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Serving as the official blog of the Financial Services Forum, BankNotes is where our team analyzes and discusses the latest proposals, ideas, and news surrounding our eight member institutions, the U.S. financial sector, and the economy. Our goal is to provide thoughtful insights on the issues impacting the eight largest and most diversified U.S.-based financial institutions, as we promote policies that support savings and investment, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.

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20 May 2019
Read Time 6 mins

In the past 30 years, large companies such as Walmart, Target, and Home Depot have transformed the U.S. economy.  At the national level, large companies represent a growing share of all commerce, which has contributed to a view that large firms dominate the economic landscape at the expense of smaller companies and consumers.  New research by economists from Princeton University and the Federal Reserve, however, shows that the increasing presence of large, national companies at the local level has actually reduced local market concentration and enhanced consumer choice.  In this post, we demonstrate that this finding extends to the presence of Financial Services Forum member bank branches.  Specifically, since the 1990s, local markets where Forum members have opened branches have become less concentrated and offered more banking choices to consumers.  What’s more, the total number of bank branches available to consumers in those local markets increases.  Accordingly, as is the case in a range of other industries, as Forum members have entered local markets, they have coexisted alongside existing banks while enhancing competition and broadening consumer choices.

Accordingly, as is the case in a range of other industries, as Forum members have entered local markets, they have coexisted alongside existing banks while enhancing competition and broadening consumer choices.

The research paper referenced above uses firm-level data covering the U.S. from 1990 through 2014 to document that across a wide range of industries, local market concentration has declined.  Market concentration is defined with respect to the Herfindahl-Hirschman or “HHI” concentration index applied at the zip-code, metropolitan, and county levels.  The HHI measure is defined as the sum of squared market shares among all companies in a local market (zip code, or city, or county).  If one firm has a 100 percent market share, then the HHI is 10,000 and if a large number of companies all maintain an equal market share then the HHI will tend to zero as the number of firms increases.  The HHI measure is a well-accepted measure of market concentration that is used by the Department of Justice and other federal regulators to gauge market competition.  Markets with a lower HHI are less concentrated, more competitive and more favorable to consumers.

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