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Wednesday, May 30, 2007

One impact of interstate banking

When interstate banking was allowed in the late 1990s there were fears that the number of banks would dwindle and the resulting increase in bank concentration would lead to a reduction in banking services, quality, and sustainability.

The March/April issue of the Dallas Fed's Southwest Economy has an interesting article concerning regional lending after interstate banking was allowed which includes a graph depicting the number of chartered banks and the number of branches of the same. The article points out that branches can offer many of the same services as banks but do not face the same requirements.

The reduction in the number of banks didn't reduce the demand for banking services and, indeed, if efficiency obtained through economies of scale reduced banking prices (an empirical question), the quantity of banking services might well have increased. This, in turn, would justify the increase in the number of branches offered.

One downside to the increasing number of branches in Texas, or at least in the Dallas-Ft. Worth Metroplex seems to be an increasing number of bank robberies, often of small branches located in other businesses such as grocery stores. I can't find any data on the number of bank robberies in Texas over time, but it would be an interesting empirical project to test whether the larger number of branches is positively correlated with the number of bank robberies but negatively correlated with the average dollar amount of each robbery.

If the cost of security times the probability of robbery is equal to the average monetary loss in each robbery plus non-monetary losses (reputation etc), it could be said that banks are profit maximizing by choosing not to spend more for higher levels of security at small branches.

C*p= M+N

If we lack information on the loss of reputation resulting from robbery but assume that banks are profit maximizing, we could back out the non-monetary value of the reputation lost due to a robbery given information on the cost of security, monetary value lost, and the probability of robbery associated with each level of spending for security.

N= (C*p)-M
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