Local or State? Evidence on Bank Market Size Using Branch Prices

eographic markets are currently defined by market analysts at each of the twelve Federal Reserve Banks, with oversight by the Federal Reserve Board and even the U.S. Supreme Court. In 1963, in U.S. v. Bank of Philadelphia, the Court ruled that the market for bank deposits is local. That 1963 ruling still unifies market analysis at each of the twelve Reserve Banks. The flavor of analysis differs somewhat across Banks, but the stock is the same. Analysts stake off their District into local markets: either metropolitan statistical areas (MSAs) or small groups of rural counties. Once they have designated the markets, analysts keep tabs on the distribution of deposits at banks operating in the markets.1 Designating the market correctly matters a lot when it comes to bank mergers. Suppose one bank wants to buy another bank that operates in the same designated market. If the banks’ combined share of deposits in that market is too large, regulators may frown upon the merger because it might stifle competition. Some bankers push back by challenging the Fed’s designated markets; “we are not too large,” bankers sometimes contend, “your designated market is too small.” To be fair, a lot has changed since the Supreme Court decreed that bank deposit markets are local. Competition across markets was limited then by state laws against branching. With those laws gone, banks can now just build