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The Expanding Geographic Reach of Retail Banking Markets

In the past three years the Spanish authorities have adopted a series of important measures in an attempt to correct the problems arising from the financial crisis and to restore confidence in the banking sector. These measures have been geared to supporting banks' liquidity, promoting the consolidation and restructuring of the more fragile institutions, and increasing capital and provisioning levels especially to cover risks arising from the real estate sector. The measures, however, have not sufficed to ease market pressure. The markets have continued to have misgivings about the quality of the assets on bank balance sheets and. | The Expanding Geographic Reach of Retail Banking Markets Lawrence J. Radecki In the view of most policymakers and economists competition in retail banking takes place in local markets covering a relatively small geographic area. Banks are thought to design their services and set their loan and deposit rates in response to the supply and demand conditions prevailing in a particular city county or metropolitan area. In keeping with this view studies of the competitiveness of banking markets generally focus on developments at the local level for example researchers and regulatory agencies assessing the effects of bank mergers on competition will examine the degree to which deposits in a given metropolitan area are concentrated in a few large banks. A reevaluation of the idea that banking markets are local may however be overdue. The banking industry has undergone a remarkable transformation in the past twenty Lawrence J. Radecki is an assistant vice president at the Federal Reserve Bank of New York. years. Deregulation has removed many of the geographic restraints on bank expansion banks are now free to establish branches nationwide or to buy banks in other parts of the country. In addition banks are seeking to achieve greater efficiency in payment credit and depository services by standardizing their product offerings centralizing their operations and shifting decision-making responsibility from local managers to the head office. In light of these changes this article investigates whether larger geographic areas have replaced cities and counties as the true marketplace for banking services. A review of data collected during 1996 and 1997 reveals that many banks set uniform interest rates for both retail loans and deposits across an entire state or broad regions of a large state. If banks were still operating in distinct local markets their retail interest rates would show substantial intercity variation. Regression analysis of the effect of market concentration on .