-
ment. It is widely felt that banks must be shielded against the 
vigorous competition that characterizes some other industries in 
which failure is considered part of the game. I n this view, t h e 
social costs of bank failures are considered to outweigh wh atever 
inefficiency results from restricting bank entry. The ro le of 
banking system in the economy is of such enormous social , 
political, and economic significance that the extensive legal en-
forcement and restraint of market forces in the industry is de e m ed 
essential. 
We have already mentioned that there are two institut ions 
having administrative authority in regulating the banking i ndustry: 
the office of the Comptroller of the Currency and the Banking Com-
mission s of the various states. Their words are not fina l in cases 
of merger and the preservation or ·regulation of competition. 
T h ey are respectively i n strument s of th e U. S. Congress and the 
state legislatures. 
In matters of merger and competition, b a p.Jcs, in common with 
all other business enterprises and notwithstanding t heir uniq ue 
structure a nd function, are subject to the Sherm an A ct ( 1890) and 
the Clayton Act ( 1913), as amended by the Geller -Kefauver B :i.U 
( 1950). These Acts are admini s t ered by the A ntitr us t Division of 
the D epartment of Justice. In addition to the general antitru st 
legislation, proposed mergers must satisfy the requirements of 
t he Bank Merger Act ( 1960). 
.57 
Acts of Congress of necessity are written in b r oad term s 
indicating the intent of the legislative body of the Government s ub-
ject to the veto power of the Presiden t and the right of the judicial 
r e view of the Supreme Court. In other words, an Act of Congress 
furnishes a Statutory Standard for the guidance of the courts. 
Through experience with actual cases brought before the courts a 
body of case law is developed to produce a more specific criterion 
for acceptable action, the Case Standard. With acts such as the 
Bank Merger Act we may interpose a third criterion , t h e Adminis -
trative Standard where a regulatory agency is charged w ith t he 
responsibility of administering an Act of Congress. The Adminis -
trative Standard is subject to challenge and modification by the 
courts but nevertheless shapes the body of case law deve lo ped by 
virtue of the expertise acquired i n the problem area by the 
official s of the regulatory agency. 
Sherman Act 
Sections I a nd 2 which may b e applied to bank cases read 
as follows. 
Sec. 1. Every contract, combination in the fo r m of trust 
or otherwise, or con spiracy, in restraint of t rade or c om-
merce among the several States, or with Foreign nations , 
is hereby declared to be i llegal . . . 
Sec. 2. Every person who shall monopolize, or attempt 
to monopolize, or combine or conspire with a ny othe r 
person or -persons to monopolize any part of the trade 
and commerce among the several State s, or with 
Foreign nations, shall be deemed guilty of a mis-
demeanor ... 
58 
A recent and a very important case which was brought up by 
the Department of Justice to the Supreme Court to block the m erger 
was that of the First National Bank a nd Trust Company of 
L exington with Security Trust Company of Lexington, Kent ucky. 
The charge-s constitute a combination in restraint of trade a nd com-
merce in violation of Section 1 of the Sherman Act and a combination 
and an attempt to monopolize trade and commerce in violation. of 
Secti o n' 2 of that Act. On April 16, 1964, the Suprem e Court 
e njoined the proposed merger ruling that the merger would b e in. 
restraint of trade. 
The facts relevant to the alleged restraint of trade under the 
Sherman Act on which the court relied were: 
1. The size relative to their competitors of the F irst 
National and Security Trust before the consolidatio n a nd of the 
First Nat io nal and Security T r u st after con solidatio n ; 
2. The competitive position before the cons olidation of the 
Fir st National and Secui-lty Trus t in the more lim ited area of t)l'.'ust 
busine ss; and 
3. 11 testimony in the record from thr ee of the four rem aini,'.!.g 
banks that the consolidation will seriously affe ct th eir a b ility t o 
compete effectively over the years • . . 11 l 
1 U. S. vs. First National Bar1k a nd Trust Co. of L exington 
and Security T r ust Go. of Lexingto n, K e ntucky. 20 8 F. S upp [. 
457, 460. p. 4. 
59' 
The testimony to which the court adverts was provide d by 
competitors of First Security and Trust a nd was characteri zed by 
the district judge who heard it as seemingly "based merely upon 
surmise and . . . lacking in factual support." 1 
Both banks are located in Fayette County w ith competition of 
four othe r banks. In the district court's decision, "before a nd 
since the consolidation ... all the banks in Fayette County have 
been operated successfully in the field of commercial bank i ng and 
in competition with each other. 112 Many witnesses, most of whom 
were men of long experience in the fie l d of banking, testified that 
this consolidation would not lessen competition in the area a nd 
did not tend to create monopoly in that fie ld . 
. According to thei;v testimony, the fact that the m erged 
bank had a large percentage of the trust business of the com-
munity did not and would not substantially restrain o r les s en 
competition in the field of commercial banking . 3 
The case was not covered by Sections 1 and 2 of the Sh erm a n 
Act as the motive behind this consolidation is no co ns piracy in 
"restraint of trade," but a progra m of expan sion and the possi bHity 
of enjoying the benefits of economies of scale. Thi s b i gness could 
be beneficial as the competitors would improve their res ourc es 
whe n the institutions merge d. They could pass their l owe r unit 
libid. , p. 6. 
2Ibid. , p. 1 7. 
3Ibid., 208 F.Supp., 459-460. 
60 
co s t of production on to consumers i n th e fo r m of lower pr i c es a nd 
better services. The opin ion of the distric t court was th at " t h e 
consolidation herein referred to clear ly appears to hav e b een th e 
re sult of a lawful program of expansion on the part of the m ergin g 
banks rathe-r tha n an invidious scheme to r e strai n competition or 
to s e cure monopoly in the local field of banki ng. 111 The Suprem e 
Court rejected the findings of the district court and conclude d that 
the consolidation vio lated the Sherman Act on the ground of " b ig -
ne ss. 11 
The major problem of applying Secti on l of the Sherm a n Ac t 
is the definition of "restraint of trade. 11 Unfor t unately, no straight -
forward definition can be given, for " r estra int of trade" is a l egal 
te r m of art. Taken literally the phrase s e ems to cover a ny re -
striction o n the -freedom of trader s to make whatever barga in 
they plea se. Howeve·r, many la ,ws r e str i ct fr eedom of bargaining , 
yet would not no r mally be rega rded a s being restrai nt of t :rad e . 
A. D. Neale define s " restraint of trade " as: " Bus i ness b ehavi o r 
which in pursuit of profi t prevents some fo r m of competitio n from 
operatin g in the market. 112 
The banking indus t ry, as we k now, is highly regula t ed . P r ice 
competition i n •11 purs uit of p r ofit" would not be a d va nta g e o u s . T here 
1Ibid., 208 F . . Supp., 460. 
2A. D. Neale, The .Antitrust Laws of the United State s of 
Ame rica: A s t udy of Compet i tion Enfor c e d by ·Law· (Ca m bri dge 
U nive rsi ty Press, 1960), p. lZo 
61 
is a limit on interest rates paid on time depos it s a nd prohib ition of 
interest payments on demand deposits. As banking is not lik e 
other industries, it would be in a precarious position if it lowered 
the -prices on its products. Mr. Saxon in his statement of d ecision 
apropos the proposed merger of the National Bank of Wes tchester, 
White- Plain , . New Y-o rk and the Tirst National C ity Bank of 
New York said: "It is not within the power of banks, as is true of 
industrial corporations, to increase freely their productive 
capacity. A bank which attempted to use lower interest rate s o n 
loans as a means of driving out competition would very soon find 
itself without loanable funds. 111 
Clayton Act 
Section 7 of the Clayton Act applied to bank mergers by the 
Department of Justice reads as follows: 
No corporation engaged in commerce s ha ll require , 
directly or indirectly, the whole or any part of the stock o r 
other share capital . . . of a nother corporatio n engaged 
also in commerce wherein any line of commerce in a ny 
section of the country, the effect of such acquisition m ay 
be substan2-ally to lessen competition or tend to create a 
monopoly. 
The mos t famous case blocke d by A ntitr ust under the Act was 
the proposed merge r of the Philad elphia Natio nal Bank a nd Girard 
1100th Annual Report of the Comptroller of the C urrency for 
the year ending December 31, 1962 (Washington, D. C.: U. S. 
Government Printing Office). 
2 
Act of December 29, 1950, Public Law 899, Sec. 7, 38 
Stat. 731, as amended: 15 U. S. C. 18. 
62 
Trust -Corn: ~xchange, ::Bank;:c Ph,iladelphia. 1 a:p,proved b y the 
Comptroller of the Currency. The grounds of this hold were that 
if the merger were allowed it would be detrimental to competition. 
The prime legal issue in this case 1 was whether Section 7 of the 
Clayton Act, as amended in 1950 by the Geller-Kefauver Act, 2 
applied to bank fusion of the form typical in the banking industry. 
The case was approved in the District Court which found no com-
petitive injury in the commercial banking line of commerce. 
On June 17, 1963, the Supreme Court enjoined the proposed 
merger, ruling that the merger would be in violation of Section 7 
of the Clayton Act. The importance of the decisio n stems from the 
fact that the narrow competition criterion contained in Section 7 
of the Clayton Act would be controlling for bank mergers rather 
than the broader criteria of the Bank Merger Act. 
In this case and in one earlier case, the court cons idered in 
a direct fashion only commercial banking in its entirety as a rele-
3 
vant line of commerce. In thi s way the court precluded th e 
evaluation of the competition offered by the 11 fringe 11 supp i e r s, 
financial institutions other than commercial banks, whose pr oduc t s 
1u. S. vs. The Philadelphi a National Bank et. al . 374 u. S. 
321 ( 1963). 
2Act of December 29, 1950, loc. cit. 
3u. S. vs . . Philadelphia National Bank, et~ al., loc. cit. 
and Transamerica Corporation vs. Board of Governors of Federal 
Reserve System, Federal Reserve Bulle tin, Aug ust , 19 53, p. 840. 
63 
are close substitutes and thus enjoy competitive positions in the 
same market. The market can be broadened by considering the 
substitutes and shortened to exclude these fringe dealers. 
The test of the lawfulness of a merger under the Clayton Act 
is whether the effect of the merger "may be substantially to lessen 
competition in any line of commerce in any section of the country." 
There are two major problems in applying this test: ( 1) what is the 
relevant "line of commerce" and (2) what is the relevant "section 
of the country." 
Before going into the details of the Supreme Court decisio n 
we should like to point out that the district court ruled earlier in 
the same case that the merger would have no competitive injury i n 
the commercial banking line of commerce. Their failure to £ind 
injury raises the question as to why an examination of potential i n -
jury to other lines of commerce was n ot pursued. Section 7 had 
been interpreted in earlier cases as prohibiting mergers wher e 
in.jury was found in any line of commerce. Judge C lary s tated, 
of course, that he could see no useful purpose in "going a ny fm.· . ther 
than designating commercial banking a separate and dis tin.ct Ur::a.e 
of commerce." In light of his failure to test other li ne s, he 
apparently meant that he found none of the other lines suggested 
by plaintiff or defendant to be relevant. If he found none of the 
i ndividual credit and deposit lines to be relevant, he evidently 
perceived the commercial banking line of commerce as composed 
of unique multiple product firms o n ly, and not as a representati v e 
64 
for the unique products and services commercial banks a r e £r e-
quently alleged to produce. 
The Supreme Court in this case professed to have 110 diffi -
culty in determining the relevant "line of commerce'.': 
We have no difficulty in determining the 'li ne of com-
merce' [relevant to product or services markets] ... in 
which i t appraise the probable competiti ve effects of 
appellee's proposed merger. We agree with the d i str ic t 
court that the cluster of products [vari ous kinds of credit] 
and services [ such as checking accounts and trust admini-
stration] denoted by the term ·•commer cial banking' . • . 
compos e s a distinct line of commerce. 1 
It i s quite clear that commercial banks do deal i n a wid e range 
of serv ices and products , and a l so face a substant ia l amo unt of com-
petition from non - bank financial i n stitution s. Commercial bank s 
are not products, nor are "total deposits," " t otal as sets" or even 
"total loans . " It is ·a more- r easonable approa ch to the competitive 
problem to examine each of the re l evant produc t line s and d eter -
mine whether the m e rger w ill result i n a sub stantial lessening of 
competition in the market for that product. 
In examining the m a rket for r eal e state loans , for example , 
it would be desirable to con sider no t only t he a m o unt o f busines s 
done by the merging banks and the other comme rc ial b ank s b ut also 
the mortgage loans of other non-bank fi na ncial i n s titutions -- mut ual 
savings banks, savings and loan associations, a nd i ns ul'a nce c om-
panies. The same is true i n the per sonal loan s, where competition 
libid., p. 356. 
65 
is from finance companie s and credit unions. 
T he o ne product line in which commercial bari..ks face no direct 
competition from other financial insti tutions is in the hand ling of 
demand deposits. Even here, however, they have some s ub-
stitutes. Currency, of course, is one alternative, trave ler's 
checks and register checks sold by many savings banks a nd savings 
and loan associations are others. 1 
The court's justification for disregarding non-ba1r.1.k competitio n 
is that commercial banking products and services e njoy "such a 
cost advantage as to be insulated within a broad range from s ub-
stitutes furnished by other i n stitutions. 112 Neverthele ss, there is 
competition between commercial ban.ks a nd small companies, and, 
perhaps more important, competition between commercial banks 
and both credit unions and sales finance companies which charg e 
rates comparable to those of the commercial bank. 
The court also found "no difficulty in determing th e 
1 section of the country' [relevant to geographica l mar k et ) i n which 
to appraise the probable competitive effects" of the m erger. The 
court argued that convenience of locatio n is importa nt in b a;:;.king 
competition: 
Individuals and corporations typically confer the bulk 
of their patronage on banks in their local community; they 
1D. Carson and P. M. Horvitz , " Concentr ation Ratios a ,. d 
Competition, 11 The National Banking Review, Septe mber , 196 3, p. 
109. 
2u. S. vs. Philadelphia National Bank, loc. cit. , p. 356. 
find it impractical to conduct their banking business a t a di s-
tance, ... The factor of inconvenien ce localizes banking 
competition as ef ectively as high t r ansportation cos t s i n 
other industrie·s, 1
Under Pennsylvania law, banks may establi sh branches o nly 
in counties contiguous to the county in which the banks have offi c e s 
located, The Philadelphia National Bank and Girar d Trust Co r n 
Exchange Bank, each with home offices i n Philade lphia County , m ay 
esta blish branches only in the adjacent counties of Bucks, Mo nt -
g om ery and Delaware. The court, therefore, decided that the s e 
fo ur c o unty areas in which each bank's office is located would b e 
the relevant geographical areas, 
It follows from the analysis of market structure of the pr e-
ceding chapter that a single geographical area cannot b e chos e n a s 
the relevant market area in which to measure compe tit ion , The 
rel e.v:ant market area differs for each banking pr oduct or · servic e . 
The relevant market area for personal checkin g account s is 
probably a small one and the four county areas m ay b e reasonab ly 
good choice. The relevant market for large deposits and business 
loans, however, is a national one. Philadelp hia b a nks compete in 
this market with banks in San Francisco and Chi c a go as w ell as 
those in Pittsburgh and New York. C>nly 54 pe rc e nt and 6 3 percent 
of the business loans of Philadelphia National a nd Girard are to 
2 
firms located in the four county areas, 
1Ibid., p. 358, 
2 . 
Carson and Horvitz, loc. cit. 
67 
The Supreme Court explicitly rejected the arguments mai n -
tained by the Philadelphia National Bank and Girard Trust Corn 
Exchange Bank under Section 7. The first argument presented by 
them was that the merger will increase the lending limits, whi ch 
will e nable them to meet the credit needs of some of the larger 
corporations. The argument can be considered on its merit s under 
the Bank Merger Act. 
The strong argument rejected by the Supreme Court is that 
the merged concern will enjoy the larger scal e of operati ons, 
which would allow lower unit costs of product or services. Thes e 
lower costs would in turn be passed on to consumers in the fo r m 
of lower prices. This is evident from the analysis of our pre -
ceding chapter. In Table 4 and Tab l e 5 we observe that w ith the 
increase in the size of banks the interest paid on savings depos it s 
increased . . Service charges o n demand deposi ts increas e d b a nk 
size from the smallest class up to and includi ng the •$ 10 t o $25 
million category a nd then declined rapidly with subs e quent in -
crease i n size. Regarding the interest char ged to bor r owers , 
small banks received higher interest than d i d their larger co unt e r -
parts, 
Lyle E. Gramley, in a study prepared for the Federal R e -
serve Bank of Kansas City, fou nd "differences i n· efficiency" 
favorable to large banks over small banks whi ch h e a t t ributed to 
" the opportunities that are made possi ble by larger- s c ale 
operations to adopt modes of orga ni zati on that make better use 
68 
' 
of labor ·resources. 11 1 
The advantages of large scale operation in banking were 
their dealing in "product mix," which reduced the risk by 
diversifying their resources. 
Bank Merger Act 
The merger of national banks, approved by the Comptroller 
of the Currency, was decided under the Bank Merger Act which 
applied the following test: 
In granting or withholding consent ... the Comptroller, 
the Board, or the Corporation, . as the case may be, shall 
consider the .financial history and condition of each of the 
banks involved, the adequacy of its capital structure, its 
future earnings ,prospects, the general character of its 
management, the convenience and needs of the community 
to be served, and whether ·or not its corporate powers a r e 
consistent with the purposes of this Act .. . . The 
appropriate agency shall also take into consideration the 
effect of the transaction on competition ( including any 
tendency toward monopoly), and shall not approve the 
transaction unless, after considering all such facto r s, 
it finds the transaction to be in the public interest . 2 
Seven factors are enumerated in the -Bank Merger Act. The 
,.,...  
first six are concerned with the quality of assets, ade quacy of 
assets, adequacy of capital, competence of management, earnings 
prospects, and "the convenience and needs of the community to b e 
served. 11 The seventh factor named in the Act is a sign of th e 
1Gramley, lac. cit., p. 59. 
2Act of May 13, 1960, Public Law 86-463, 74 Stat. 129, 
12 U. s. C. 1828 (c). 
69 
times. It deals with the effect that the merger will have "on com-
petition (including any tendency towards monopoly)." 
There are three major differences existing between the 
merger criteria of the two Antitrust Laws and Bank Merger Laws: 
1. The competitive criteria of the Bank Merger Act are 
significantly broader -than those of Section 7, Clayton Act, 
2. The Merger Act contains a number of points which must 
be considered along with the competitive criteria by the bank 
supervisory agencies in evaluating a merger, while the narrow . 
competitive criterion of Section 7 is the so le standard of the 
Clayton Act, 
3. The Bank Merger Act calls upon the bank supervis ory 
agency to weigh all the relevant factors noted in the light of the 
:'public interest" while there is no explicit "public interest" 
standard in Section 7 of the C layton Act. 
We have seen from the above legal provision s of the Merger 
Act~c ases that competition is one -of several factors to b e con -
sidered in approving a merger. The above provision i nd icates 
that competition is just o ne of several fac tors to b e consid ered 
when a ruling is made on the merger of two or more banks. 
Situations may exist where a merger actually lessens competition. 
However, other point s benefiting the banking public may b e m ore 
significant than the effect on competi tion. Similarly, the grar.iting 
of new charters or de novo branch openings i n an area which wo uld 
have the effect of increas ing competition may be withheld d ue to 
7Q 
other factors not in the public interest. 
As noted above, even u nder competitive c riteria the broader 
wording of the Bank Merger Ac t would allow some factors, such as 
d i ffer ential i mpact on competition in several mar k ets and at th e 
post merger level of competition, to b e given different i mportance 
than has been done in Section 7, Clayton Act. The r e are o ther 
factors which should have been taken into con sideration i n arrivin g 
at a d e c ision of bank merger include d in the Bank Merger ·Ac t . 
The court rejected the economies of scal e argument as _irrelevant 
fo r Section 7, Clayton Ac t . The argument coul d b e considered 
under the Bank Merger Act. 
The need for a solvent banking system does not i mp ly t hat 
the individual banks must be ins ulated from the vigoro u s competit io n 
of riva ls , o ld or new . The other facto... ~rs- -sh-o-uld a l so b e considered , ~~ 
where the b anking industry could operate more efficiently. 
Mr . . Saxon commented on another p r opos ed m erger of the 
National Bank of Westche ster, White P lains , N ew York a nd th e 
First Natio nal City Bank of N ew Yor k in 1962, w hi c h h e disapproved 
for reasons other than its injury to competitio n . He said: 
Thi s is a view charged w ith emotionalism a nd 
characte r i zed a t the present t i m e by an a lm ost complete 
lack of clarity and obj e ctiv i ty, b rought a bout in part b y 
an i nd iscrimina te use of c onceptual term s . There has 
to our knowledge been no adequate study of bank com-
petition or the standar d s by w hic h t he e ffe cts u po n c om-
p e t ition of bank m ergers should be m eas ured. The 
nature of commercial b ank in g and t h e regulato r y fram e -
wor k under which it operates distinguish b a nk ing fr om 
the type of industrial e nterprise to which the general 
a ntitrust laws were d esig ne d to app ly, a nd render 
7 1 
highly questi onab le for judging bank mer gers the conc e pts 
d e v eloped i n the applicati on of th es e laws of i ndus t rial 
corporati o n s. 1 
Every merge r cas e has a di ffer e nt s ituation a nd should b e 
judge d by the circums tances unde r whi ch it is propos ed r ath er 
than b e ing b locked o nly by the compet iti ve account as has b een 
done ·rece nt ly . . 
It i s not withi n the scope of thi s s t udy to a na lyze a ll the 
cas e s b r ought to the for e front by the Antitrus t D epartm ent und er 
Se ction 7 of the Clay to n Act and Sec tions 1 a nd 2 of the She rman 
Act and the merger proposal s applied by the Comptroller of t h e 
Currency . We have, howev er, obs e r v ed that the A nt i trus t D e -
partment 1 s main aim is to prev e nt a less eni ng of competiti o n a nd 
the approvi ng authority 1 s obj ect i s to s ee tha t the " convenienc es 
and needs of the communi ty" under th e Bank Mer g e r Act a r e m et. 
None of the parti es consi d e red the optimum s i z e of a ba 11.k o r th e 
conditi on s for economi c e ffi ciency . Compe titio n is not t h e appro -
priat e conc ept to ta ke as the basi s fo r the a na lys i s of the condi t i o n s 
of e conomic effi cie ncy. The funda m e nt a l concepts a r e the flow of 
r e sources to uses where utility is m axim i z ed a nd the mob:Uity of 
factors of p r oduction. Two principal a spec t s o f mobHity a r e 
(a) switchi ng r e sourc e s i n r esp onse to c hang es in d e m a nd a nd to 
m eet the new demands created by new tec h niques , a nd (b) b r h'r.ging 
1 11 Comptrolle r 1 s D ecis i o n in t h e Wes t c h e s ter Merger , " 
Banking , February , 19 62, p. llO. 
72 
lower cost factors of production into use in place of higher cos t 
factor·s. Promoting and encouraging factor mobility is a c entral 
economic problem that all societies have to face. 
Competition is, of course, one means -- and an impor tant 
one - - towards the end of mobility. But it is untrue that there 
cannot be mobility without competition -- witness the economic 
growth of countries in which competition is given no great part to 
play. There can be some examples in which competi tion positively 
impedes mobility, such as the industry in which large scal e re-
search and development are needed for n ew and improved 
I I 
products. In the banking industry much research has to be carrie d 
on in order to predict the market condition and thus act accordingly. 
In order to be more efficient and up to date, banks have to use 
modern technique·s. 
Where an industry already has an o ligopolisti c struc t ure such 
as that of the banking industry, the arguments for the lessening of 
competition by merger and acquisition are not r elevant. The sur -
viving firms of an oligopoly are strong and large enough to e n joy 
scale economies and thus be economically efficient. The C lay t on 
Act applied to the banking industry i n cases of m e rgers, con -
solidation or acquisition of assets, where such agreement lessens 
competition (including the tendency towards monopo ly), co ntai ns 
a large admixture -of "small banks" sentiment. The arguments 
in the Clayton Act cases are not economic; the question of 
whether ther·e is effe ctive competition among the exi sting banks 
73 
and whether the economic efficiency of merged banks is overr idden 
by the question of whether their practices diminish the opport unit i es 
of small banks to join in the game. The same is true for the cases 
enjoined under the She rman Ac t only o n the fear of " bigness , " a nd 
no economic argument has been _giv.:en ,.:s-0 'fa:-r . 
We have ·seen in our earlier discussion that small b anks have 
their own local market and have thei r share of this market. The 
monopoly -power these small banks enjoy could not be reduced o n ly 
b y prohibiting a merger, but by r e ducing the barriers to e ntry. 
Table 6 indicates the mergers, consolidati ons and purchases 
of assets approved by the Comptroller of the Currency, Mr. James 
J. Saxon, from November 16, 1961 through April 19, 196 3. The 
acquiring and acquired banks are groupe d here according to the 
amounts of their deposit. The se are further classified as smaH , 
banks under $5, 000, 000; medium s i ze, from $5, 000, 000 to 
$50,000,000; and large banks, who have d epos it s over $50,000,000. 
Our study shows tha t the largest number of b ank s a cqui red a re 
medium size banks and are cons o lidated into the large s i z e ba nks. 
The second largest acquis ition is the sma l and m edium s i z e 
banks, and the third largest among medium size banks. 
This study revelas that the disagreem ent of some economi s t s 
and banker s who argued that the r e c ent mergers were b i g b anks 
consuming small banks and thus les seni ng compet i t i o n , o r 
merging amongst thems elve s and increasing concentrati o n ratio s , 
is inaccurate. The arguments are mer e ly based on surmis e a nd 
TABLE 6 
MERGERS, . CO NSO LIDATIO NS, AND PURCHASES OF ASSETS APPR O VED BY THE 
COMPTRO LLER OF THE CURRENCY FROM NOVEMBER 16, 1961 
THROUGH APRIL 19, 1963 
Banks Group e d Less 500 Total 
Acc o rding to than or Acquired 
Amount of Dep o s its p:, 1 - 2 2-5 5-10 10-25 25-50 50-100 100-500 More Banks 
Small 
Less than 1 2 1 3 
1-2 3 1 5 1 2 12 
2-5 1 4 11 7 6 7 2 38 
Medium 
5-10 2 7 8 9 14 1 41 
10-25 1 4 2 4 12 4 27 
25-50 2 3 7 1 13 
Large 
50-100 1 2 3 
100 - 500 1 1 2 
500 or more 
Total 
Acq uiring banks 2 3 10 30 18 24 42 10 139 
~'Numbers given in millions 
Source : u. s.' Congress , House, Committee on Banking and Currency, Conflict of Federal ...J 
a nd State Banking Law, 88th Cong., 1st Sess. , 1963. ~ 
75 
lack factual support. We see that the main banks acquired are 
medium size banks, who in order to meet the needs of g r owing 
communities have to grow with them. Secondly, the medium size 
banks want to grow in order to enjoy the benefits of large scale 
operation, which will allow lower unit cost of· product a nd service. 
Thirdly, most of the -small banks merged wit h medium size banks 
in order to operate more efficiently by approaching more c l osely 
to the optimum size for the conditions of the market area. 
Mr~ Jame·s J. Saxon, Comptroller of the Currency, 
appointed November, 1961, was aware of the critici sm and 
emphasis being given to the merger. He stated in an address 
before the Banker's Association, Miami Beach, F lorida, on 
March 22, 1963: 
Great concern has been expressed that a ny move to 
enlarge banking facilities -- whether through new charters , 
new branches, mergers or ho lding companies -- would 
quickly deteriorate into a plethora of banks, which could 
lead only to destructive competition fata l to the so lvency 
and liquidity of many institutions. Some feel that t he 
i nevitable outcome would be virtual disappearance of 
small banks, thus bringing about an excessive concen -
tration of banking control. None of thes e doubts are , 
in my judgment, well supported. 1 
Summary 
The Antitrust Laws, . Section 7 of the C layton Ac t a nd 
1James J. Saxon, "Non-Branch Banking Policy -- A For m ula 
for Stagnation, " The Commercial a nd Financial Chronicle, 
April 25, 1963, p. 
76 
Sections 1 and 2 of the Sherman Act, applied to the commercial 
banking industry, are inequitable. Our study of the bank ing m ark et 
reveal s that the banking industry shoul d not be treated as other 
commerce. It is altogether a "different a nimal" and should b e 
treated as such. Many of the existing regulatory practices and 
some banking legislation are frankly intended to restrai n competition 
in comme-rcial banking. The stockholders benefit from the 
restraint of competition achieved through entry and branching re-
striction , ceilings on deposit interest, and similar measures. 
The -use of government regulation to protect the stockholders is 
itself contrary to -competitive philosophy. The growth through 
merger of banks is not the only thing to be precluded in order to 
maintain competiti on. There should be some other gradual 
modification of current regulatory practices: 
1. The question of permitting banks to resume the payment 
of interest on demand deposit may be re-examined. 
2. In the climate that such devel opments cou ld weH 
establish there is a possibili ty that the state po licies toward b ranc h 
banking may become somewhat more liberal, espe cially in s ::ate s 
where tight unit banking may tend to preserve loca bank ing 
monopolies. 
3 . . Anothe·r likely possibility is for public policy, both 
Federal and State, to encourage competi tio n in bank ing by sharply 
reducing re·strictions on new bank charters and new b ranch offic e s 
with a view to allowing the relatively free play of busi nes s com-
77 
petition to determine entry into banking as it does in man ufacturing 
and other industrie·s. 
4. The question of lifting of interest rate ceilings on savi ng s 
deposits may be re-examined. The ceiling on savings depos it s 
placed commercial banks at competitive disadvantage with their 
non-bank financial competitors. 
The view expressed above are carried on by Saxon in hi s 
philosophy of expansion in banking industry, through his lib e r al 
policy of branches, new entry and mergers.. The fo llowi ng cha pter 
is devoted to his expansion planes through branches and new e nt r y. 
CHAPTER IV 
BRANCH BANKING AND THE MERGER MOVEMENT 
IN UNITED STATES BANKING 
Introduction 
The attitude of the Comptroller of the Currency, Mr. James 
J. Saxon, towards bank mergers is strongly conditioned by the 
demonstrated effectiv eness of branch banking in meeting the 
present day banking requirements of the American people. Branch 
banking, as we shall show in this chapter, when viewed in relation 
to criteria of public benefits possesses significant advantages over 
unit banking without necessarily impairing the o v erall c ompetitive~ 
ness of the banking industry. In fact, branch banking may lead to 
increasing rather than stultifying competition within the industr y. 
Where Federal and State regulations and regulators permit , 
merger is a convenient device for effecting a change in the 
structure of the banking industry away from unit banking and to-
wards branch banking. The proliferation of branch banking do e s 
not, of course, arise from merger alone but also by the occupancy 
of additional premises by banking firms operating elsewhe re in the 
metropolitan area, county or state experiencing an incr ease in 
branch banking. 
As in all questions affecting the American banking industry, 
79 
we can make relatively few policy statements which are universaHy 
true i n all 50 states for State and for Federally chartered banks. 
Consequently the main trend of the discussion in this chapter is 
devoted to Federally chartered rather than State chartered banks. 
Historical Trends 
The trend in the United States banking structure towards in-
creased use of the branch form of organization continued from the 
first decade of the twentieth century. The first two decades wi t-
nessed a tremendous growth in the number of banking offices and 
banks. These were years of rapid industrial and agricultural 
advance, accompanied by the development of the American Wes t 
and by rising land and commodity prices. The peak was reache d 
in 1920 and then the number of banks began to fall. The numbe r 
of banks continued to decline, though slowly, from 1933 to 1945 
due to mergers. The number of branches rose almos t un - --
interruptedly throughout the whole period. This tr e nd ha s co n -
tinued up to the •present time. 
The change in the banking structure in favor of the branc h 
form was aided by banking legislation passed in 1933. The 
MacFadden Act and the Banking Act liberalized th e power of 
national banks to establish branches, Several state s pas s ed 
legislation liberalizing their branch banking laws so that 34 states 
80 
n ow permit some form of branch banking. 1 Nevertheless, the 
Uni ted StateS' still has a dual banking syste m of State and F ederally 
c hartered banks, each a llowing both unit and b ranch banking. 
The effect of the branch banking movem e nt on the structure 
of bank ing markets has been a subject of controversy for m ail'l.y 
years -- from the earliest debate concerning .the F ir st a nd Seco irl.d 
2 
Bank of the United States, thro ugh concer n over the branc h es of 
"wildcat" banks that accepted deposit s b ut di d not honor with-
d rawal s. Fundamental changes i n b ranch bank ing laws were 
instituted in the 1920 1 s and 1930 1s, contin uing to the present day. 
The conflicts which existe d in 1900 between d ifferent types of 
banks and regulatory a uthorities have not been resolved a nd~ in 
fact, have become more inten se. 
Mr~ Saxon and Branch Bank ing 
Mr. Saxon, and a good m any other people, believe that 
present restrictions on bra nches often work not for competition 
but against it. A study of this viewpoint has b e en p r ep a red by 
Bernard Shull and Paul M. • Horvitz, senior e c o tnlom i s t s, :h11 t h e 
office of the Comptr oller of the C urrency. 3 
1see T a b le 7. 
2J. M. Chapman and R. B. Westerfie ld, Branch Ba.rr.aJd ng 
(New York a nd Lo ndon: Harper & B rothers, 1942), p. 22. 
3B. Shull a nd P. M. Horvitz, " Branch Ba ~..kin g a t2d 
Competition ," T-he Na tional Bap.Jdn g Review; March , 1964. 
81 
Competition in banking, as in any other industry, is affected 
by a number of factors. High on the list are such things as number 
of competitors, the -degree of concentration, and the ease with 
which new competitors can enter -the field. For the effects of 
branch banking on competition we must see: 
A. whether branch banking re-sults in a small number of 
competing institutions; 
B. whether branch banking results in significantly higher 
concentration; and 
C. whether branch banking discourages the entry of new 
banks. 
A. The total number of banks has declined by about 700 
between the years 1953-1962. Opponents of widespread bank 
branching make much of the fact that many independent banks 
during that period were absorbed by other -institutions and con-
verted into branch banks. However, this fact has had little 
relevance to the spread of bank branches. In 1963, for example, 
only 139 new branches resulted from such mergers while 1065 
new branches were started from scratch. 
In communitie-s outside metropolitan areas, there is 
little difference between branch and non-branch States in the 
number of banks available to an individual customer. In metr o-
politan areas of less than 500,000 population,, the difference is 
also small. Larger cities in non-branch States tend to have many 
82 
more banks than comparable cities in States that permit branching. 
However, this does not necessarily mean that competition 
suffers in the branch bank States. Many individuals and corporations 
will have acce·ss to banks throughout a large city and·in other cities 
as -well, but many more are likely to do business only in banks in 
their own neighborhoods. Thus a large metropolitan area in this 
sense may not be one market but many . . When branch restrictions 
bar a bank from moving into other parts of its metropolitan area, 
the effect may well be anti-competitive and again st the public 
interest. 
B. We turn now to concentration ratios. In the proportion 
of a community's bank deposits held by the large·st banks, Messrs. 
Shull and Horvitz find no significant difference between branch 
and non-branch States. On the average, the two largest banks in 
metropolitan area.s of non-branch States ·held 60 percent of their 
area's deposits in 1962, compared with 67 percent for branch 
States. It would be difficult to argue that this disparity was of 
real economic significance·. 
C. Whatever the present pattern of concentration, thi s 
pattern can be altered by the ·e.ntry of new banking offi ces . 
. Actually, the branch banking States have acquired more new bank s 
than those ·State~ that permit no new branches in relation to the 
banks in existence in 1953. 
Furthermore, when new branches (those started from 
scratch) are ·counted, the branch States have added new banki ng 
83 
offices at a much faster rate than the non-branch States. One 
reason for this is simply the regulators' reluctance to charter new 
banks that may fail or ·cause •other·s in the community to go out of 
business. In non-branch States the new bank, as are all its 
prospective competitors, is a self contained institution. It must 
'Stand or fall on results in its own area. In branch States, the 
new banking office, as are some of its competitors, may be a 
branch of a large institution. Failure -of a branch office nee d not 
endanger the whole institution. 
There are ·other factors which seem to argue in favor of 
branches. The nature of most metropolitan areas is changing; 
there -is no sensible ·reason why banks in the centers of cities 
should be barred from following their customers to the suburbs. 
Such rigid curbs as currently exist deny the flexibility that a ny 
/ 
industry needs in a modern economy. For such reasons Mr. 
Saxon has been urging that the national banks be given limited 
branching power in non-branch States. 
Opposition to the- Growth of Branch Bankin g 
Many State regulators and State-chartered banks c aim tha t 
Mr. Saxon's policy threatens to create havoc in the nation ' s 
banking system. Three basic fears have been express e d: 
1. that there is particular danger of undue bank concen-
tration where the branching technique is employed; 
2. branching threatens the position of unit bank s; and 
84 
3. that branches will lead to overbanking. 
Mr. Saxon dealt with these fears one by one in an address 
before the Annual Spring Dinner of the New York Financial Writers 
Association on May 27, 1963. He remarked that the branching 
restriction is not the proper means of controlling bank concen-
tration: 11 Impr9perly conceived branching limitation may actually 
increase, rather than diminish, the probable degree of such co n -
centration. 111 His liberal policy of expansion and less restricted 
entry has favorably reduced the degree of concentration in the 
banking industry: "The fewer the sources of competition which 
may enter any market, the greater is there likely to be the degree 
of concentration. 11 2 This issue is often confused by the degree of 
concentration found in the 100 or 200 largest banks. Thi s test 
does not , however, truly reveal the concentration which prevails. 
Each bank deals in a different market or market s a nd is not com-
petitive with all the banks in the nation. If there were o nly 200 
banks in the United States, and each competed in every m ark et 
area in the nation, there would be far more competition than now 
exists . 
The second fear expressed by State authorities is that M!". 
Sa xori i'13- philosophy of expansion is a threat to the dual b a nking 
1James J. Saxon, "What Ki nd of Banki ng Struc t ure Do We 
Need : Ro l e of Branch Banking, 1 1 Address before New Yor k F i nan-
cia l Writ e rs Association , May 27 , 1963. 
2Ibid. 
85 
system of the United States, since it puts unit banks in a di s-
advantageous position. Mr. Saxon, commenting o n this fear, 
said: 
(The State bankin g authorities] view the control of bar1k 
entry and bank expansion as a matter which should b e 
handled through what amounts to the allocation of finan-
cial markets. They would approach this problem by 
parceling out these markets among National and State-
chartered banks, so that each group, and individual 
banks within the group, would have assured territories 
reserved to them .... It is a bleak picture we would 
have to paint for the future of our banking system, if 
our efforts were to be centered safeguarding the m arkets 
for any segment of that system. The progress of our 
entire economy would be severely hampered if w e re-
garded this to be the purpose of public cont!P.:'ol in the 
field of Banking. 1 
Branch banking is being liberalized because of the services 
the community derives from larger scale banking operations. The 
cost advantages obtained from larger scale operations could b e 
realized i n any i ndustry in which there are substantial fixed 
i nvestme nts or specialized p e rsonnel capable of more extensive 
use, and not only through branch banking. The objec t of pub lic 
policy should be, not to safeguard banks of any size , b ut to assure 
that the public's needs are met to the best advantage by whateve:r 
institution can do the job most effectively. T he p r oper standard 
applied is the one of public ben efit. The applicatio n of this 
J 
standard does not mean "that there will be no proper place in the 
1u. S., Congress, House, Subcommittee o n Banking a nd 
Currency, Conflict of Federal and State Banking Law, 88th C ong., 
1st Sess., 1963, p. 278. ' 
86 
banking structure for unit banks, and banks with few branches. 
The ,capability of banks to survive competition is not solely depen -
dent upon the scale of their operations. For many banking services, 
size confers no advantage. Moreover, our experience shows that 
well managed, adequately capitalized, aggressive smaller 
institutions can prosper and progress alongside the largest banking 
institutions we have in our country. For such banks, which rely 
upon their own efforts, and not upon public protection against 
competition, there will always be a place in banking structure. irl 
The fear of over-banking is to a large degree a survival of 
I 
the unhappy experiences of the 1930 1 s and of earlier periods of 
crisis, which produced many of the excessive banking regulati ons 
which prevail today. It is a valid purpose of bank regulation to 
safeguard the solvency and liquidity of banks -- but not without 
regard to the adequacy of banking facilities in the country. Under-
banking is as much a public concern as over-banking. The proper 
J 
test of bank expansion is to a ~low the forces of private fr.itiative 
to be expressed in this industry in the degree and in. the forms that 
are requi:i:-ed to assure the public the services and facilities they 
must have to meet their needs. The safeguards should be pub ic 
safeguards -- and not safeguards for individual banks. Mr . Saxon , 
however, is convinced that he is proposing not havoc b ut competition. 
, 1 James J. Saxon, "What Kind of Ban.king Structure Do We 
Need: Role of Branch Banking, 11 loc. cit. 
87 
The conflict concern ing branch banking ex ists not only b etw een 
the I n.depe nde nt Bankers Associatio n a nd b r a nch bankers , b ut a lso 
b etween the IBA and some regula t or y author itie s, 1 the C omptroller 
of the Cur rency a nd between national and state bank ing auth or iti es . 
The major part of the problem is rela t ed to the r ole of competition 
i n banking. 
Opponents of branch ban.king asser t tha t bec a us e of c o nc e n -
trat i on of banking units i n the typical community, compe t i t ion. i s 
lacking. Thi s view has been best expressed by Co ngressm a n 
Emanuel Geller: 
The present degree of concentration i s c ontrary, I 
think , to the fundamental premi se t ha t the banking s ystem 
s h ould rely for its vitality on vigorous competi tio n b y a 
multitud e of i nd epend ent ba nks, locally organized , locally 
financ ed, and locally manag ed .. . . As a res ult of the 
depletion in the ranks of t he co untry 's ba nk s through 
mergers, competition among banks ha;f b een lessened 
i n communitie s througho ut the na t i on. 
Opponen t s of bran.ch ba nk ing also arg ue t ha t with b r a ,:.ch ba,:.k s 
ent e r i ng a community smaller banks m a y b e d r i ven out of b ush:ess , 
due to the operating economie s and gr eater fac ilities offe red b y t~e 
forme r . The new b r anch cannot, e ven if it wanted t o, use unfair 
ta ctics such as cha rging below cost int er e st rates o n. l oa ns , as 
th e rates are d e te r mined by the hea d offi c e . Unit ba ri..ks, t he r efore , 
1WaU Street Journal, Ma y 2, 1963, p. 1. 
2u. S., Congr e ss, Hous e, Subcommittee o n Banking and 
Currency, Regulatio n of Bank Merger -s , 86t h C ong., 2d Ses s ., 
pp. 134, 137. 
88 
are hurt by the entry of the branch office by loss of their monopoly 
position rather than cost advantages of the branch. 1 
On the other hand, it is argued, particularly within the com-
mercial banking industry itself, that competition is as keen today as 
it has been for many years. This view is shared by former 
Comptroller of the Currency, Mr·. Gidney, who testified as follows: 
Our banking system today is in a very healthy condition. 
With the strengthening of its management, capital position, 
and resources, there has been corresponding progress in 
the character of banking competition. Banks strive to 
furnish the most complete service possible a nd continually 
vie with each other in seeking enlargement of their 
customer groups, whetho/ depositors, borrowers or 
users of other services. 
Structural Factor-s Influencing Bank Competition and Structural· Change , 
A. Number of Banks 
At the outset, we must not look at the large number of banks 
in the United States and conclude that barr,,..king is a very competitive 
industry. It is obvious that not aU banks compete with ot1e another. 
\ 
There are many more-or-less separate and distinct banking m ark ets 
and it is important to stimulate competition in these separate b3,ra..kfo.g 
markets. 
lp. M. Horvitz, "Branch Banking, Mergers and Com-
petition, 11 Banking and Monetary Studies (Homewood, IU.: 
(Richard-I:rwin, 'Inc.,, 1963), p. 315. 
2u. s., Congress, House, Subcommittee Oi.'.!. Banking and 
Currency, Hearings, on s. 1062, Regulation of Bank Mergers, 
loc~ci~ • 
89 
B. Growth of Branch Banking 
The forces underlying the recent acceleration in the estab-
lishment of new bari.ldng offices fall into two groups. One includes 
factors relating to overall expansion of the economy which signi-
ficantly affect the demand of banking services. The other group 
contains the main locational and structural shifts in American 
economic life: from agricultural and non-agricultural employment , 
from rural to urban residence, and from metropolitan to suburban 
residence. These latter factors are, of course, intimately related 
to growth, but their impact on bank expansion is in part distinct, 
since they imply not only a need for new banking offices but a pos-
sible shift in the relative importance of various services performed 
and hence in the types of offices needed. 
C. Economic Growth Factors 
Since a significant number of banking services are rendered 
directly to individuals, population growth per se is import a ::1'.t to 
the demal:'!..d for banking facilities. The United States has ex-
perienced rapid population growth, which even exceeded United 
States Census forecasts in the last few decades. Virtually an th e 
pre-1940 forecasts of population growth for the period through 
1955 were exceeded by 1950. The presumption of more rapid 
rates of increase in the 1960 1 s and 1970 1 s is reinforced by th e 
coming-of-age during this period of those born during the post-
war period. 
90 
The technological expan sion is adequa t e provis ion of constant 
or rising per capita real income for this growing population , which 
will require very substantial expan sion of capacity at a n lev els --
primarily production, processing a nd marketing. Hence the demand 
of business firms for commercial banking facilities may be expected 
to show rapid a nd sustained growth over the next several decades . 
D. Structural a nd Locational Shifts of Industry and Population; 
The growth factors discussed above are operatirn.g at very un-
even rates i n different economic and geographic areas. R ecent 
developments in this regard show two distinct lin®s of development. 
The number of person s employed in agriculture and residence on 
farms is declining, and it seems evident that durin g the next o ne or 
two decades this trend will conti n ue. Thi s shift of the contribution 
of agriculture to the national product and total employment is likely 
to produce some changes in the demand for banking services. T he 
s h ift of resources out of agriculture enhances growth in real 
incomes and bankin g services are more fami liar and conveirtie:'.'.lt 
to urban residents. 
The second item of poteir.!tial significance is the rapid p o pu-
lation growth in the suburban communities of metropolitan. areas . 
This shift has accelerated s ince 1954. 1 The most impressive 
feature of the decentralization of metropolitat'l population in 
lsee Chart 1, p. 91. 
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92 
recent years is the multifaceted aspect of the development. There 
is an increase in demand of adequate living conditions by upper 
and middle income families in a period of continued high employ-
ment and rising incomes. In addition, the outward movement of 
industrial plants, as well as retail and service establishments, 
helped to increase the shift to the suburbs. The movement of 
industrial and other retail service establishments has given rise 
to an increasing demand for suburban banking offices. 
The tendency to decentralize at least some banking functio ns 
has been reinforced by the increasing importance of bank loans to 
individuals. The rapid expansion of bank participation in the c orn.-
sumer-credit 1 and home-mortgage fields has increased the [!Umber 
of daily customer contacts and emphasized further the advantages 
of locations adjacent to shopping and residential districts. 
It appears that the factors effecting the growth in deman.d for 
banking services and the necessity of redistributing banking offices 
are broadly based and likely to persist for some time. This re-
flects the fact that within the framework of the present restrictive 
regulatory policy, the nation is rapidly outgrowing its present 
bari.king quarters. 
E. Regulatory Policy 
Banking authorities on the State and Federal levei. of govern -
lsee Chart 2, p. 9 3. 
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~-rr--r-n-T - --- -- -:- -~ · -r ---·------- ~_ .-.-:_-'-I· -t- --.-,
- -------.+ --.....'... 1 -+ 1 I , -~ ---,------+-----+1 --~-t-...,...--,....,-.....,..---j 
:rt-1_-t- -r·rr-~ -;-·: -:-r-;- ,;--r --J ....,-r~-i_· 11"""T-----rt· ..:. --~---;-- ------· ·- - • ~-;---- ----,-+------f---.L.---+---i- --~,------+: - ----,-----t- --,---+-.-~--; 
I -·--r--"---r---t-f----'--~1--r-+·-•- r--- 7--r-r--- -· ,.....,. - I - - ____ !_...._.___ I f I I I 
i; ~v 1940 1950 1960 
94 
TABLE 7 
CLASSIFICATION OF STATES OF BRANCHING LAW 
State-wide -Limited Unit 
Branch Banking Branch Banking Banking 
Alaska · Alabama Arkansas 
Arizona Georgia Colorado 
California Indiana Florida 
Connecticut Kentucky Illinois 
Delaware Louisiana Iowa 
Hawaii Massachusetts Kansas 
Idaho Michigan Minnesota 
Maine Mississippi Missouri 
Maryland New Jer·sey Montana 
Nevada New Mexico Nebraska 
North Carolina New York New Hampshire 
Oregon Ohio North Dakota 
Rhode Island Pennsylvania Oklahoma 
South Carolina South Dakota Texas 
Utah Tennessee West Virginia 
Vermont Virginia Wyoming 
Washington -Wisconsin 
Note: This classification is the same as that used by the 
Federal Reserve (Federal Reserve Bulletin, September, 1963, 
p. 119 5) with the exc·eption of South Dakota, Wisconsin, and 
Maine. Although branching is quite restricted in the first two 
States, there were 69 branches in South Dakota and 162 in 
Wisconsin at the end of 1962. Maine law g_enerally restricts 
branching to contiguous counties hut the small number of counties 
and the exceptions to the -r ·estric-tions warrant including Maine 
in the statewide branching class. 
95 
ment have, as we have seen in the preceding section, strongly in-
fluenced the structure of competition in commercial banking 
through the exercise of their chartering powers. State banking 
authorities allow branches in 17 states, limited branches in 
another 17 states, and prohibit branches in 16 state~. The Federal 
authority, the Comptroller of the Currency, has the power under 
the MacFadden Act and the Banking Act to establish national bank 
branches only in the states where state law would not be violated. 
Besides the legislative restrictions, there are some adminjs-
trative restrictions on branch banking which considerably limit 
the growth of branches. On the State level, authorities have often 
evaluated the application of a new branch on the same basis as 
they would evaluate the application of a new unit bank for a 
charter. On the Federal level, many applications for the estab-
lishment of national bank branches were annually disapproved on 
the grounds that the new branch would lead to destructive com-
petition. 1 The administrative restrictions are somewhat 
liberalized under the expansionary program of the present 
Comptroller of the Currency, Mr. Saxon. 
Many banks in branch restricted States merge to create 
branches. This eases the bank's most difficult current problem, 
that of a large migration of population from metropolitan to 
1Ninety-second Annual Report of the Comptroller of the 
Currency for the year !954, p.---rT."" 
suburban areas. This shift in population leads metropoW::an bat?.ks 
to follow their customers and to ,open offices for the convenie~1.ce 
and need of customers at the place of their domicile. The sh.Ht 
has affected the bank's earnings in two ways: first thro ugh the 
drain on deposits which raises the capital-deposit ratio, a n.cl 
secondly through the shift of the loan business of the depo sitor s 
to the local banks of their domicile. 
Advantages of the Branch Form of Structure 
Whenever there is need for additional banking facilities in 
the States where branches are allowed, this need is met with 
branching by existing banks. There are several reasons why 
these expan sion needs have been made by branching rather than 
through chartering of new banks. We have discussed in the 
previous section the legislative reasons, b ut t here are some 
economic factors influencing expansion through b arlki;::g. 
1. Branches can often operate profitably h'l commut:li:'les 
which cannot support a ut11it bank. Many smaller communldes 01.4 
suburban areas present unbalanced banking business . Some 
wealthy suburban communities may manage to :;raise a sizable 
volume of time and demand deposits, but may have vi:etuaHy no 
business loan demand. Other residential areas may provide sub-
stantial demand for installment and mortgage loan, b ut may not 
be able to generate adequate deposit volume. Branch b anks p ro -
vide mobility of funds arnd can shift excess reserves from one 
97 
plac e to the community with b usine ss loan demand. 
2 . The branch banks certainly are in a more advantageous 
position of employing experienced staff. The branch bank already 
has experienced staff which can be shifted to the new branch. T he 
new branch needs to cover o nly the direct cost of its operation, 
at least at first. That is to say, it does not need to cover officers' 
salaries or even the expenses of maintaining an investmerc.t de-
partment or credit department, or some other highly specializ ed 
service department, as these already exist in the head office. 
3. When there is any doubt about whether the commun.ity 
can support the banking office, it is more beneficial to open a 
branch office which can be closed without loss to depositors if it 
turns out to be unprofitable. 
4. Savings in labor and other expenses that come with larger 
banking units emphasize the economies of large-scale operatior.s. 
In discussion of costs of manufacturing , the point is often m a d e 
that economies of scale are due to size of p lant rather than size of 
firm. The multi-plant operation in banking is branch banking, 
which means lower cost with increase of the size of the bank. 
5. If there are some initial losses which must be borne 
w hile the bank is establishing its place in the community, the 
branch bank can probably better afford these than a new small 
unit bank. 
When a branch bank seeks to establish an office and t he entry 
is restricted, it often attempts to gain a branch in the des i red 
98 
location through merger. This method is usually adopted in the 
States with limited branches. There are several other factors 
affecting this decision: 
1. The existing banks already have custome rs a nd thus 
additional promotional expenses are minimized. 
2. The existing bank already has an office; thus construction 
cost may be avoided. 
3. The existing bank already has personnel , so that the 
employment problem is minimized. 
Branching and Competition 
We have observed in our previous chapters that economic 
theory supports competition. However, competition is not an end 
in itself., Competition is desirable because of what it leads t o : an 
efficient allocation of resources with production carried on at 
minimum cost with minimum sustainable pric es charged to cm1-
sumers. Merely having a large number of competlto:l."s does not 
assure that these ends are being achieved. Thi s is the gist of a 
large part of the problem of branch banking a rn.d banking competition. 
Opponents of branch banking focus on the number of ba[l.lcs a nd the 
concentration of banking ratio. Proponent s of branch banklc!.g a14 e 
more concerned with making the competitors really competitive . 
Opponents of branch banking claim to be protecting com-
petition. If a bank is permitted to establish branche s in scattered 
communities around a State, they argue, it will tend to acqulre 
99 
monopoly power which will enable it to charge higher fees for its 
services. With this power, they further argue, a bank can move 
into a locality with a new branch and drive smaller banks out of 
business, thus reducing the number of competitor s. 
We have observed earlier that the bankin g industry, d ue to 
different State and Federal regulations, is not in a position to enjoy 
exclusive monopoly power. In the case of branch banking prices , 
the policy of maintaining the same interest rate a rnd charge s has 
been set by the head office. The head office of a large b ranch 
bank is likely to be located in large cities which have seveZ'al 
other banks, and the rates are determined by competitive situatio,1.s. 
Branch banking, in this manner, can be viewed as a meacs of 
transmitting the competition of the larger cities to small com-
munities. For example, interest rates on automobile and pe:i-soc'.1:;).l 
loans were reduced by ban.ks in New York's Westchester and 
Nasau Counties shortly after ban.ks in neighboring New Yor k GHy 
were authorized to establish branches outside the city. 1 
Summary 
Due to different rates of development of ecot1.om :lc ar..d geo -
graphic c>,reas in the United States in the last decade, the iL':'.creased 
demand for banking services is not felt un~formly across the 
1100th Annual Report of the Comptroller of the C urrency, 
1-oc. cit. ' p. r:Io. 
100 
nation. Economic expansion requires the expansion of its main. 
generator -- the banking industry. Expansion could take place 
either through the entry of new banks or the expansion of existing 
banks. 
The shift of industrial location and structure encoul"aged the 
banks to follow their customers to the suburbs. These shifts do 
not only imply a need for new banking facilities, but a possible 
shift in the relative importance of various services performed 
and hence in the type of offices needed. 
There are many regulatory, administrative and economic 
barriers to the new entry. In the markets where these barriers 
are substantial, the demand is met by expansion of existing 
institutions by creating new branches. The opponents of bratmch 
banking fear that this expansion leads to the higher concen.tratlon 
ratio and is thus less competitive. 
Competition within the banking structure is not only due to 
the number of existing banks but also to the possibility of u:.ew fhms 
entering the market. There are economic barriers to ent:ry in 
every industry. These include such factors as product dif-
ferentiation, economies of scale, and difficulties i n obtalnit~g 
certain factors of production such as management , capital, o:r 
labor. Though barriers to entry are not high in the banking 
industry, they are lower under branch banking than under unit 
banking. 
Competition in branch bankin g structure is dependent on th e 
101 
number of banks in relevant banking markets, the degree of con-
centration in banking markets, and the ease of entry it1.to ban.king. 
To analyze the effect of branch banking ot1 bank numbers is to 
specify the banking market to be considered. Outside the metro-
politan areas the difference between branch and non-branch 
States in the number of available banks is very little. In large 
cities the difference is significant. Our analysis of the banking 
market in previous chapters shows that the large markets are 
competitive and that it is only the local market which enjoys 
monopoly. The difference is very little in this local market and 
thus branch banking seems to have no adverse effect on com-
petition. 
Concentration in banking is high in most local markets. 
While concentration ratios are somewhat lower under unit banking, 
the differences do not appear to be very significant from an 
economic point of view. Messrs. Shull and Horvil:z's analysis 
suggests that the structure of local banking markets has no t beetc 
adversely affected by branch banking in the United States, e :U:helr' 
in terms of number of competitors or concentration., or in teEms 
of condition of entry. The weight of evidence supports the 
opposite viewpoint; market structures are adversely affected by 
restrictions on branch banking. 
CHAPTER V 
SUMMARY AND EVALUATION 
The controversy surrounding Mr. James ,Saxon's policies 
on bank merger can only be understood by referring to the his-
torical circumstances which have shaped the views and fears 
of the protagonists. 
From the latter half of the nineteenth century two basic 
fears have carried over into discussions on. banking policy in the 
twentieth. On the one hand the periodic crises of liquidity and 
solvency have led to the creation of agencies at both the Federal 
and the State level to modify and restrain the forces of a com-
petitive market; on the other hand geniune fears have been created 
by the specter of centralization of the financial decision-maklr.g 
process of the nation in the hands of a few men. 
The trend towards bank mergers started in the 1920 1s and 
continued until the depression of the 1930 1s. The factors affect:ir'.1.g 
the merger activity at that time were more of a life ·saving na t u:re 
than due to other economic factors. The trend continued un.t:H 
1940. With the increasing demand for banking services, the need 
was met more by the opening of branches than by the chartering 
of new banks. The recent upswing of this movement beginning l n. 
1953 was due principally to the growth of economic activity. 
Other contributory factors in recent years include managerial 
103 
difficulties such as the shortage of experienced persormd and d-:e 
realization of the importance of scale economies. 
The present Comptroller of the Currency, Mr. _J. J. Saxo,i, 
has adopted an even more liberal attitude towards proposed ba;t1.Jc 
mergers than bis predecessor, Mr. R • . M. Gidney. In doing so 
he has encountered rigorous opposil::ion both from within the 
banking industry and from other regulatory agencies responsible 
for shaping the industry's structure such as the Antitrust Division 
of the Department of Justice. The views of these three groups 
regarding mergers are set forth below. 
Mr-. Saxon 
Mr. Saxon, aware of the criticism placed upOi.'.1 the ler::i.e:.t 
policy in approving bank mergers of his predecessor, was al.so 
aware of the rapid growth and development of the United States 
economy. The banking industry, being the mafo. gen.exator of 
business enterprise, must grow fo. 014 der to meet th e ::-1eeds cf fhe 
nation. His strong belief in industrial expa:::lsio;:i, wh~teve? fo::m 
it may take -- new charters, new banks, merge1"s, ~x:.d hold'l:"c.g 
companies -- has been practiced durbg his te:t"m of office. He 
adopted the merger device for expanslon due to th e regt;:.lat:l.o,2s 
in several States restricting new charters and branches. He 
approved eighty mergers in the year 1962 as compared to 
Mr. Gidney's average of seventy-four a year durfri.g his t0rm of 
office from 1953 to 1961. Mr. Saxon approved 139 merge14 s from 
104 
November, 1961 through December, 1963; 76 percent of these 
took place in States with limited area branch banking, 19 percent 
in States with statewide branch banking, and only 5 percent in 
States which prohibit branch banking. 
Mr. Saxon expressed his views about the need for bank 
expansion in an address before the National Credit Conference of 
the American Bankers Association, Chicago, Illinois, on 
January 22, 1963: 
As our economy has grown, it has become increasingly 
evident that the commercial banking system occupies a 
central role in its progress. It is upon the commercial 
banking system that we significantly rely for the mar~ 
shalling and disposition of our capital resources, and 
the provision of our payments mechanism. A deficiency 
in financial mechanism will critically affect the rate 
of our economic growth. 
Mergers are generally approved in the States where State 
Law prohibits branches. The growing demand for branches 
accelerated the merger movement. Merger of banks to creat e 
branches eases the banks I most difficult current problem, that 
of large migration of population from metropolitan to suburban 
areas. This shift in population creates not only a need for new 
banking offices but a possible shift in the relative importance of 
various services perfor1ned and hence in the types of offices 
needed. This leads metropolitan banks to follow their customer s 
and to open offices for the convenience and needs at the place of 
their domicile. The shift has affected the bank 1 s earnings in 
two ways: firstly through a drain on deposits which raises the 
105 
capital-deposit ratio, and secondly through the shift of the loan 
business of the depositors to the local banks of their domicile. 
In absence of free entry in the banking industry and re-
strictions on branch bar-..king in several states, the expansion of 
the banking industry was at stake . . Existing banks, with no fear 
of new entry, enjoy monopoly power in their respective market 
areas. According to a study prepared by the Commission o n. 
Money and Credit, 40,000,000 people live in one bank towns. 
These people cannot enjoy the complete range of bankin g s ervices 
from the small unit banks. The expansion i n any form it may 
take, branches, new charters, merger or holding company was 
considered necessary. Every form of bank expansion was 
criticized for fear of adverse competitive effects, without 
realizing the need of adequate banking facilities. 
Mr. Saxon does not only con s i der the convenience and need 
of the community under the growth of the economy, but also 
realizes the importance of the strength of the bar:.k lng ir.tlustry 
a t~d examines the economic factors involved in i nd i v idual m e:,.•ge:,•.  
c a ses. Cost advantages obtained from large s cale ba:r..kh1.g 
operation are one of the factors con sidered in such cases . 
Economies of scale are due to size of th e p lant ratb.e!' th3,n size 
of the firm. Multiplant operation s in the bankin g fr.dusl:ry, i .e. 
branch banking, result in lower costs , when larger bank s are 
created or facilities are shared between branches . 
106 
Department of Justice 
The merger movement since 1953 has been opposed by the 
Justice Department on the grounds of creating monopoly or 
lessening competition. Antitrust Laws are applied to the banking 
industry. Other industries are subject to governmental regulations 
and control to the same extent as commercial banking. In those 
cases they are usually exempt from the Antitrust Laws in matters 
subject to regulation. In the banks there are limitations on the rates 
of interest which they may pay on time and savings deposits; they 
are prohibited from paying interest on demand deposits; they are 
limited by the usury laws in the interest which they may charge on loans. 
The supply of loanable funds which is the bank's stock in trade 
is limited: ( 1) by the amounf of deposits they are able to generate; 
(2) by the reserves they are required to keep with the Federal Reserve 
System; (3) by the amount of total supply at any given time; and in many 
other respects. The Board of Governors of the Federal Reserve System 
has several methods including setting of reserve requirements and 
discount rates and open market operations, which it can and does use 
to influence the money supply. It is not within the power of the 
banks ;; as is true ·of iridustrial ·c·o,rpQrations,- . to.increase freely 
their piroducti ve. . o~pacity .or . the p.riice _: of ,th.eit output. In 
spite of thes.e . reguls3-tor.y. restriat:io:hs : there can- .exist 
107 
monopoly prices in the commercial banking industry as it operates 
in the United States today. 
Section 7 of the Clayton Act and Sections 1 and 2 of the 
Sherman Act, applied to the banking industry in several mer ger 
cases by the Antitrust Division of the Justice Department, fail 
to recognize the unique position of the ban.king industry. 
Mr. Saxon pointed out the consideration of legal issues in-
volved which were of long-range significance to the banking 
industry . 
. and particularly on the issue of the basic clash 
between the -fundamentals of the banking structure as 
determined by the Congress of the U. S. wlth respect 
to National banks, namely, the preservation of solvency 
and the basic tenet of the ant\trust laws which is the 
preservation of competition. 
The Justice Department would prevent mergers and branch 
banking development on the basis of the drawback of this approach 
to the problem of banking competition. Paul M. Horvitz, de-
scribing the pre~etit state of competition as unsatisfactory;, said: 
We would remain with the banking system con sisting 
of thousands of small banks. This is a desirable approach 
if one is satisfied with the present state of competition in 
banking. If, on the other hand, we feel that banking could 
be more competitive, that there are too many commutaities 
with no banks or with only one bank, .,or that there are 
significant economies of scale in banking, the antitrust 
approach is not optimal. 2 
1 James J. Saxon, Hearing Before the Committee ot'"l. Ban..king 
and Currency, U. S. Senate, • Nomination of James J. Saxon, 
87th Cong., 2d Sess., February 6, 1962, p. 8 0 
2Horvitz, loc. cit. , pp. 311-312. 
108 
State -Banking Authorities 
Mr. Saxon's policy of expansion and his proposal to facilitate 
Nation.al banking system to open branches even in the States pro-
hibiting branches, has raised objections by the State b anking 
authorities. They fear that Mr. Saxon 's expansion through 
branches, whether 11 de novo 11 or by merger, threatens drastic 
changes in banking policy and the destruction of the one hundred 
year old U. S. dual banking system. This liberal policy would 
drive the unit banks out of business with the concentration of power 
in the hands of a few large branch banks . Mr. Saxon. replied to 
these fears in a 1962 address: 
The objective of public policy should be -- not to 
safeguard banks of an.y particular size, but to assure 
that the p ublic I s needs are met t o the bes t advantage, 
by whatever institutions can do the job most effectively. 
There is a point beyond which the cost advantages of 
large-scale operations will be exhausted, or win not 
be passed on to consumers b ecause of diminished com-
petition. But until that point is reached, no arbitrary, 
absolute limit shol\ld be p lac ed upo n the expan sim, of 
banking facilities. 
The Independent Banker's Associatio n fears that i n the 
merger resultin g in large branch banks competing with s m a H un:lt 
bafr.l ks, it is possible that the unit b a!Thk could be forced out of 
business due to operating economies a nd greater facHitie,s offell'.'ed 
by the branch. Mr. Saxon, commenting on this fear, s a id: 
1James J. Saxon, 11 What Kind of Bank i ng .Structure Do We 
Need; The Role of Branch Banking, 11 loc. cit. 
109 
The capacity of banks to survive competition is not 
solely dependent upon the scale of their operations. For 
many banking services, size confers no advantages. 
Moreover, our experience shows that well-managed, 
adequately capitalized, aggressive smaller institutions 
can prosper and progress alongside the largest banking 
institutions. 1 
The merger activity resulting in large branch banks helps to 
strengthen the unit bank to compete more effectively with branch 
banks. The unit banks is not hurt by entry of branches, but the 
damage to unit banks is done by loss of its monopoly position 
rather than by the cost advantages of branches. 
Evaluation 
We shall examine the position taken by Mr. Saxon on mergers 
and, for the sake of comparison, that held by the Department of 
Justice and the Independent Bankers Association from three dif-
ferent but interrelated viewpoints. Firstly, do their merger 
policies tend to reduce or increase competitio n ? Secor.,dly , is the 
implemen.tation of Mr. Saxon's policies in United States banking 
creating an industry structure which better serves the require-
ments of public convenience and necessity than the structure ·lt 
is replacing or that advocated by the other groups? Thir dly, do 
the changes occurring in the demand for banking services justify 
this policy? 
Competition may be -regarded as an end in itself whic h is 
110 
to be fostered even though in some circumstanc es it can be shown 
to lead to a sub-optimum allocation of goods a nd services compared 
with alternative distribution systems, such as central p lanning at 
one polarity or distribution through kinship ties at the other. 
Alternatively competition can lead the economy towards an optimum 
allocation of resources when certain conditions are met, 
Even when some of the theoretical requirements of the pe:i:-
fectly competitive model are absent, it is possible to create a 
legal and institutional framework which modifies the forces of 
market competition to produce a similar social result to that 
observed when they are present. 
One notable departure of the banking structure from the 
perfectly competitive model is the lack of freedom of entry. With 
numbers entering the industry controlled by the State Banking 
Commissions and oy the Comptroller of the Currency, iw. the case 
of banks with national charters, an important determinants of 
the vigor of competition is under regulatory control. W1c..e,:e a 
large range of bank sizes can operate at a profit, permltt'lti.g 
merger and/ or allowing new entrants into the barr.,,.king sector e:"c.-
ables the -regulatory body to direct the growth of the industry 
towards a workably competitive structure. Competli:lver.e ss k. 
banking need not necessarily be an. increasing function of the 
number of banking firms per million people. The Independent 
Bari..kers Association and the Antitrust Division. have tended to 
view the accelerated merger movement sanctioned by Mr. Saxon 
111 
as being antithetical to the encouragement of competition. 
Many small banks operating in geographically isolated 
markets, e.g. one bank towns, are less responsive to market 
forces than fewer banks with overlapping market areas. The 
branch form is particularly suited to increasing the competitiveness 
of the industry without necessarily increasing concentration ratio. 
Branch banks introduce competitive prices in monopolistic markets , 
as the rates are determined by the head office usually ln met ro-
politan areas where banks have more competition. These com-
petitive banks are more responsive to changes in monetary poli cy. 
Branch banks tend to adjust their policy quickly to changes in supply 
conditions as well as changes in demand throughout their market, 
while unit banks may react more slowly in the local market areas, 
particularly when the supply of funds increases and free market 
rates tend to fall. 1 Large scale operation means lower cost 
production. As the bank increases in size the lower cost is passed 
on to consumers. This cannot be done in smaH banks op erating 
in geographically isolated markets. 
In order to increase the competition in the bankin g mar ket, 
it is the nature of the regulation which requires modification 
rather than the imposing of a ntitrust laws on this industry. 
The most important change in the policy would be to permit 
111Banking Structures and Reactions to Monetary Stringency or 
Ease," loc. cit. 
112 
freer entry. This would inv9lve making new charters available 
on a less restrictive basis than is done on the cur·rent "need and 
conveniencen criteria, removing arbitrary limitations on de novo 
branching and branching by mergers. Efficient independent banks 
and those smaller banks which offer differential services for 
which there is market demand would not be forced from market 
by these changes. In efficient banks would have to improve their 
efficiency, merge·, or fail; the market power of locally monop-
olistic or oligopolistic banks would be effectively constrained. 
The changes occurring in demand for banking services, due 
to increasing population and structural and locational shifts of 
industry and population from metropolitan to suburban areas, do 
not only need new banking offices, but also a shift in various 
services performed and hence the types of offices needed. With 
the barrier on entry and restriction on branches to supply the 
type of services needed, the merger device was adopted to fulfill 
the convenience and need of the growing communities. The 
merger is not the only way to extend services; Mr. Saxon, 
wherever law permits, liberalizes the policy to open branches in 
needed areas. In his view, to increase competition in the 
banking industry is to remove the legislative barrier to new e ntry 
and liberalize the branch banking policy. To prohibit mergers 
which tend to lessen competition is a difficult standard to apply. 
There is danger that this policy could evolve into protection of 
small and inefficient competitors rather than a policy to promote 
1!3 
competition. An extremely strict merger policy wou ld make i t 
difficult to realize scale economies and the benefits of freer 
entry. Mr. Saxon feels that to imµrove the performance of com-
mercial banking is essential. It appears, however, that the ro le 
of conventional antitrust policy -- the prevention of mergers and 
combinations in restraint of trade -- in achieving the result is 
a n extremely limited one due to public regulation a nd supervision. 
In conclusion, it is seen that the merger movement in 
banking corresponds to the growth of larger firms with natior..-
wide marketing and/ or production facilities in other sectors of 
the economy, of industrial congolomerates which cannot be 
identified uniquely with any one sector, and of rising per capita 
incomes and increased demand for credit and o t her banking 
services. The branch form of banking emerging as a result of 
a more liberal policy towards mergers brings the benefits of 
competition to consumers living in areas where i nter-bank com-
petition is in.feasible and provides a wide range of banking 
service without the scale d i seconomies of a large unit bank. 
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Horvitz, P. M. Concentration and Competition in New England 
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Malanos, G. Intermediate Economic Theory. New York: 
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Theses 
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B usin e-ss Week, February 12, 1955. 
carson, D. a nd Cootner, P. "The Structure of Comme r cial 
Banking in the United States , 11 Private Financial I rrs titt.1tions, 
A series of research studies p r epa'red fo r the Commi s sion 
o n Money and Credit; E nglewood Cliffs, N. J.: P ren.tice -
Ifa1I,7nc., 1963. 
----- and Horvitz, P. M. "Concentration Rati os a nd C om -petiti on, '' The National Bankin g Review, Volume 1, 
Number 1 TS'eptember, 1%3). 
116 
"Changes in Banking Structure, 1953-1962," Federal Reserve 
Bulletin, Volume 49, Number 9 (September, 1963). 
"Comptroller ' s Decision in the Westchester Merger , " Banking 
(February, 1962). 
Crutchfield, J. A. and Hold, E. C. "Economic Expan sion a nd 
American Banking System, 11 Journal of Business 
(April, 1956). 
Edwards, C . D . 11 Preserving Competition vs. Regulating Mo nopoly , " 
American Economic Review, 1940. 
Federal· Re-s·erve Bulletin, 1953-1963 . 
Horvitz, P . M. "Economies of Scale in Banking, 11 Private Finan--
cial Institutions, a series of research studies prepared 
for the Commission on Money and Credit , Eng l ewood 
Cliffs, N. J.: Prentice-Hall, Inc.• 1963. 
"Branch Banking, Mergers and Competition," Banking 
and Monetary Studies, Homewood. Illinois: Richard 
D. Irwin, Inc., 1963. 
Motter, D . C . "Bank Mergers and Public Policy," The National 
Banking Review, Volume 1, Number 1 (September , 1963). 
New York -Time-s , 1953-1963. 
Robinson, R. I . "Priorities in the Use of Bank Funds ," Mo ney a nd 
Economic Activity:- Reading in Money a nd Banking, Boston: 
Houghton-Miffin Company, 1961. 
Saxon, J. J. "Non-Branching Policy -- A Formula for Stagnation, 11 
The Commercial and Financial Chronicle (April 25 , 1963). 
. "What Kind of Banking Structure Do We Need: Role of 
-----.B"""ranch Banking," Address before New York Financial 
Writers Association, May 27, 1963. 
Shull, B . "Commercial Banking as a I Line of Commerce, 11 1 
The National Banking Review, Volume 1, Numbe r 2 
Wecember, 1963). 
,and Horvitz, P. M. "Branch Banking and Structu r e of 
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Number 3 (Mardi, 1964). 
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117 
Wan St:r;--e-et Journal-, 1963-1964. 
Public Documents 
U. S, House of Representatives.. Committee on Banking and 
Currency. Conflict of Fedel;'al and State Banking Law. 
88th Cong., Ist Sess., !963. 
U. S. House of Representatives. Committee on Banking and 
Currency. Regulations of Bank Mergers. 86th Cong., 
2d Sess., 19 
U. S. House of Representatives. Committee on Judiciary, 
Subcommittee No. 5. Bank Mergers and Concentration 
of Banking Facilities-. 82nd Cong., 2d Sess., 1952. 
U. S. Senate. Committee on Banking and Currency. Nomination 
of James J. Saxon; 87th Cong., 2d Sess., 1962. 
U. S. Senate, Committee on Judiciary, A Staff Study of the 
Subcommittee on Antitrust and Monopoly. Corporate 
Mergers -and Acquisition~ 85th Cong., 1st Sess., 1957. 
Reports 
Board of Governors, Federal Reserve System., Annual Reports 
for the Years 1952-1962. 
Comptroller of the Currency. Annual Reports for the Years 1952-
1962. 
Federal Deposit Insurance Corporation. Annual Reports for the 
Years 1952-1962. 
Typed: Nancy McLain 
Multilithed: Margaret Pluid