1
Introduction
Since the early 1980s, the United States’ banking industry has experienced tremendous
deregulation. Accompanying this deregulation has been increased competition in and consolidation of
the banking and financial industry in the United States (Loevinger 1985; Rose 1997). Regulatory
changes implemented through the Depository Institutions Deregulation and Monetary Control Act of
1980 (DIDMCA), the 1982 Garn-St. Germain Depository Institutions Act of 1982, and the 1994
Riegle-Neal Interstate Banking and Branching Efficiency Act increased competition in the banking
industry. Through these legislative changes, banks began to compete with each other and with other
financial institutions due to the elimination of interest rate caps that banks may offer depositors, the
introduction of interest-bearing checking accounts (NOW accounts), and the reduction of geographic
market restrictions. The policy changes and their suggested effects were legitimated on the basis of
the neo-classical economic assumption that deregulation would increase competition and reduce
inefficiencies through the elimination of weaker banks. As Hanweck and Shull (1999:258) suggest:
The relaxation of regulatory barriers to entry, and technological advances that helped
establish other financial institutions as competitors, were procompetitive structural
improvements that could be accepted as intensifying competition and thereby
lowering the bar for mergers. In the new environment, mergers would, in turn,
eliminate inefficient institutions and, through new entry by established banking
organizations, further promote competition in local banking markets.
Putting it simply, neo-classical economics assumes that banks that are financially weak would
succumb to banks that are financially strong or, as Spiegel and Gart (1996:48) put it, “[b]igger,
stronger banks continue to buy smaller depository institutions” (emphasis added).
The above policy changes did bring about consolidation of the banking industry, largely
through mergers. For example, the number of mergers increased from 138 in 1976 to 567 in 1998, a
300 percent increase (FDIC 2002a). Further, the number of independent banks in the United States
declined by nearly 60 percent during this same period, from 14,410 unit banks in 1976 to 8774 in
1998, with such consolidation due largely to mergers occurring in the economy (FDIC 2002b).
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Convention