Irwin/McGraw-Hill 1 Geographic Diversification: DomesticChapter 22 Financial Institutions Management, 3/e By Anthony Saunders

Irwin/McGraw-Hill 2 Domestic Expansions n Historically FIs' ability to expand constrained by regulation. n Regulations also create potential opportunities for new entrants to exploit existing monopoly rents.

Irwin/McGraw-Hill 3 Regulatory Factors Impacting Geographic Expansion n Insurance companies State regulated. Usually easy to establish subsidiaries n Thrifts Since 1980s, restrictions on expanding across state lines have been loosened considerably.

Irwin/McGraw-Hill 4 Constraints on Domestic Expansion n Commercial Banks Restrictions on intrastate banking have been liberalized in a piecemeal fashion. Interstate restrictions: »McFadden Act, 1927 »From 1927 to 1997 relied on establishing subsidiaries rather than branching. »Multibank holding companies (MBHC)

Irwin/McGraw-Hill 5 Stages in Regulation of BHCs n One-bank holding company loophole in Douglas Amendment Growth in one-bank holding companies from 1956 to n 1970 Bank Holding Company Act Amendments. Permissible activities “closely related to banking”

Irwin/McGraw-Hill 6 Erosion of Interstate Banking Restrictions n Regional and national banking pacts Nationwide Nationwide reciprocal Regional reciprocal n Purchase of troubled banks n Nonbank banks Ended by Competitive Equality Banking Act, 1987

Irwin/McGraw-Hill 7 Erosion (continued) n Expansion in OBHC activities. n Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 U.S. and nondomestic banks allowed to branch interstate.

Irwin/McGraw-Hill 8 Synergies from Geographic Expansion n Cost synergies X-efficiency Less evidence of cost savings from economies of scale and scope n Revenue synergies Enhance revenues by expanding into growing market or less than fully competitive market More stable revenue stream

Irwin/McGraw-Hill 9 Monopoly Power Concerns n Regulators concerned with merger activity that could result in monopoly power. n Concentration ratios such as Herfindahl- Herschman Index (HHI) employed to measure the effects of merger. HHI = sum of squared percentage market shares.

Irwin/McGraw-Hill 10 Other Factors Impacting Geographic Expansion n Attractiveness of bank merger measured in terms of merger premium. Analysis indicates that highest merger premiums paid for well-managed banks in relatively uncompetitive environments.

Irwin/McGraw-Hill 11 Success of Geographic Expansion n Investor reaction Abnormal returns for both acquiring bank and target bank. n Postmerger performance merged banks tended to outperform industry improved ability to attract loans and deposits, increase employee productivity and enhance asset growth.