Transformation of commercial banking in the United States, 1956--1991

The commercial banking system of the United States has been undergoing a profound transformation over the past thirty years. Historically the banking system of the United States has been composed of a large number of relatively small localized unit banks operating within the context of intra- and interstate branch banking restrictions. This is changing as the independent unit bank is rapidly being replaced by bank holding companies, one-bank and multi-bank, which are building statewide, regional, and in some cases national branch banking networks. Economists and economic historians agree that the holding company organizational form is relatively inefficient when compared with unitary and multi-divisional organizational forms. Then why are banks adopting the holding company form?; From a new institutionalist perspective using dynamic event history and time series methods, the analysis clearly indicates that the diffusion of the multi-bank holding company is the result of banks adopting growth strategies in lieu of state and federal branch banking restrictions. The results support the conclusion that the founding rate of multi-bank and one-bank holding companies is higher in states restricting branch banking than in states that allow statewide branch banking. Also, the results indicate that modestly performing banks are acquired by multi-bank holding companies and that the subsidiaries of multi-bank holding companies show improved financial performance in limited branch banking states. These results indicate that scope and scale economies are being realized through bank acquisitions in limited branch banking states which explains the diffusion of the multi-bank holding company form. Also, the study finds support for the conclusion that the one-bank holding company is primarily a defensive strategy by relatively profitable independent banks desiring to maintain their autonomy which has produced only incremental change in the overall structure of commercial banking in that over seven thousand independent banks still existed in 1991.