Interstate Banking: Experiences in Three Western States (Letter Report,
12/30/94, GAO/GGD-95-35).

Supporters of a nationwide interstate banking law argue that geographic
restrictions no longer make sense in today's integrated financial and
credit markets and actually undermine the ability of U.S. banks to
compete domestically and internationally.  Opponents, however, fear that
relaxing geographic restrictions could concentrate economic power among
a relatively small number of banks.  This report provides Congress and
regulators with information on the potential impact on states of lifting
geographic restrictions.  GAO discusses the experiences of three western
states--California, Washington, and Arizona--that have operated in an
environment permitting interstate banking and in-state branching.  GAO
evaluates their experiences to determine whether these geographic laws
have had any effect on the (1) market share and number of large banks,
(2) viability of smaller banks, and (3) availability of credit to  small
businesses.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-95-35
     TITLE:  Interstate Banking: Experiences in Three Western States
      DATE:  12/30/94
   SUBJECT:  Banking regulation
             Bank management
             Federal reserve banks
             Financial institutions
             Banking law
             Bank holding companies
             Interstate commerce
             Small business assistance
             Small business loans
             Lending institutions
IDENTIFIER:  Bank Insurance Fund
             BIF
             California
             Washington
             Arizona
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Banking, Housing, and Urban
Affairs, U.S.  Senate

December 1994

INTERSTATE BANKING - EXPERIENCES
IN THREE WESTERN STATES

GAO/GGD-95-35

Interstate Banking in Three States

(233379)


Abbreviations
=============================================================== ABBREV

  C&I - commercial and industrial
  CD - certificate of deposit
  FDIC - Federal Deposit Insurance Corporation
  HHI - Herfindahl-Hirschman Index
  MSA - metropolitan statistical area
  OCC - Office of the Comptroller of the Currency
  ROA - return on assets
  SBA - Small Business Administration

Letter
=============================================================== LETTER


B-258203

December 30, 1994

The Honorable Donald W.  Riegle, Jr.
Chairman, Committee on Banking,
 Housing, and Urban Affairs
United States Senate

Dear Mr.  Chairman: 

This report responds to your request that we review the potential
impact of lifting restrictions on interstate banking.  Supporters of
a nationwide interstate banking law have argued that geographic
restrictions no longer make sense in today's integrated financial and
credit markets and, further, undermine the ability of U.S.  banks to
compete domestically and internationally.  Opponents, however, feared
that relaxing geographic restrictions could result in a concentration
of economic power among a relatively small number of banks.  Given
these conflicting views, you asked us to review the experiences of
some states that have had interstate banking for some period of time. 
Congress recently passed legislation lifting some restrictions on
interstate banking and branching.  On September 29, 1994, the
President signed into law the Interstate Banking and Branching
Efficiency Act,\1 hereafter termed the Interstate Banking Efficiency
Act. 

In our November 1993 report,\2 we reported on interstate banking and
its (1) potential effect on the banking industry's structure
nationwide; (2) implications for the safety and soundness of the
banking industry, the Bank Insurance Fund\3 , and the economy; and
(3) associated risks and ways to minimize them.  In that report, we
said that the best way to minimize the potential risks to the quality
and availability of banking services arising from interstate banking
is to ensure that markets remain competitive through vigilant
antitrust enforcement and that laws and regulations governing credit
availability are enforced. 

This report discusses the experiences of three western
states--California, Washington, and Arizona--which have operated in
an environment permitting interstate banking and in-state branching. 
Specifically, we evaluated their experiences to determine whether
these geographic laws have had any effect on the (1) market share and
number of large banks,\4 (2) viability of smaller banks,\5 and (3)
availability of credit to small businesses.\6 This report provides
useful information for Congress and regulators on the potential
impact on states of lifting certain geographic restrictions. 


--------------------
\1 P.L.  103-328. 

\2 Interstate Banking:  Benefits and Risks of Removing Regulatory
Restrictions (GAO/GGD-94-26, Nov.  2, 1993). 

\3 A deposit insurance fund operated by the Federal Deposit Insurance
Corporation (FDIC).  This fund generally insures deposits in banks up
to $100,000 per account in interest and principal. 

\4 In California, we considered large banks to be those with more
than $10 billion in assets, from December 1984 to June 1993.  In
Washington and Arizona, however, we were not able to use this
categorization because only one bank of this size existed in each
state in most of those years.  Nonetheless, banks with more than $1
billion in assets in these states had a statewide presence similar to
those with more than $10 billion in assets in California.  We
therefore considered large banks in Washington and Arizona to be
those with more than $1 billion in assets. 

\5 Smaller banks refer to those with $1 billion or less in assets in
all three states. 

\6 The Small Business Administration (SBA) defines small businesses
as independent firms employing fewer than 500 workers. 


   BACKGROUND
------------------------------------------------------------ Letter :1

Prior to the passage of the Interstate Banking Efficiency Act,
Congress largely had ceded to the states the power to determine how
bank holding companies could branch within states or expand across
state lines.  Generally, states could permit a bank holding company
to expand by (1) interstate banking--acquiring bank subsidiaries
outside its home state; (2) interstate branching--establishing
branches outside its home state; and (3) in-state
branching--acquiring branches throughout all or part of its home
state.\7

Section 3(d) of the Bank Holding Company Act of 1956, commonly known
as the Douglas Amendment, prohibited bank holding companies from
acquiring a bank subsidiary in another state unless the state where
the acquired bank was located specifically permitted such
acquisitions.  The Douglas Amendment had two central purposes:  (1)
to help alleviate concerns that economic power could be concentrated
among a relatively small number of nationwide banking institutions
and (2) to keep national and state-chartered banks on an even footing
by giving states, not the federal government, authority over
interstate banking.  The McFadden Act of 1927 generally barred
interstate branching for all national banks and all state-chartered
banks that were members of the Federal Reserve System.\8 A national
bank was allowed to branch within its headquarters state to the
extent that state law authorized branching by state banks. 

Over time, most states relaxed their interstate banking laws by
enacting laws authorizing out-of-state bank holding companies to
acquire in-state banks and bank holding companies.  Many of these
state laws had nationwide triggers, which allowed holding companies
from anywhere in the country to acquire banks in those states.  By
year-end 1993, all but one state--Hawaii--permitted some form of
interstate banking.  Most states had laws permitting in-state
branching.  However, only eight states permitted interstate
branching, and only for state-chartered Federal Reserve nonmember
banks. 

Although most states had relaxed their interstate banking laws, some
bankers urged Congress to enact a nationwide banking and branching
law to facilitate the banking industry's ability to compete.  They
argued that without a nationwide law, banking companies must deal
with each state separately, and that this was an expensive and
inefficient process.  Proponents of a nationwide interstate banking
and branching law believed that removing restrictions would
strengthen the banking industry and benefit customers by (1)
increasing competition and geographic diversification, (2) reducing
the need for customers to maintain separate accounts in different
states, and (3) offering a wider range of products and services that
are generally associated with larger banking companies.\9 Opponents
feared such actions would lead to adverse effects such as excessively
concentrating assets and deposits under large banks' control,
impairing smaller banks' survival, and reducing small businesses'
access to credit.\10

Congress passed a nationwide interstate banking and branching law,
the Interstate Banking Efficiency Act, during the second session of
the 103rd Congress.  This act authorizes the Federal Reserve Board,
effective 1 year from the date of enactment, to permit adequately
capitalized and adequately managed bank holding companies to acquire
banks located anywhere in the United States outside of the acquirer's
home state without regard to state laws.  In addition, the act
provides for interstate mergers and branching by FDIC insured banks
in states where such activity is permitted.  First, beginning June 1,
1997, banks may merge across state lines so long as the states
involved have not enacted laws which expressly prohibit interstate
mergers before that date.  Interstate mergers earlier than June 1,
1997, are allowed in states having laws that expressly allow them. 
Second, out-of-state banks may acquire branches, without acquiring
the bank itself, but only if the state where the branch is located
permits such transactions.  Finally, the act permits national and
state nonmember banks to enter states for the first time through the
establishment of a new branch, if the state has a law expressly
permitting such branching. 


--------------------
\7 Bank subsidiaries are separately chartered and regulated
institutions that are part of bank holding companies.  Bank branches
are offices of the bank and, as such, do not have separate capital
requirements. 

\8 The Federal Reserve System is the central banking system in the
United States, consisting of 12 district banks and the Board of
Governors.  National banks are required by law to own stock in the
Federal Reserve bank in their district.  State-chartered banks have
the option of becoming members or remaining nonmembers. 

\9 For a further discussion of the benefits of interstate banking and
branching, see GAO/GGD-94-26. 

\10 Opponents of lifting geographic restrictions have other concerns
such as increased fees and deteriorating customer service that may
result from reduced competition.  However, we have addressed some of
these concerns in our report GAO/GGD-94-26.  For a discussion of how
geographic deregulation affected the three states we reviewed in this
report, see appendix II through appendix IV. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Although states' interstate banking and in-state branching laws
provided large banks with the opportunity to expand, the experiences
of California, Washington, and Arizona indicated that such geographic
deregulation\11 did not necessarily result in a more concentrated
industry.\12 One reason for the lack of significant additional
consolidation\13 may have been that the banking industry in these
states was already highly concentrated, reflecting previous
consolidation. 

In all three states, the experience of large banks was mixed; some
grew, some declined, and others were acquired.  On balance, large
banks held no greater share of the three states' markets in June 1993
than they did at the end of 1984.  However, both federal and state
regulators became concerned about undue concentration when the two
largest bank holding companies in the western states--BankAmerica and
Security Pacific--requested approval for a merger.  Before approving
the merger, regulators proposed the divestiture of a number of
branches.\14

During the period December 1984 through June 1993, smaller banks,
whether owned in-state or by out-of-state bank holding companies,
continued to play an important role.  They frequently were among the
most profitable banks as measured by return on assets\15 and, despite
geographic deregulation, either gained additional market share or
regained previously lost market share.  In Washington and Arizona,
this was caused in part because some smaller banks--especially in
Arizona--were acquired by out-of-state bank holding companies.\16 By
mid-1993, Washington's in-state smaller banks had regained most of
the market share previously lost to out-of-state banks.  Their market
share rose to 17.6 percent from a low of 13.8 percent in 1989. 
However, in Arizona, smaller banks that were owned out-of-state
gained market share at the expense of in-state smaller banks, with
the latter's share falling from 11.2 percent in 1985 to 6.8 percent
in June 1993. 

Although over the period of our review, the market share of all
smaller banks as a group did not generally decline, the market share
of the smallest banks--those with less than $100 million in
assets--did decline.  In Arizona and Washington, most of this market
share was lost to other small banks (those with assets from $100
million to $1 billion).  In California, the smallest banks' lost
market share was generally gained by small or midsized banks (those
with assets between $100 million and $10 billion). 

According to some bankers and focus group participants\17 we
interviewed, large banks were credited with increasing credit
availability to those small businesses in the three states that met
the large banks' lending criteria.  Other bankers and participants
mentioned, however, that the practices of centralizing and
standardizing loan decisions, common to large banks, could result in
some small businesses having difficulty obtaining credit in markets
where there are few alternatives to large banks.\18 They told us that
the standardization of loan criteria, coupled with the removal of
authorization for loan decisions by local bank officers knowledgeable
about the community, impaired small businesses' access to credit. 
However, bankers from large banks told us that centralizing and
standardizing their bank operations had allowed them to become more
efficient and in turn serve many more small businesses. 

Some bankers and focus group participants attributed credit
difficulties to a decline in the number of small banks or a change in
lending emphasis from commercial lending to consumer lending by some
banks that were acquired.  They viewed smaller banks as strong
providers of credit in the three states we visited even though they
said these banks did not have a large presence in some inner cities
and rural markets. 

As we said in our November 1993 report, vigilant antitrust
enforcement of the banking industry is necessary to ensure that any
adverse impact of consolidation on certain segments of the small
business sector is minimized.  Such actions should increase the
likelihood that small business loan needs are met. 


--------------------
\11 Geographic deregulation is a general term that refers to
interstate banking, interstate branching, and/or in-state branching. 

\12 Concentration is measured by the amount of business handled by
the largest banking companies within a market. 

\13 Industry consolidation is characterized by a greater
concentration of assets among the largest banking companies in the
country.  For more information on the concentration of the banking
industry nationwide, see GAO/GGD-94-26; "Concentration in Local
Markets," Stephen A.  Rhoades, Economic Review, (Mar.  1985); "Trends
in Banking Structure Since the Mid-1970s," Dean F.  Amel and Michael
J.  Jacowski, Federal Reserve Bulletin, (Mar.  1989); and "Interstate
Banking:  A Status Report," Donald T.  Savage, Federal Reserve
Bulletin, (Dec.  1993). 

\14 A divestiture refers to the sale of an asset to achieve a desired
objective.  A bank may sell branch offices or an entire operating
division, for example, to cut expenses or carry out its business plan
for long-term growth. 

\15 Return on assets is calculated by dividing net income by total
assets.  This indicates how profitably a financial institution's
assets are employed. 

\16 A corporation that controls at least one bank. 

\17 In each state, we met with three or four focus groups made up of
administrators of nonprofit loan funds, individuals who helped
businesses obtain bank financing by assisting them with loan
applications for loans guaranteed by the states or the SBA, SBA
officials, directors of city and county economic development
departments, and former bankers.  For a discussion of the benefits
and limitations of these group discussions, see appendix I. 

\18 Under a centralized and standardized system, loan officers
working in a central location make loans according to standardized
financial criteria.  This system may depersonalize the relationship
between the loan officer and borrower, making it difficult for the
loan officer to take into account relevant credit information that is
not captured using standardized criteria. 


   THE THREE STATES OFFER A
   CONTRAST
------------------------------------------------------------ Letter :3

The three states we focused on--California, Washington, and
Arizona--allowed us to examine interstate banking and in-state
branching provisions in a variety of banking and economic
environments.  According to many observers, California's large size,
diversified economy, and relatively consolidated banking industry
provides one example of how the nation might fare under nationwide
banking and branching.  California law has permitted in-state
branching since the early 1900s and interstate banking since 1987. 
Several large California banks have branched throughout the state,
but out-of-state banks have no significant presence. 

In contrast, once Washington and Arizona introduced interstate
banking, out-of-state bank holding companies acquired the majority of
the banking assets in each state.  Washington had some restrictions
on in-state branching until 1985 and passed interstate banking in two
phases.  First, in 1983, out-of-state banks were allowed to purchase
failing in-state banks in Washington.  Second, in 1987, out-of-state
bank holding companies were permitted to purchase healthy Washington
banks as long as the state where the acquirer was headquartered
permitted reciprocal arrangements for bank holding companies
headquartered in Washington.  Arizona has had in-state branching
since the 1870s and interstate banking since 1986. 

California, the most populous state in the nation, was considered
economically sound until the early 1990s.  Washington is a
middle-sized state that since the mid-1980s has, for the most part,
exhibited steady but more moderate economic growth than California. 
Arizona, also a middle-sized state, has in recent years experienced
rapid economic growth followed by an abrupt downturn.  All three
states had relatively high rates of economic growth from 1984 through
1990.  California's and Washington's gross state products grew 60
percent and 58 percent, respectively, while the national gross
domestic product grew 46 percent during this 6-year period.\19

Despite its economic problems, Arizona--whose gross state product
grew by 52 percent--also grew at a faster rate than the nation as a
whole.  Although its real estate market suffered greatly, the
remainder of Arizona's economy continued to grow. 

The three states fared differently in the national recession that
began in 1990.  California began to suffer from the effects of the
recession in 1990; as of year-end 1993, economists saw its recovery
lagging behind the nation's.  Washington, in contrast, did not begin
to suffer the effects of the recession until mid-1991, and economists
did not expect the recession to be as prolonged or as deep as it was
in California.  Finally, Arizona had experienced economic problems
well before the national recession began in 1990.  In the late 1980s,
Arizona's economy was severely hit by a variety of factors, the most
frequently cited being the collapse of the real estate market. 
However, according to economists in the state, Arizona, like the
nation, has started its economic recovery. 


--------------------
\19 The gross domestic product--the total national output of goods
and services, valued at market prices--is a standard measure used to
gauge economic growth.  The gross state product is the state
counterpart.  The latest year for which state data are available is
1990. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :4

In examining the experiences of the three states, we focused on a
broader period--December 1984 through June 1993--than the period when
interstate banking laws became effective in those states.  We did
this because the three states phased in the relaxation of interstate
banking laws over time.  For example, California began lifting
interstate banking restrictions in 1987; Washington in 1983; and
Arizona in 1986.  Further, two of the states--California and
Arizona--have permitted in-state branching for many decades.  In
addition, many geographic restrictions on banking were removed by
states permitting out-of-state banks to expand into the states we
examined; many mergers among financial institutions occurred (some
involving the largest banks in the western states); and a nationwide
recession took place. 

In each of the three states, to evaluate the degree of market share
among large and smaller banks, we (1) analyzed call report data
maintained by FDIC on banks' profitability and market share, along
with data on mergers, failures, and new charters maintained by both
federal and state regulators;\20 (2) reviewed economic research; and
(3) met with regulators, bankers, and other interested parties.  To
assess the availability of credit for small businesses, we examined
banks' asset portfolio data, interviewed bankers, and met with focus
groups in 11 markets.\21 Our focus groups were composed of
individuals who helped businesses apply for bank financing, SBA
officials, officials of city and county departments of economic
development, and former bankers. 

Although the focus group results could not be statistically
generalized as representative of small businesses, they offered us a
practical means of obtaining a small business perspective on credit
availability.  Further, since the scope of our work was limited to
California, Arizona, and Washington, we could not extrapolate our
observations to other states. 

FDIC provided written comments on a draft of this report.  These
comments are presented and evaluated on page 17 and 18 and are
reprinted in appendix V.  We also requested comments from the Office
of the Comptroller of the Currency (OCC) and the Federal Reserve. 
OCC said it had no substantive comments and the Federal Reserve did
not provide comments, which is its policy when we do not make
recommendations. 

We conducted our work from June 1992 through June 1994 in accordance
with generally accepted government auditing standards.  We present a
more detailed discussion of our scope and methodology in appendix I. 


--------------------
\20 Call reports are quarterly reports of income and condition
required by a financial institution's primary supervisory agency. 

\21 These markets consisted of both urban and rural areas.  Urban
markets were defined using metropolitan statistical areas (MSA) and
rural markets, which were not part of an MSA, were defined using
counties.  For a description of these markets see appendix I. 


   LARGE BANKS' MARKET SHARE IN
   THE THREE STATES CHANGED LITTLE
------------------------------------------------------------ Letter :5

Studies have shown a link between the removal of branching
restrictions and banking industry consolidation within a state.  On
the basis of such studies, many observers predicted that nationwide
interstate banking and branching would also lead to consolidation. 
Such consolidation had not occurred in the three states covered by
this report, in part perhaps, because the bank concentration levels
for these three states were already high.  For example, of the states
with a large banking presence,\22 California had the second highest
concentration level--with the three largest banks accounting for 62.3
percent of banks' assets.  Of the states with a medium banking
presence,\23 Arizona and Washington had the highest and second
highest concentration levels, with the three largest banks accounting
for 82.6 percent and 62.4 percent of total bank assets, respectively. 

Figure 1 shows that the market share the largest banks controlled
within each of these states fluctuated over the period we reviewed. 
However, by mid-1993, these market shares either approximated 1984
levels or fell below those levels. 

   Figure 1:  Market Share of
   Large Banks for 1984-1993

   (See figure in printed
   edition.)

Note 1:  Large banks in California are those with more than $10
billion in assets.  Large banks in Washington and Arizona are those
with more than $1 billion. 

Note 2:  1993 data are as of June 30.  All data for the other years
are as of December 31. 

Source:  FDIC call report data. 

In all three states, some large banks increased their market share,
while others saw their share decline or were acquired.  Perhaps the
most significant event was the 1992 merger of two large bank holding
companies, BankAmerica Corporation and Security Pacific Corporation. 
The merger left BankAmerica with the largest or second largest bank
in each of the three states.  Table 1 shows the change in the market
share of BankAmerica's subsidiaries\24 and their position in each
state from 1984 to 1993.  The subsidiaries' market share in each
state would have been greater, if federal and state regulators had
not encouraged BankAmerica to divest some of the branches of its
subsidiaries in markets where they felt competition might adversely
be affected because of its large presence.  For example, without the
1992 divestiture in Washington state, BankAmerica's
subsidiary--Seattle-First National Bank--would have had $1.5 billion
more in assets than it did as of mid-1993. 



                                Table 1
                
                 BankAmerica's Market Share and Ranking
                             for 1984-1993


                                        Market  Rankin  Market  Rankin
State                                    share       g   share       g
--------------------------------------  ------  ------  ------  ------
California                               37.3%       1   41.3%       1
Washington                                30.2       1    37.4       1
Arizona                                     \a      \a    28.3       2
----------------------------------------------------------------------
Note:  1993 data are as of June 30.  All other data are as of
December 31. 

\a BankAmerica did not enter Arizona until 1990. 

Source:  FDIC call report data. 


--------------------
\22 We defined these as the 14 states with the largest amount of
banking assets of all of the states.  California ranked second. 

\23 We defined these as the 12 states with the second largest amount
of banking assets of all of the states.  Of this grouping, Washington
ranked ninth and Arizona, twelfth. 

\24 A subsidiary is a separately chartered and regulated bank that is
part of the bank holding company.  The California subsidiary is
called Bank of America, the Washington subsidiary is called
Seattle-First National Bank, and the Arizona subsidiary is called
Bank of America Arizona. 


   SMALLER BANKS REMAINED VIABLE
------------------------------------------------------------ Letter :6

Throughout the period we focused on, smaller banks as a group
remained viable in the three states.  In fact, smaller banks were
often among the most profitable banks in California and Washington
when measured by return on assets.  In Arizona, purchases by
out-of-state bank holding companies helped maintain the viability of
smaller banks through the infusion of capital.  Although smaller
banks' share of the market declined temporarily in Washington and
Arizona, by June 1993 it had regained or even slightly exceeded its
1984 market share levels.  (See fig.  2.)

   Figure 2:  Market Share of
   Smaller Banks for 1984-1993

   (See figure in printed
   edition.)

Note:  1993 data are as of June 30.  All other data are as of
December 31. 

Source:  FDIC call report data. 

Smaller banks as a group were recapturing market share.  However, the
smallest banks were losing market share to other small banks with
assets from $100 million to $1 billion.  Table 2 shows that banks
with assets of less than $100 million declined in number and market
share in the three states, while those with assets from $100 million
to $1 billion increased in number and market share. 



                                     Table 2
                     
                      Changes in Market Share Among Smaller
                                      Banks



                          Market          Market          Market          Market
State             Number   share  Number   share  Number   share  Number   share
----------------  ------  ------  ------  ------  ------  ------  ------  ------
Arizona               37    3.8%      22    2.7%       5    7.1%      10    8.8%
California           346     4.7     250     3.9      89     8.3     176    13.3
Washington            87     9.8      65     6.4       9     8.3      20    11.8
--------------------------------------------------------------------------------
Note:  1993 data are as of June 30:  1984 data are as of December 31. 

Source:  FDIC call report data. 

Regulators, bankers, and many industry experts we spoke with believed
that California's long history of in-state branching showed that
smaller banks could successfully exist alongside large banks with
statewide networks.  Smaller banks would always survive, they
contended, because such banks carved out special niches that large
banks were unable or unwilling to fill. 

The number of smaller banks first rose and then fell in California
between 1984 and mid-1993, but the market share of smaller banks
generally increased throughout this period.  Regulators and bankers
we spoke with attributed the reduced number more to an economic
downturn than to competition from large banks with extensive branch
networks.  They attributed this decline to economic cycles because
smaller banks tend to be more dependent on local economic
fluctuations than larger, more diversified banks. 

In Washington and Arizona, smaller banks had both out-of-state and
in-state ownership.  We therefore analyzed trends for these banks
both as a single group within each state and by ownership in- or
out-of-state.\25 In both states, the market share of smaller banks as
a group increased during the first year that these states permitted
interstate acquisitions of healthy banks (i.e., 1986 in Arizona and
1987 in Washington).  These gains, however, were achieved by
out-of-state, not in-state banks. 

In succeeding years, the market share of smaller banks in both states
declined.  In Arizona, according to a state regulator, this reduction
probably occurred because the economic downturn caused many smaller
banks to fail.  In Washington, we found that the decline was
primarily due to one out-of-state bank holding company acquiring
several in-state smaller banks and building them into a large bank. 

In both states, however, new smaller banks eventually formed.  As a
result, smaller banks (i.e., in-state and out-of-state banks
combined) regained or exceeded the market share they held in 1984,
before the states permitted the acquisition of healthy banks within
their borders by out-of-state banks.  In Washington, the formation of
additional in-state smaller banks helped this bank category to regain
almost all of the market share it had held in 1984.  In Arizona,
however, while in-state smaller banks made gains, their 1993 market
share declined to about 60 percent of what it was in 1984 (see fig. 
3).  This decline had more to do with Arizona's "boom and bust"
economy than with geographic deregulation, according to regulators
and industry experts. 

   Figure 3:  Market Share of
   Washington and Arizona In-State
   Smaller Banks for 1984-1993

   (See figure in printed
   edition.)

Note:  1993 data are as of June 30.  All data for other years are as
of December 31. 

Source:  FDIC call report data. 

In all three states, some markets lacked smaller banks.  In each
state, we found there were at least three rural counties that lacked
smaller banks.  Also, focus group participants reported that there
were few smaller banks in inner cities in all three states. 


--------------------
\25 California also had a few out-of-state smaller banks.  Because of
their small presence (0.38 percent of California's banking assets in
June 1993), however, they were not analyzed separately from
California's in-state smaller banks. 


   POTENTIAL EFFECT ON
   AVAILABILITY OF CREDIT TO SMALL
   BUSINESSES
------------------------------------------------------------ Letter :7

Small businesses are crucial to this country's competitive future. 
They have traditionally been substantial contributors to both
national economic growth and new job creation.  In 1989, the most
recent year for which data were available at the time of our review,
small businesses comprised 93 percent of all businesses in the
nation.  Opponents of interstate banking are concerned that lifting
geographic restrictions will result in greater consolidation of large
banks.  In their view, such consolidation would harm small businesses
because large banks would be less likely than small banks to make
small business loans. 

Much recent research has focused on credit conditions that affect
small businesses.  Frequently, such research concluded that small
businesses have had more difficulty obtaining credit over the last
decade for various reasons.\26 The authors of some of these studies
attributed the decline in small business lending primarily to the
reduced demand for these types of loans.  Others, however, stated
that there were a number of reasons for credit difficulties, some of
which related to interstate banking, banking industry consolidation,
and increased regulatory scrutiny. 

Focus group participants and bankers in all three states reported
localized difficulties for some types of small businesses seeking
loans.  Businesses viewed as experiencing credit difficulties
included (1) those whose financial statements did not fit
standardized criteria, such as nonprofit firms or companies whose
profits are cyclical; (2) those borrowing small amounts that do not
provide reasonable profits for the bank; (3) businesses that are new
or have not had 3 years of profitability; and (4) established
companies in "high-risk" industries, such as restaurants (because of
high failure rates) or sawmills (because of the poor health of the
timber industry).  These difficulties, however, were attributed to a
number of causes, including a slow economy, tighter regulation, and
the lack of a large smaller bank presence in certain areas. 

Although nonbanks and other financial providers met some of the needs
of small businesses, banks were still viewed by bankers and focus
group participants as the major source of credit.  Representatives of
large banks we interviewed viewed further consolidation resulting
from interstate banking and branching as a means to provide credit
more efficiently.  However, others we interviewed viewed these
changes as threatening the interests of small businesses.  The most
common opinion expressed in focus groups was that although large
banks have benefited many small businesses by increasing the volume
of small business lending, increased consolidation could cause some
small businesses to experience reduced access to credit.  Further,
focus group participants and many bankers from smaller banks believed
that small businesses in certain markets such as rural areas and
inner cities may experience problems obtaining credit where there are
insufficient credit alternatives to branches of large, interstate
banks. 

We could not ascertain in the three states covered whether large
banks would be less likely to provide credit to small businesses
because available data were limited.  Regulators have data on the
commercial lending activity of banks; however, prior to June 1993,
these data did not separately identify the amount of lending made to
small businesses.  Our analysis of June 1993 call report data, the
first report with small business lending data separately identified,
showed that large banks in California provided the least amount of
small business loans in terms of absolute dollars as compared to
smaller banks.  Further, the amount represented a smaller proportion
of their total assets as compared to smaller banks.  In Arizona and
Washington state, large banks provided the highest amount of small
business loans in terms of absolute dollars as compared to smaller
banks, but the amount smaller banks provided represented a greater
proportion of their total assets. 

Several studies\27 have suggested that small businesses may encounter
increased difficulties obtaining credit in an unrestricted branching
environment because of large banks' loan decisionmaking processes. 
Large banks generally have processes where lending criteria are
standardized and loan decisionmaking is centralized and removed from
the local level.  Under a centralized and standardized process, local
branch managers no longer make loans on the basis of both a financial
and a character analysis of the borrower; instead, loan officers
working in a central location make loans according to standardized
financial criteria.  Under such a system, large banks might turn down
small business applicants who might otherwise have obtained loans on
the basis of other financial considerations, such as conditions
unique to a local market or borrower. 

Representatives from large banks told us that standardizing loan
decisionmaking processes encourages small business lending because it
reduces a bank's administrative costs and increases a bank's
confidence that loans will be repaid.  Focus group participants,
however, added that this practice could cause banks to deny loans to
businesses that did not meet the standard criteria, because central
decisionmakers lacked personal knowledge of the borrowers or markets
that might temper their decisions. 

Focus group participants also identified bank mergers as having the
potential to adversely affect small business credit.  They believed
that small business credit could be affected because the number of
banks serving small businesses would be reduced and because the newly
merged banks may have a lending philosophy that would not be
supportive of small businesses.  While some focus group participants
viewed some mergers as increasing funds available to small businesses
because of a bank's capital and lending philosophy, the more common
perception among focus group participants was that mergers involving
large banks tended to make credit less available to small businesses
within a local area. 


--------------------
\26 See for example, Quarterly Economic Report for Small Businesses,
the National Foundation of Independent Businesses, (Fall 1992); "The
Small Business Credit Crunch," NFIB Foundation, (Dec.  1992); Survey
Results of Small and Middle Market Businesses, sponsored by Arthur
Andersen's Enterprise Group and National Small Business United, (July
1992 and June 1993); and "The Credit Crunch:  Are Federal Policies
Putting Entrepreneurial Firms on a Debt Diet?" (University of
Southern California). 

\27 "The Impact of Geographic Expansion in Banking:  Some Axioms to
Grind," Economic Review, Federal Reserve Bank of Chicago, (May 1986);
Banking on the States:  The Next Generation of Reinvestment
Standards, Robert K.  Stumberg, Center for Policy Alternatives, (May
1990); "Too Big to Fail, Too Few to Serve?  The Potential Risks of
Nationwide Banks," Arthur E.  Wilmarth, Jr.; "The Proconsumer
Argument for Interstate Branching," Federal Reserve Bank of
Philadelphia, Business Review, (May-June 1993); and Deregulation and
the Structure of Rural Financial Markets, U.S.  Department of
Agriculture, Rural Development Research Report, number 75. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

We requested comments on a draft of this report from the Federal
Reserve, OCC, and FDIC.  FDIC provided written comments, which are
reprinted in appendix V, and OCC informed us it had no substantive
comments.  The Federal Reserve did not provide oral or written
comments, as is its policy when we make no recommendations. 

FDIC agreed that smaller banks can be profitable and viable, even
when faced with much larger competitors.  However, it believed that
our categorization of smaller banks (i.e., those with less than $1
billion in assets) might be too broad to disclose interesting trends. 
FDIC provided data dividing this category into those banks with (1)
less than $100 million in assets and (2) from $100 million to $1
billion in assets.  As FDIC pointed out, a divergent trend was
occurring within the smaller bank category (see appendix V).  The
smallest banks (i.e., those with assets of less than $100 million)
declined in number and market share, while those with assets from
$100 million to $1 billion increased in number and market share. 

Although these trends were divergent, they did not refute our
observation that generally the largest banks had not held a greater
share of the three states' banking markets than had the smaller
banks--a basic concern of opponents of lifting restrictions on
interstate banking and branching. 

FDIC took issue with our observation that some small businesses may
have difficulty obtaining credit.  In support of this position, it
provided data on the absolute dollar amounts large banks committed to
small business lending reported in June 1993 call reports.  We agree
with FDIC's observation that large banks are a major provider of
small business credit.  We had also reviewed the same data and made a
similar observation in our draft report that large banks have
benefited many small businesses.  We are not in disagreement with
FDIC and have made changes in the report to more clearly reflect
this. 

FDIC also noted that if problems exist in small business credit
access, regulatory efforts and banking laws will address these
issues.  We agree that laws and regulation can be an important means
to help ensure access to credit.  However, it is also important to
monitor the effects of lifting restrictions on interstate banking and
branching to make sure that markets remain competitive and to
determine whether changes to laws and regulations are needed. 
Finally, FDIC recommended that we acknowledge that other factors will
also have an impact on the availability of credit.  We noted this
throughout our report. 


---------------------------------------------------------- Letter :8.1

We are providing copies of this report to other interested Members of
Congress; the Chairman of the Board of Directors, Federal Deposit
Insurance Corporation; the Chairman of the Board of Governors of the
Federal Reserve System; and the Comptroller of the Currency.  We will
also make copies available to others upon request. 

Major contributors to this report are listed in appendix VI.  If you
have any questions about this report, please contact me on (202)
512-8678. 

Sincerely yours,

Helen H.  Hsing
Associate Director, Financial
 Institutions and Markets Issues


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

Our first report on interstate banking and branching\1 assessed
interstate banking's effect on the banking industry nationwide.  Our
principal objective in this study was to analyze the potential
effects of interstate banking and branching on the banking industry
by examining three states--California, Washington, and Arizona--where
interstate banking and in-state branching existed.  Specifically, we
focused on how interstate banking and in-state branching affected

  -- a state's banking structure and the role of large banks;

  -- the number, market share, and viability of smaller and midsized
     banks; and

  -- the availability of credit to small businesses. 


--------------------
\1 GAO/GGD-94-26. 


   THREE STATES SELECTED
--------------------------------------------------------- Appendix I:1

In this report, we used a case study approach to gain a state-level
perspective on the effects of laws that allow interstate banking and
branching.  The case study approach did not allow us to reach
definitive conclusions about the possible effects of relaxing
interstate banking and branching restrictions nationwide.  However,
it permitted us to see potential effects on various types of markets. 

We chose each state for different reasons.  We selected California
because it has a long history of in-state branching and a large and
diverse economy and population.  Thus, by focusing on California, we
were able to observe how a relatively consolidated banking industry
operated without laws restricting in-state branching and interstate
banking.  The one limitation of California as a case study was that
out-of-state banks have had no significant presence in the state. 
Therefore, we also chose to study Washington and Arizona, where the
majority of banking assets (82.4 percent and 88.3 percent,
respectively, as of June 1993) were owned by out-of-state banks.  By
focusing on Washington and Arizona, we were able to observe the
effect that out-of-state ownership of banks had on a relatively
healthy economy--Washington--and on a poor economy--Arizona. 


   INFORMATION SOURCES
--------------------------------------------------------- Appendix I:2

To assess the role of large banks and the health of small and
midsized banks in each of the three states, we analyzed

  -- financial statements, loan portfolio data and deposit
     information of banks contained in Federal Deposit Insurance
     Corporation (FDIC) call reports from December 1984 through June
     1993; and

  -- merger, failure, and charter data, from 1984 through 1992,
     provided by federal and state regulators. 

We did not verify the accuracy of these data. 

To do our analysis, we used data from banks, rather than that of bank
holding companies.  Thus, except when we discuss mergers between bank
holding companies, we are discussing banks. 

To supplement our analysis, we reviewed economic studies by industry
analysts.  These studies included topics such as geographic
diversification, economies of scale and scope, cost savings
associated with bank mergers, the relevance of local markets in the
analysis of antitrust issues, and the ability of smaller banks to
compete with large banks.  Finally, in the three states, we held
discussions with federal and state banking regulators, staff members
of the offices of the attorney general, and bankers.  As discussed
later in this appendix, we also conducted focus groups with
participants who worked with small businesses on financing issues. 


   URBAN AND RURAL MARKETS WE
   VISITED
--------------------------------------------------------- Appendix I:3

To assess the effect of changes in the banking structure on the
availability of credit to small businesses, we visited 3 to 4
communities in each state, for a total of 11 markets.  We chose these
markets, most of which were metropolitan statistical areas (MSA), to
obtain both an urban and a rural perspective.  \2 We selected markets
on the basis of (1) discussions with individuals knowledgeable about
small business financing in a state and (2) banking industry data,
such as deposit market share and number of banks in a market. 

These markets gave us a broad view of small business credit issues by
state.  They also gave us insights into whether focus group
participants and bankers' perceptions of credit problems differed
with the size and location of the market. 


--------------------
\2 Most MSAs consist of one or more counties.  The general concept of
an MSA is that of a "core area" containing a large population
nucleus, together with adjacent communities having a high degree of
economic and social integration with the core.  Some counties,
however, are not part of an MSA because they do not meet specified
criteria, such as sufficient population or economic and social
integration with a core area.  These are called nonmetropolitan
counties. 


      CALIFORNIA MARKETS
------------------------------------------------------- Appendix I:3.1

In California, we focused on four MSAs--Los Angeles, San Francisco,
Oakland, and Fresno--and 14 nonmetropolitan counties that we
characterized as a single rural market--rural northern California. 
Los Angeles, the largest MSA in the state, had nearly 9.1 million
people in 1992--29 percent of California's population.  The area was
in the grip of a recession; unemployment surged from 5.8 percent in
1990 to 9.3 percent in mid-1993.  According to federal regulators,
the banking industry has felt the effects of the recession more in
Los Angeles than in other parts of the state.  The number of banks in
Los Angeles declined from 187 in 1989 to 180 in 1992.  (See table
I.1.)



                                    Table I.1
                     
                       Number of Banks For Five California
                                Markets, 1984-1992

Market                      1984  1985  1986  1987  1988  1989  1990  1991  1992
--------------------------  ----  ----  ----  ----  ----  ----  ----  ----  ----
Los Angeles                  159   167   179   186   186   187   184   185   180
San Francisco                 \a    \a    \a    64    75    71    74    72    69
Oakland                       \a    \a    \a    53    55    53    54    54    50
Fresno                        21    27    29    29    29    28    26    26    26
Rural northern                57    59    54    56    57    55    58    60    62
 California\b
--------------------------------------------------------------------------------
\a Number of banks is not reported for San Francisco and Oakland
areas for 1984 through 1986 because they were considered a single MSA
during these years; thus, totals for each area were not listed
separately.  In 1984, the San Francisco/Oakland MSA had 75 banks, and
by 1986 this number had increased to 93. 

\b Consists of 14 nonmetropolitan counties. 

Source:  FDIC data book. 

The San Francisco and Oakland MSAs had a combined 1992 population of
3.8 million, or 12 percent of the state's total population.  Compared
to southern California, this area has a relatively strong economy and
low unemployment, but it still was hurt by the recession.  From 1990
to 1992, average annual unemployment rose from 3.4 percent to 5.8
percent in San Francisco and from 4.1 percent to 6.5 percent in
Oakland.  As table I.1 shows, San Francisco lost five banks between
1990 and 1992, and Oakland lost four. 

The Fresno MSA, which comprises the entire Fresno county, had a 1992
population of more than 700,000.  The area is the nation's number one
farming county, with a gross crop value exceeding $2.9 billion. 
Fresno also serves as the financial, trade, commercial, and
educational center for many counties in central California.  Like
many other parts of the state, Fresno experienced poor economic
conditions in the early 1990s; its unemployment rate increased from
10.5 percent in 1990 to 14.5 percent in 1992.  When BankAmerica
Corporation merged with Security Pacific Corporation in 1992, federal
and state regulators were concerned about the possible
anticompetitive effects; these concerns were resolved in Fresno when
BankAmerica divested $54.2 million of its deposits in the community
in 1992.  Fresno had 26 banks in 1992. 

The 14 nonmetropolitan counties in rural northern California\3 had a
1992 population of more than 500,000.  In 1992, the unemployment
rates of all these counties increased, and all but one had
unemployment rates above the state average of 9.1 percent.  During
1992, the number of banks in each county ranged from 0 to 9 and, as
table I.1 shows, totaled 62. 


--------------------
\3 We defined rural northern California as all the nonmetropolitan
counties north of Sacramento. 


      WASHINGTON MARKETS
------------------------------------------------------- Appendix I:3.2

In the state of Washington, we visited four MSAs--Seattle, Spokane,
Olympia, and Yakima.  Seattle, the largest MSA in Washington, also
had the largest number of banks.  Its estimated population of more
than 2 million in 1992 accounted for 40 percent of the state's
population, and its banks numbered 29.  (See table I.2.) It is one of
the major locations where large banks make lending decisions for
other parts of the state.  Seattle's principal economic activities
include aerospace, high technology, retail and wholesale trade, and
manufacturing. 



                                    Table I.2
                     
                       Number of Banks for Four Washington
                                Markets, 1984-1992

Market                      1984  1985  1986  1987  1988  1989  1990  1991  1992
--------------------------  ----  ----  ----  ----  ----  ----  ----  ----  ----
Seattle                       27    27    28    28    25    28    29    29    29
Spokane                       10    10    10    10    10     9    11    12    11
Olympia                        8     8     7     7     8     9     8     9     9
Yakima                         8     8     8     8     7     8     8     8     8
--------------------------------------------------------------------------------
Source:  FDIC data book. 

Spokane, which had a population of 375,000 in 1992, is Washington's
second largest city.  The Spokane MSA had 11 banks in 1992.  (See
table I.2.) Spokane serves as another major location where large
banks make small business lending decisions.  The area's principal
economic activities include food processing, apparel and textile
manufacturing, agriculture, electronics, machinery, and wood
products. 

Olympia is Washington's state capital.  The greater Olympia MSA had
an estimated 1992 population of 174,300.\4 Although it is located
about 90 minutes south of Seattle by car, it is considered a separate
banking market.  The Olympia MSA had nine banks in 1992.  (See table
I.2.) The area's primary industries, other than state government,
include wood products, food processing, and agriculture. 

The Yakima MSA, which comprises Yakima county in the south-central
part of the state, had a 1992 population of nearly 200,000.  The town
of Yakima is surrounded by small towns and some of its eight banks
serve a wide geographic territory.  The Yakima MSA is one of the
nation's richest agricultural areas, and it also includes food
processing and wood processing industries. 


--------------------
\4 The greater Olympia area includes all surrounding incorporated and
unincorporated cities. 


      ARIZONA MARKETS
------------------------------------------------------- Appendix I:3.3

In Arizona, we visited three MSAs--Phoenix, Tucson, and Yuma.  The
Phoenix MSA had a population of 2.4 million in 1992,\5

about 62 percent of Arizona's population.  This MSA had 31 banks, the
largest number in the state.  (See table I.3.) Phoenix is one of the
major locations where large banks make lending decisions, and it
contains the headquarters for the subsidiaries of Arizona's
out-of-state banks.  Phoenix's well developed, diversified economic
base includes manufacturing as its major income producer, electronic
production, which it is noted for, and tourism. 



                                    Table I.3
                     
                        Number of Banks for Three Arizona
                                Markets, 1984-1992

Market                      1984  1985  1986  1987  1988  1989  1990  1991  1992
--------------------------  ----  ----  ----  ----  ----  ----  ----  ----  ----
Phoenix                       31    37    42    44    39    38    33    33    31
Tucson                         7     8     8     9     9     8     8     9     9
Yuma                           7     7     7     6     7     7     7     8     8
--------------------------------------------------------------------------------
Source:  FDIC data book. 

Tucson, located about 117 miles southeast of Phoenix by car, had a
1992 population of 700,000.  This MSA had nine banks in 1992.  Like
Phoenix, Tucson is a major location where large banks make loan
decisions for Tucson and sometimes for other parts of the state. 
Tucson's principal economic activities include government and
university activities as well as services, tourism, and
high-technology manufacturing. 

Yuma County, a rural community that became an MSA in 1990, is located
in the southwest corner of the state.  It had an approximate 1992
population of 112,800.  As of 1992, all of the state's large banks
and three smaller banks had a presence in Yuma.  Some, but not all,
loan decisions by large banks are made in Yuma.  Yuma's economy is
based primarily on agriculture, the military, and tourism. 


--------------------
\5 As of 1992, the Phoenix MSA includes Maricopa and Pinal counties. 


   FOCUS GROUP DISCUSSIONS
--------------------------------------------------------- Appendix I:4

In 9 of the 11 markets we visited, we met with focus groups that
consisted of 5 to 10 participants who worked with small businesses on
financing issues.  In two rural markets (Yuma, Arizona and Yakima,
Washington), we were unable to identify enough knowledgeable
individuals to hold focus group discussions.  Therefore, we
interviewed the two or three key individuals in each area who, like
focus group participants, worked closely with small businesses on
financing issues.  The results of our focus group discussions include
the perspectives of these individuals, which we incorporate in our
report. 

We interviewed potential focus group participants by telephone and
selected those knowledgeable about small business credit issues. 
These individuals included administrators of nonprofit loan funds,
individuals who help businesses obtain bank financing for loans
guaranteed by the states or the federal Small Business Administration
(SBA), SBA officials, and directors of city and county economic
development departments.  Most of the focus groups included
participants who were former bankers. 

We asked each group a number of pretested general questions.  These
questions explored the participants' perceptions of

  -- whether small businesses were having problems obtaining credit;

  -- the nature of these credit problems; and

  -- the reasons for these problems, including any role played by
     interstate banking and in-state branching. 

We used a focus group format because it was one practical means to
obtain a "small business perspective" on banking issues.  Focus
groups generate a range of perspectives on a specific topic through
the use of informal discussions guided by a moderator.  The moderator
encourages participants to share their views and experiences on
specific topics.  However, this qualitative methodology is limited in
that it cannot (1) statistically estimate the extent of a problem or
generalize results to a larger population, (2) provide statistically
representative quantitative estimates, or (3) develop a consensus of
agreement among parties to any particular problem or solution. 


   STUDIES REVIEWED AND ADDITIONAL
   INTERVIEWS UNDERTAKEN
--------------------------------------------------------- Appendix I:5

To compare and contrast the results of our focus groups with other
types of research and individual perspectives, we reviewed relevant
studies on the availability of credit to small businesses and
interviewed lenders from two to four banks in each of the selected
markets that were major providers of small business loans.  These
providers included the largest interstate banks; prominent, smaller
banks in all three states; and large in-state banks in Arizona and
California.  Our interviews focused on

  -- how the various banks provided small business loans,

  -- whether some businesses were unable to obtain loans, and

  -- if so, the reasons why. 

Because of a lack of comparable lending data at a local market level,
we could not verify the perceptions expressed by focus group
participants and bankers about their markets.  Nevertheless, the
results of our focus groups and the additional interviews provided a
perspective that was generally consistent across all the markets we
visited.  We also reviewed SBA loan data from 1984 through June 1992. 


   LEGISLATIVE HISTORY REVIEWED
--------------------------------------------------------- Appendix I:6

We reviewed relevant federal laws and legislation, including the
Garn-St Germain Depository Institutions Act of 1982; the Competitive
Equality Banking Act of 1987; the Financial Institutions Reform,
Recovery and Enforcement Act of 1989; the Federal Deposit Insurance
Corporation Improvement Act of 1991; the Bank Holding Company Act of
1956; the McFadden Act of 1927; and the Interstate Banking Efficiency
Act of 1994.  We also reviewed the California, Washington, and
Arizona laws pertaining to interstate banking and in-state branching. 


THE BANKING STRUCTURE AND SMALL
BUSINESS LENDING IN CALIFORNIA
========================================================== Appendix II

California has permitted statewide branching for state banks since
the early part of this century and has had few restrictions on
in-state branching by out-of-state banks since 1987.  The state's
unrestricted in-state branching has contributed to a banking industry
that, when compared with many other states and with the country as a
whole, is more consolidated, with large banks owning most of the
banking assets.  Nevertheless, the state has a varied banking
structure.  In this structure, large, midsized, and smaller banks all
play roles in meeting the financial needs of consumers and
businesses.\1 The viability of smaller banks in the state has been
demonstrated by the increase in their share of the banking market for
nearly a decade.  This increase has occurred at the expense of large
banks with extensive statewide branch networks. 

Many factors influence the availability of credit for small
businesses, and California's unrestricted in-state branching could be
one.  However, a direct link between the state's small business
credit problems and the state's unrestricted branching structure
could not be established.  But unrestricted in-state branching does
allow banks to become larger, and as banks grow, the relationship
between the banker and the borrower may become depersonalized.  Some
focus group participants said that such a relationship could have
made it difficult for some small businesses to obtain loans.  Some
bankers, however, told us that overall centralization and
standardization allow large banks to increase their total amount of
small business lending.  Difficulties were mainly reported by focus
group participants in markets where there may have been few
alternatives to large banks.  These included (1) inner cities, (2)
depressed markets where smaller banks were suffering economically,
and (3) rural areas. 


--------------------
\1 The bank categories we used in this appendix are (1) large banks
with more than $10 billion in assets, (2) midsized banks with between
$1 billion and $10 billion in assets, and (3) smaller banks with less
than $1 billion in assets.  We used current dollars to determine
which banks belonged in each of these categories.  When comparing the
growth trends of banks across several years, however, we used
constant dollars to control for inflation. 


   CALIFORNIA'S ECONOMY
-------------------------------------------------------- Appendix II:1

In 1990, California ranked as one of the 12 largest economies in the
world, with the value of its goods and services estimated to be more
than $745 billion (12.35 percent of U.S.  goods and services). 

In 1989, California's economy completed 7 years of uninterrupted
growth.  During this 7-year expansion, employment, a key measure of a
state's economic health, grew at an average of 3.9 percent per year;
it increased by 418,000 jobs to a total of 12.5 million jobs in 1989. 
However, from May 1990 through February 1994, California lost
approximately 850,000 jobs due to the recession. 

California has weathered earlier national recessions better than it
has the most recent one.  In previous downturns, its population
growth and favorable mix of fast-growing industries buoyed its
economy.  Compared with the rest of the nation, during a recession,
California never seemed to lose as many jobs and was able to recover
much earlier.  However, in the most recent recession, California has
lagged behind the national recovery.  Although by December of 1992,
the recession in California had lasted longer and had been more
severe than expected, many economists believed that by 1994
California would have resumed its growth.  However, since then,
economic predictions have become less optimistic because of many
factors. 


   CALIFORNIA'S BANKING HISTORY
-------------------------------------------------------- Appendix II:2

California has permitted in-state branching for more than 80 years. 
Initially, however, few banks operated branch networks in the state. 
In 1905, for example, only five banks had branches. 

The first California bank to establish an extensive branch network
across the state was the Bank of Italy (now Bank of America).  In
1909, it began to buy existing banks, often those in financial
trouble, and by 1921, it had 34 branches and resources of more than
$1 billion. 

California has allowed interstate banking for only a few years. 
Beginning in July 1987, it allowed banking firms in 12 western states
to enter the state provided California banks were granted reciprocal
interstate banking privileges in those 12 states.  In early 1991,
California extended its interstate banking provisions to permit the
entry of banking firms from other states that would grant reciprocal
privileges to California bank holding companies. 

After California passed interstate banking laws in the late 1980s,
out-of-state bank holding companies entered the state by buying
smaller banks.  However, as of June 1993, less than 1 percent of its
banking assets were controlled by out-of-state U.S.  banks.  When
U.S.  banking assets held by a foreign activity are included in the
percentage of out-of-state banking assets, the number increases to
almost 15.4 percent. 

Several bankers told us that out-of-state bank holding companies have
not entered California on a large scale because they lacked the
necessary capital to acquire an adequate market share to compete with
the large banks already operating statewide.  However, several
regulators said that large out-of-state banks wanted to expand their
presence in California and would find a way to do so. 


   CALIFORNIA BANKING IS
   RELATIVELY CONSOLIDATED WHEN
   COMPARED TO MOST OTHER STATES
-------------------------------------------------------- Appendix II:3

California's long history of in-state branching has contributed to
its banking industry being more consolidated than that of most other
states.  Possibly because of the state's already high level of
consolidation, interstate banking has had little effect.  One common
measure of consolidation is the extent to which banking assets are
concentrated among a state's three largest banks.  Using this
measure, as of December 1992, California ranked 15th in
consolidation, with about 62 percent of its banking assets held by
its three largest banks.  By comparison, as of December 1992, Rhode
Island had the highest consolidation level--with its three largest
banks controlling nearly 91 percent of its assets; and Oklahoma, the
lowest consolidation level--with its three largest banks controlling
21.4 percent of its assets. 

Another measure of consolidation is the number of people each bank
holding company serves.  Using this measure, in 1992, California
ranked 10th, with each bank holding company serving 71,000 people. 
New York ranked as the most consolidated state, with 113,000 people
served per bank.  The least consolidated state was Nebraska, with
5,000 people served per bank. 


      RECENT TRENDS SHOW
      DECREASING CONSOLIDATION
------------------------------------------------------ Appendix II:3.1

Despite California's standing as a relatively consolidated banking
market, recent years have seen it becoming less consolidated as the
nation has become more so.  The total number of banks in the nation
has declined by 3,263 from 1984 through mid-1993, as shown in table
II.1.  This decline is attributable primarily to mergers (which were
facilitated by states allowing both in-state branching and interstate
banking) and failures. 



                                                                                      Table II.1
                                                                       
                                                                          Number of Banks Nationwide and in
                                                                                      California



Year                   Number   Percent    Number   Percent    Number   Percent     Total       Number      Percent       Number      Percent       Number      Percent        Total
-------------------  --------  --------  --------  --------  --------  --------  --------  -----------  -----------  -----------  -----------  -----------  -----------  -----------
1984                       24      0.2%       250      1.7%    14,182     98.1%    14,456            5         1.1%           12         2.7%          428        96.2%          445
1988                       40       0.3       319       2.4    13,090      97.3    15,562            5          1.1           14          3.0          452         96.0          471
1993\a                     53       0.5       316       2.8    11,193      96.7    13,449            4          0.9           15          3.4          426         95.7          445
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Note 1:  Large banks have more than $10 billion in assets; midsized
banks have from $1 billion to $10 billion in assets; and smaller
banks have less than $1 billion in assets.  We used current dollars
to determine which banks belonged in which category. 

Note 2:  Percentages may not add due to rounding. 

\a 1993 data are as of June 30.  All other data are as of December
31. 

Source:  FDIC call report data. 

In California, there was no net change in the number of banks between
1984 and mid-1993 (see table II.1).  Many new banks entered the state
during the 1980s, and consolidation followed in the early 1990s.  A
major reason for the increases in the new entries was the strong
California economy that existed during the 1980s, which created a
favorable environment in which new banks could form.  During this
period, California had no in-state branching restrictions and, in
1987, it began to remove interstate restrictions.  However, because
only a few out-of-state banks acquired or merged with existing
California banks, the state's removal of interstate banking
restrictions played a minor role in the decrease in the number of
banks, but the recession in the early 1990s contributed to a decrease
in the number of banks. 

The state's history of in-state branching has allowed large banks
with extensive branch networks to form.  Large banks made up a higher
proportion of banks and controlled a greater market share in
California than they did nationwide (see tables II.1 and II.2). 
Conversely, the market share of both midsized and smaller banks is
lower in California than it is in the rest of the nation.  However,
whereas large banks nationwide are increasing in number and in market
share, they are losing market share in California.  This may not be
surprising given the high concentration levels already existing in
that state. 



                               Table II.2
                
                Comparison of Market Share Held by Banks
                      Nationwide and in California



                                Midsiz  Smalle          Midsiz  Smalle
Year                     Large      ed       r   Large      ed       r
----------------------  ------  ------  ------  ------  ------  ------
1984                     34.6%   28.7%   36.6%   75.4%   11.7%   12.9%
1988                      37.3    31.6    31.1    70.2    11.9    17.9
1993\a                    43.4    28.3    28.3    67.6    13.3    19.1
----------------------------------------------------------------------
Note:  Large banks have more than $10 billion in assets; midsized
banks have from $1 billion to $10 billion in assets; and smaller
banks have less than $1 billion in assets.  We used current dollars
to determine which banks belonged in which category. 

\a 1993 data are as of June 30.  All other years are as of December
31. 

Source:  FDIC call report data. 


      MARKET SHARE AMONG LARGE
      BANKS AS A GROUP HAS
      DECREASED
------------------------------------------------------ Appendix II:3.2

Since 1984, California's midsized and smaller banks have increased
their market share, while its large banks as a group have lost market
share.  As of June 1993, the assets of the large banks in California
ranged from approximately $16 billion to nearly $134 billion.  These
banks comprised three in-state banks (Bank of America, Wells Fargo
Bank, and First Interstate Bank California) and one foreign-owned
bank (Union Bank).  In viewing California as an example of how the
country would fare under nationwide interstate banking and branching,
we considered its large banks with branches covering the state
analogous to interstate banks with extensive branch networks across
various states. 

The three in-state large banks had more extensive branch networks
than the foreign-owned bank, with Bank of America being the largest
in-state bank, followed by Wells Fargo Bank.  Two of the in-state
banks (Bank of America and First Interstate Bank California) also had
a substantial presence in other western states, including Washington
and Arizona. 

To assess the amount of assets and the percentage of market share
among the various banks in California, we used 1992 constant dollars. 
We used constant dollar comparisons to measure increases, or a lack
of increases, adjusting for any increase that was caused by
inflation.  Table II.3 shows that the total assets for large banks
decreased by nearly 22 percent between 1984 and mid-1993 and that
those for midsized and smaller banks increased by about 1 percent and
30 percent, respectively.  During the same period, large banks lost
nearly 8 percent of their market share, about two-thirds of which
went to smaller banks and one-third of which went to midsized banks. 



                                    Table II.3
                     
                     Comparison of California Banks by Asset
                              Size and Market Share

                       (Constant 1992 dollars in billions)


                                      Percentage                      Percentage
Bank category         1984    1993\a   of change      1984    1993\a   of change
------------------  ------  --------  ----------  --------  --------  ----------
Large               $286.0    $223.9      -21.7%     75.4%     67.6%       -7.8%
Midsized              44.3      43.9         -.9      11.7      13.3         1.6
Smaller               48.8      63.2        29.5      12.9      19.1         6.2
================================================================================
Total               $379.1    $331.0        6.9%    100.0%    100.0%        0.0%
--------------------------------------------------------------------------------
\a 1993 data are as of June 30.  All other data are as of December
31. 

Source:  FDIC call report data. 

According to our analysis, a large percentage of the loss in assets
and market share among the state's large banks occurred from the mid-
to late-1980s, after Bank of America and First Interstate Bank
California downsized to solve their financial problems. 


      MERGERS OF THE STATE'S
      LARGEST BANKS INCREASED
      MARKET SHARE
------------------------------------------------------ Appendix II:3.3

As of June 1993, although the market share of large banks was
declining overall, the two largest banks--Bank of America and Wells
Fargo Bank--had increased their individual shares by merging with
other large California banks in 1986 and 1992, respectively.  During
the recent merger in 1992 between BankAmerica Corporation (the
holding company for Bank of America) and Security Pacific Corporation
(the holding company for Security Pacific Bank), some consumers and
regulators expressed concern about the formation of such a large
bank.  Both federal and state regulators closely scrutinized the
proposed merger because of its size and potential for reducing
competition.  Although the merger produced a higher concentration
level for Bank of America, one state regulator, who was involved in
the merger's approval process, told us that the proposed merger was
not anticompetitive because it would not have created a monopoly or
made price collusion among banks more likely. 

Because nationwide interstate banking and branching may encourage
mergers among the country's largest banks by removing geographic
barriers, an increase in the market share of the largest banks at a
national or state level is a real possibility.  The Interstate
Banking Act addresses this concern by prohibiting interstate mergers
if the resulting bank would control more than 10 percent of the total
amount of deposits of insured depository institutions in the United
States or 30 percent or more of the deposits in any state affected by
the interstate merger.  States may waive the 30-percent limit.  Wells
Fargo Bank, the surviving bank from the 1986 merger between Wells
Fargo & Company and Crocker National Corporation (the holding company
for another large bank), retained the market share increases from
this merger.  In the case of the 1992 merger between BankAmerica
Corporation and Security Pacific Corporation, it is too soon to tell
whether or not the surviving bank, Bank of America, will retain its
market share increases in the future.\2

Table II.4 shows the asset sizes and market share of the state's
three largest banks in 1984, 1986, 1989, and June 1993.  In 1984,
Bank of America reached its peak asset size.  Then from 1986 through
1989, its size and market share decreased in part due to its
financial problems.  This downsizing reduced the gap between Bank of
America and Security Pacific Bank, the state's second largest bank
during that period.  Bank of America declined from approximately 2.6
times to 1.6 times the size of Security Pacific Bank. 



                                    Table II.4
                     
                     Changes Among California's Three Largest
                         Banks Between 1984 and June 1993

                       (Constant 1992 dollars in billions)


                      Percentage              Percentage              Percentage
                       of market               of market               of market
Year      Asset size       share  Asset size       share  Asset size       share
--------  ----------  ----------  ----------  ----------  ----------  ----------
1984          $141.5       37.3%       $54.6       14.4%       $32.7        8.6%
1986           118.0        31.4        61.3        16.3        50.6        13.5
1989            98.8        26.8        61.9        16.8        51.9        14.1
1993\a         136.6        41.3          \b          \b        50.9        15.4
--------------------------------------------------------------------------------
\a 1993 data are as of June 30.  All other data are as of December
31. 

\b Security Pacific Bank data were not available for 1993 because it
had merged with Bank of America. 

Source:  FDIC call report data. 

In 1986, when Bank of America was beginning to downsize, Wells Fargo
& Company (the holding company for the state's third largest bank)
bought Crocker National Corporation (the holding company for
California's largest foreign-owned bank at that time).  This merger
increased Wells Fargo Bank's assets from $32.7 billion to $50.9
billion and brought its asset size closer to that of Security Pacific
Bank's $61.9 billion.\3 The merger also increased the market share of
Wells Fargo Bank by more than one-third (from 8.6 percent to 13.5
percent), and this greater presence made it more able to compete
against other large banks in the state. 

The Wells-Crocker merger also resulted in the demise of Crocker
National Bank, a large bank.  Within a few years, however, a midsized
bank grew into a large bank, returning the number of large banks in
the state to five.  In 1988, Bank of Tokyo, the owner of a midsized
foreign-owned bank operating in California under the name Union Bank,
merged with another foreign-owned bank about two-thirds of its size. 
This merger increased Union Bank's assets to more than $18 billion in
current dollars.\4 Its market share also increased from 3.2 percent
to about 5 percent and has changed little through June 1993. 

In 1992, the second large merger in California occurred.  In this
merger, BankAmerica Corporation merged with Security Pacific
Corporation.  This merger led to the elimination of the state's
second largest bank, Security Pacific Bank, and increased the size of
the state's largest bank, Bank of America.  By June 1993, Bank of
America's assets increased by nearly $33 billion to $136.6 billion,
and its market share increased by more than 13 percent to 41.3
percent.  The second largest bank in 1993 was Wells Fargo Bank, which
was less than half the size of Bank of America.  As of mid-1993,
Wells Fargo Bank had $50.9 billion in assets and a market share of
15.4 percent. 

A comparison of the two largest banks in 1984 and June 1993 (in
constant 1992 dollars) can provide insight into how the merger
between BankAmerica Corporation and Security Pacific Corporation
changed the structure of the large bank market in California.  Table
II.4 shows that in 1984, before it began downsizing, Bank of America
was nearly $5 billion larger than it was in 1993, after the merger. 
Moreover, the merger did not significantly increase Bank of America's
size relative to the number two bank (Security Pacific Bank in 1984
and Wells Fargo Bank in 1993).  It was about 2.6 times as large as
the second largest bank in 1984 and 2.7 times as large in 1993. 

The merger structurally affected Bank of America's market share,
however.  For the period we focused on before the merger, Bank of
America's largest portion of the market was 37.3 percent in 1984;
whereas in 1993, after the merger, its share was 41.3 percent (see
table II.4).  In comparison, from December 1984 through June 1993,
the market share of the second largest bank increased 1 percentage
point, from 14.4 percent to 15.4 percent.  Moreover, the gap in
market share between Bank of America and the second largest bank
widened as a result of the merger.  In 1984, Bank of America's market
share exceeded that of the second largest bank--Security Pacific--by
23 percentage points, and in June 1993, when Wells Fargo Bank was the
second largest bank, this margin increased to about 26 percentage
points. 

Although federal and state regulators did not believe that Bank of
America's post-merger size posed a threat to competition in most
markets in California, they recommended that it divest a number of
branches it had in certain markets that the regulators viewed as
being susceptible to anticompetitive effects.  During the merger
approval process, the regulators conducted an analysis within local
markets to determine whether the merger would cause an impact on
competition.  In markets where they felt the merger was potentially
anticompetitive, they obtained BankAmerica Corporation's agreement to
divest a portion of its branches to another competitor.  In total,
BankAmerica Corporation divested 53 of its branches to Union Bank and
U.S.  Bank. 

The local market analysis conducted by the regulators also included
the regulators' calculation of the Herfindahl-Hirschman Index (HHI). 
HHI measures concentration of market share by adding together the
squares of the percentages of total deposits each bank or thrift
holds in a local market.  This calculation accounts for both the
number of banks and thrifts in a market and their relative
sizes--since squaring the market shares emphasizes the larger
organizations.  The maximum value of the HHI is 10,000 (100 percent
squared) for a market with only 1 bank or thrift, while the minimum
approaches 0 for a market with a very large number of similarly sized
banks and thrifts. 

In general, regulators will further investigate the effect of any
merger that could add 200 or more points to a local HHI of 1,800 or
higher.\5 An HHI of 1,800 corresponds to a market in which the top 3
or 4 banking companies account for about 70 percent of the market
share. 

Of the 30 markets where BankAmerica divested branches, 14 were above
the 1,800 cutoff before the merger and were projected to have no
change in their HHIs with the divestiture.  In the remaining 16
markets that were below the 1,800 cutoff, 3 experienced no change in
the HHI after the divestiture, and 13 had a change of between 20 and
676 points. 


--------------------
\2 Mergers can result in a loss of market share.  For example, some
customers may choose to leave the newly formed larger bank for a
variety of reasons.  Bankers from smaller banks told us that this
"run-off" often results in their customer base increasing, thus, they
do not feel threatened by mergers within their communities. 

\3 Unless stated otherwise, asset sizes are in constant 1992 dollars. 
The current dollar figures for these banks are:  Wells Fargo at $23.5
billion in assets before the merger and $39.2 billion after the
merger; and Security Pacific at $47.5 billion. 

\4 In constant 1992 dollars, Union Bank would have been classified as
a large bank at least since 1984 because its assets were more than
$10 billion. 

\5 For more information on the merger approval process, see
GAO/GGD-94-26. 


   SMALLER BANKS WERE VIABLE UNDER
   UNRESTRICTED IN-STATE BRANCHING
-------------------------------------------------------- Appendix II:4

Because smaller banks have existed alongside large banks with
extensive branch networks for decades in the state, California
provided us with some particularly useful insights into the question
of the survival of smaller banks.  The smaller banks distinguished
themselves from their larger counterparts by carving out specialized
niches, such as agricultural or SBA lending and offering personalized
service.  For this reason, regulators, bankers, and many industry
experts told us that although individual smaller banks may have come
and gone, their survival as a group was ensured. 

Smaller banks generally operated in one or two markets and were
commonly found in both urban and rural areas.  Smaller banks tended
to make fewer loans as a percentage of assets than either large or
midsized banks, and their loan portfolios tended to be more oriented
toward commercial rather than consumer loans. 

Market share data, profitability indicators, and perceptions of
regulators, bankers, and industry experts, all led us to the
conclusion that smaller banks were a profitable and viable part of
California's banking industry.  Smaller banks have successfully
competed in an environment where large banks control more than 50
percent of the banking assets and operate without substantial
branching restrictions. 

The profitability of smaller banks varied with size.  Those with
assets of $100 million to $1 billion earned the most consistently
high return on assets (ROA) of any bank category from 1984 through
1992.  However, those with less than $100 million generally earned
among the lowest ROAs over this period.  (See fig.  II.1.)

   Figure II.1:  ROA by Asset Size
   for California Banks

   (See figure in printed
   edition.)

Note:  Large banks experienced a significant decline in ROA in 1987
because Bank of America, Security Pacific, and First Interstate all
had negative ROAs that year. 

Source:  FDIC call report data. 

Forty-five regulators, bankers, and industry experts we spoke with in
California provided us with further indications of the viability of
smaller banks.  They contended that smaller banks were a viable part
of the banking industry in California, effectively competing against
both midsized and large banks with extensive branch networks.  Many
of them also noted that the success of smaller banks in an
unrestricted in-state branching state, such as California, suggested
that smaller banks would continue to be a viable component of the
banking industry nationwide under interstate banking and branching. 

Most of the 17 bankers from smaller banks we spoke with in California
believed that large banks, regardless of whether they were in- or
out-of-state banks, did not threaten their survival.  For example,
two bankers mentioned that a large bank's acquisition of a bank in
their community would be an opportunity to increase their own market
share.  They would expect some of the customers at the "target bank"
to switch to a different bank because of unfamiliarity with the
acquiring bank.  Also, according to several federal regulators, if a
large, nonlocal bank buys the only remaining smaller bank in an area,
within a few years a new local smaller bank is often formed. 

The number of smaller banks fluctuated greatly within California
between December 1984 and June 1993.  Regulators and bankers
attributed such changes to economic cycles, not to competition from
large banks with extensive branch networks.  According to regulators,
smaller banks that were dependent on a local economy were more likely
to experience problems during economic downturns than larger, more
geographically diversified banks.  Full nationwide interstate banking
was often cited as beneficial, in part, because it can facilitate
such diversification.  However, regulators cautioned us that
geographic diversification in and of itself does not ensure that
banks will never get into financial trouble.  They believed that the
management philosophy of a bank was more of a primary determinant of
safety and soundness. 

The number of smaller banks increased from 428 in 1984 to a peak of
460 in 1990.  New bank entry into California was especially prolific
in the mid-1980s, coinciding with the state's strong economic growth. 
Fewer mergers occurred in 1985 and 1986 than in most other years
through 1992, and most of the consolidation that did occur consisted
of smaller banks that were purchased by other smaller banks. 
Beginning in 1987, however, the rate of consolidation started to
increase as banks with assets of more than $1 billion became more
active acquirers.  During the 1991 and 1992 recession, the number of
smaller banks declined by 22, as consolidation more than offset new
bank entry.  By mid-1993, there were 426 smaller banks, two less than
in 1984. 

The total market share of smaller banks steadily increased from 12.9
percent in 1984 to 19.1 percent in 1993, despite the recent decrease
in their numbers.  This approximate 6-percent increase was generally
taken from large banks, which lost about 8 percent of their market
share during this period. 

While smaller banks as a group were recapturing market share, a
divergent trend was occurring within the group.  That is, the market
share held by banks with assets of less than $100 million declined
from 4.7 percent to 3.9 percent, while the market share for banks
with assets from $100 million to $1 billion increased from 8.2
percent to 13.3 percent. 


   MIDSIZED BANKS WERE VIABLE
   UNDER UNRESTRICTED IN-STATE
   BRANCHING
-------------------------------------------------------- Appendix II:5

Another bank category that regulators identified as being at risk
under nationwide interstate banking and branching was the midsized
bank.  According to regulators, such banks were often seen as
attractive targets for acquisition by interstate banks.  However, the
potential of such banks for acquisition does not mean that they will
cease to exist as a group. 

Midsized banks had expanded in California over the period we focused
on, both in number and market share.  This expansion showed that they
were a viable part of the California banking industry.  They were not
only successfully competing but were gaining market share largely
from the type of banks that opponents of interstate banking and
branching feared could come to excessively dominate the
industry--large banks with extensive branch networks covering a wide
geographic area. 

In California, midsized banks had from $1 billion to $10 billion in
assets and consisted of both foreign- and domestic-owned banks.  As
of June 1993, there were 15 such banks in the state.  These banks
tended to operate in the state's MSAs, particularly its two largest
MSAs--the Los Angeles Basin and the San Francisco Bay Area.  In
general, their lending is more commercial than consumer oriented. 

Foreign-owned banks, many of which are Japanese-owned, were a major
component of the midsized bank category in California.  During the
period 1984 through 1993, foreign-owned midsized banks accounted for
a high of about two-thirds and a low of about one-third of the banks
in this category.  These banks tended to be located in midsized and
large urban areas, where there were significant concentrations of
business customers.  Foreign-owned banks tended to make more loans
than did the domestic midsized banks overall and they emphasized
commercial lending over consumer lending more so than did the
domestic banks. 

As a group, midsized banks often earned the lowest ROAs of any bank
category between 1984 and 1992.  (See fig.  II.1.) ROAs ranged from
.22 percent to .75 percent.  Foreign-owned banks accounted for a
significant portion of the comparatively low ROAs in this category. 
The ROAs of domestic midsized banks were either the highest or among
the highest when compared to other bank sizes in most years between
1984 and 1992. 

Midsized banks were thought to be likely targets for future
out-of-state acquisitions, both in California and nationwide.  For
example, California regulators believed that large out-of-state banks
would most likely expand their presence in California by purchasing
midsized banks, because such banks operate in urban markets that are
attractive to these potential acquirers. 

The attractiveness of midsized banks to out-of-state acquirers does
not mean, however, that these banks will no longer exist as a group. 
In California, although some midsized banks have been purchased by
larger banks, others have been bought by other midsized banks, and
remain within this bank category.  Still others have survived intact. 

Between 1984 and 1987, the number of midsized banks in California
increased from 12 to 19, then declined to 15 as of June 1993.  The
market share of such banks followed a similar pattern, increasing
from 11.7 percent in 1984 to nearly 18 percent in 1987 and decreasing
to 13.3 percent by mid-1993.  The 1.6 percent net increase in market
share from 1984 to 1993 was gained from the large banks, which was
the only bank category experiencing a net decline during this time. 


   RESEARCH HAS BEEN UNABLE TO
   EXPLAIN THE PRICING OF
   CALIFORNIA BANKING SERVICES
-------------------------------------------------------- Appendix II:6

The pricing of banking services is another area of concern.  In
California, consumer groups and the media have suggested that they
believed California banks offered lower interest rates on deposits
than banks in other parts of the country.  A 1990 study conducted by
the Federal Reserve Bank of San Francisco explored whether these
pricing differences existed and, if so, the reasons for them.\6 The
authors of the study looked at transaction accounts\7 and
certificates of deposits (CD) and found that California banks clearly
offered lower interest rates than the rest of the country on
transaction accounts but not necessarily on CDs.\8

The authors could not determine why California pricing differed from
that of the rest of the country.  However, they did find that some
differences were partially explained because (1) the characteristics
of bank markets in California differed from those in the rest of the
country and (2) California banks responded to the determinants of
deposit rates differently than their counterparts did elsewhere. 

The authors then speculated that interstate banking and branching may
have contributed to California banks tending to set interest rates
differently from their counterparts elsewhere.  That is, entry by
only a few out-of-state banks in California may have shielded
California banks from influences outside the state's borders.  If
more non-California banks enter the state in the future, a key
question may be whether these banks will continue to set deposit
interest rates as they did outside the state or whether they will
respond like their California counterparts in setting these rates. 


--------------------
\6 Bank Pricing of Retail Deposit Accounts and "The California Rate
Mystery," Jonathan A.  Neuberger and Gary C.  Zimmerman, Federal
Reserve Bank of San Francisco, (Spring 1990). 

\7 Transaction accounts consisted of negotiable order of withdrawal
accounts and money market deposit accounts. 

\8 The study examined interest rates paid on the various accounts
from 1984 to 1987, using a sample of 435 banks nationwide and 29
California banks. 


   SMALL BUSINESS LENDING
   EXPERIENCE IN CALIFORNIA UNDER
   UNRESTRICTED IN-STATE BRANCHING
-------------------------------------------------------- Appendix II:7

Bankers and small business representatives told us that some small
businesses in certain types of markets in California were having
difficulty obtaining loans.  However, we were unable to determine if
this difficulty was the direct result of unrestricted in-state
branching because many factors (e.g., poor economic conditions and
regulation) were seen by bankers, focus group participants, and
industry experts as contributing to credit availability problems. 

Focus group participants and some bankers told us that the practices
of centralizing and standardizing loan decisions, common to large
banks, could result in some small businesses having difficulty
obtaining credit in markets where there were few alternatives to
large banks.  These businesses could have difficulty because the
relationship between the banker and the borrower becomes
depersonalized under such lending practices, which would make it
difficult to fund would-be borrowers who may be creditworthy but not
"gold plated." However, other bankers told us that although it may be
true that some small businesses may find credit more difficult to
obtain, overall, centralization and standardization allow large banks
to increase their total amount of small business lending. 


      DATA ON SMALL BUSINESS
      LENDING IS INCOMPLETE
------------------------------------------------------ Appendix II:7.1

One step in the determination of whether unrestricted in-state
branching affects small business lending is to ascertain (1) which
type of banks--large banks with extensive branch networks or smaller
banks--are the more common providers of small business loans and (2)
the extent of their business lending.  Although data was limited on
this subject, two sources--quarterly statements banks submit to
regulators, known as call reports, and SBA loans--showed that all
types of banks were key providers of commercial loans. 

Although call reports are a major source of lending data, they are
limited because (1) until June 1993, they reported only the total
amount of commercial lending done by different sizes of banks and
thus did not list separately the amount of small business lending and
(2) some small businesses may obtain financing through home equity,
credit card, or other types of loans not classified as commercial
lending.  Nevertheless, call report data provided us with an insight
into the type and amount of commercial lending generally undertaken
by banks. 

Our analysis of these data indicated that from 1985 through 1992
midsized and smaller banks devoted a higher proportion of their
assets to commercial lending.  Figure II.2 shows the commercial
loan-to-asset ratio by year.  Depending on the year, midsized banks
had a commercial loan-to-asset ratio that ranged from 38 to 42
percent, smaller banks had a ratio that ranged from 34 to 43 percent,
and large banks' ratio ranged from 29 to 35 percent.\9

Also during this period, smaller and midsized banks increased their
total amount of commercial lending, whereas large banks decreased
theirs.  Commercial lending included both commercial and industrial
(C&I) loans and commercial real estate loans.\10

   Figure II.2:  Percentage of
   Assets in Commercial Lending in
   California

   (See figure in printed
   edition.)

Note:  Commercial lending included both C&I loans and commercial real
estate loans. 

Source:  FDIC call report data. 

Types of commercial lending also differed among the three bank
categories.  Figure II.3 shows that midsized and smaller banks
generally provided more commercial real estate loans than C&I loans,
whereas large banks did the opposite.  It also shows that although
all three bank categories increased their real estate lending over
the period, smaller banks and midsized banks had the greatest
increases.  In addition, as real estate lending increased for each
bank category, C&I lending decreased. 

   Figure II.3:  Commercial
   Lending in California

   (See figure in printed
   edition.)

Source:  FDIC call report data. 

June 1993 FDIC call report data contained, for the first time, the
number and amount of outstanding small business loans.  Small
business lending encompassed all commercial real estate and C&I loans
of less than $1 million.  However, because June 1993 was the first
time that these data had been collected, regulators cautioned that
the potential for reporting errors was greater than usual because
banks could possibly misinterpret the instructions or have
uncertainties about the classification of specific information, or
because of other factors. 

Our analysis of June 1993 call report data showed that of the three
bank categories, smaller banks devoted a higher percentage of their
assets to small business commercial lending.  The data also showed
that smaller banks provided the most credit to small businesses.  For
the 3 months ending June 1993, smaller banks made commercial loans
(i.e., C&I and commercial real estate) that totaled nearly $13
million, or 20.9 percent of their assets.  This amount was more than
twice the dollar amount provided by large banks and more than three
times the amount provided by midsized banks.  Midsized banks provided
the least amount of credit at $4 million.  Although midsized banks
committed less money to small businesses, they provided a greater
percentage of their assets, 9.3 percent, as compared to large banks'
2.9 percent.  We also found that these trends did not change when C&I
loans and commercial real estate loans were analyzed separately. 

In doing our review of SBA lending in California, we learned more
about the type of small business lending done by different sized
banks.  We also obtained some insights into the role nonbanks\11

play in providing this type of credit.  Our review showed that SBA
guaranteed loans are made primarily by smaller banks and nonbanks. 

SBA loans are long-term loans, generally made for 6 or more years
with SBA guaranteeing up to 90 percent of the loan amount.  In a 1983
report, we estimated that 30 to 40 percent of all long-term small
business loans were guaranteed by SBA.\12 Although this report is
several years old, it is the most current estimate of the magnitude
of SBA loans to the small business community. 

Table II.5 shows smaller banks making the majority of SBA loans,
followed by nonbanks.  Large and midsized banks provided relatively
few SBA loans. 



                               Table II.5
                
                  SBA Lending in California by Type of
                       Institution for 1988-1992

                                                            Percentage
                                                Number of     of total
Type of institution                                 loans      lending
--------------------------------------------  -----------  -----------
Smaller banks                                       9,818        68.5%
Nonbanks                                            3,207         22.4
Large banks                                           496          3.5
Thrifts and saving banks                              476          3.3
Midsized banks                                        330          2.3
----------------------------------------------------------------------
Source:  SBA data. 

According to an SBA official, large banks used to be strong providers
of SBA loans but largely dropped out of this market in the early
1980s.  The proportion of SBA loans made by Bank of America, Security
Pacific Bank, First Interstate Bank California, Wells Fargo Bank, and
Union Bank declined from 20.1 percent in 1984 to 3.7 percent in 1992. 
However, this same official commented that large banks have recently
begun to express interest in becoming more active SBA lenders. 


--------------------
\9 In absolute dollars, large banks made the most commercial loans. 
In 1992, for example, total commercial loans from (1) large banks
were $65.9 billion, (2) midsized banks were $19.4 billion, and (3)
smaller banks were $27.2 billion. 

\10 Commercial real estate loans included all commercial loans,
regardless of purpose, that were secured by real estate.  C&I loans
included all commercial loans that were secured by something other
than real estate or were unsecured.  Thus, if a bank made a loan to a
firm that was secured by real estate it would be a commercial real
estate loan.  However, if that same loan was secured with something
other than real estate collateral, it would be a C&I loan. 

\11 Nonbanks include private companies specializing in SBA loans,
such as The Money Store, bid companies, nonprofit and public
certified development corporations, and loan funds. 

\12 SBA's 7(a) Loan Guarantee Program:  An Assessment of Its Role in
the Financial Market (GAO/RCED-83-96, Apr.  25, 1983). 


      OTHER SOURCES OF SMALL
      BUSINESS LENDING
------------------------------------------------------ Appendix II:7.2

In the markets we visited in California, nonbanks, as shown in table
II.5, were a source of loans for small businesses.  Nonbanks included
nondeposit institutions, finance companies, and nonprofit and public
loan funds.  These loan funds, which are managed by city or county
agencies, typically provided loans to small businesses for which
credit was not otherwise available.  However, because the amount of
their funding was limited, these funds could not meet all demands. 


      TREND TOWARD CENTRALIZED AND
      STANDARDIZED LOAN DECISIONS
------------------------------------------------------ Appendix II:7.3

Large banks in California were seen as important sources of small
business financing by bankers and focus group participants.  However,
the way each of these banks goes about lending was changing toward a
more centralized and standardized process.  These changes resulted
from the banks' attempts to improve efficiency and performance,
instead of as a direct consequence of in-state branching, interstate
banking, and consolidation. 

Officials at several large banks said that their banks did not
aggressively target small business loans in the 1980s because they
did not find such loans profitable.  According to the officials,
although the loans were made in the branches by branch managers,
strategies were not developed to make this lending cost-effective. 
For example, making a small loan was as costly as making a large
loan; therefore, to earn a higher return, bankers preferred to focus
on making larger loans. 

However, the four largest banks have changed their small business
lending strategy.  Senior officials from these banks viewed small
businesses as belonging to a sector with opportunities for profit. 
These officials told us that large banks were now aggressively going
after small business loans.  Through centralized and standardized
decisionmaking processes, they believed that they could make these
types of loans profitably.  Under such decisionmaking, small business
loans were no longer made by branches at the three largest banks but
by loan officers in central processing centers.  The fourth bank's
loan officers, while in the branch, reported to regional senior loan
officers.  Because an objective process was needed to monitor a large
volume of loans, centralization led to standardized underwriting
criteria. 


      CENTRALIZATION MAY AFFECT
      CREDIT AVAILABILITY
------------------------------------------------------ Appendix II:7.4

Because available data do not fully address credit availability
issues for small businesses, we selected four markets to review for
more insight into these issues.\13 We interviewed regulators,
industry experts, and bankers from large and small banks and held
focus group discussions with individuals who worked with small
businesses on financing issues.  In discussions with our California
focus groups, we found a possible indirect effect of in-state
branching on small business credit availability.  This effect was
that small businesses had difficulties in obtaining certain types of
loans because of the increased centralization and standardization of
lending decisions.  These difficulties consisted of some small
businesses either not being able to obtain credit or eventually
obtaining it only after approaching several banks.  This lengthy
search for a lender was reportedly costly and resulted in missed
opportunities. 

The most prevalent view among bankers from smaller banks we
interviewed and focus group participants was that centralized and
standardized decisionmaking was one of several factors that impaired
credit availability for some types of small businesses.  Many focus
group participants and bankers told us that central decisionmakers of
large banks lacked local knowledge, provided little personalized
assistance, and were less likely to consider special circumstances. 
Focus group participants and bankers from smaller banks attributed
credit difficulties to economic and regulatory factors, as well as to
the lending practices of large banks. 

Although bankers from large banks believed that centralized and
standardized decisionmaking had the potential to provide more
business loans, most also recognized that loans to certain applicants
could be denied.  According to one banker from a bank that used a
standardized process known as credit scoring, a loan that was
declined was not necessarily a bad loan.  However, if 10 loans like
it were to be made, the bank would run the risk that one of these 10
would fail, which would eliminate all profits from the other 9 loans. 
Because the scoring model could not predict which of the 10 borrowers
would be the one most likely to default, the bank must decline all
the loan applications in this category.  Although the scoring system
might protect the bank from defaults and increase the bank's total
amount of small business lending, it could result in the bank
rejecting loan applications that could have been repaid by the
would-be borrowers. 

Focus group participants and some bankers described the types of
small businesses likely to have problems obtaining loans as those
businesses

  -- whose financial statements were unusual, such as nonprofit firms
     or companies whose profits were cyclical;

  -- needing small loans, such as loans for less than $100,000, or
     unsecured lines of working capital;

  -- that were new or did not have 3 years of profitability; and

  -- that were well-run, established companies in "high-risk"
     industries, which in California included real estate and timber. 

Most bankers at large banks told us that centralized decisionmaking
encourages small business lending.  For example, one large California
bank installed a system whereby loans of less than $250,000 were
referred to a central "community banking group." Loan officers in
this group had expertise in credit analysis for specific industries
as well as an incentive to make small business loans.  The bank
relied on input from the branch manager for familiarity with the
borrower.  Bank officials believed that this system allowed the bank
to meet the banking needs better than it could when branch managers
were making the decisions because these managers lacked the necessary
expertise and, as we previously mentioned, small loans made on a
case-by-case basis were often not profitable for larger banks. 

This bank appears to be an example of an observation made by some of
our focus group participants:  that the degree of small business
lending depends more on a bank's lending philosophy than on its size
or processes.  For example, participants told us that when an
out-of-state bank bought a thrift in northern California, it began
providing greatly needed small business loans.  Another participant,
who operated the state's equivalent to the SBA loan guaranty program,
cited a smaller bank that had been a strong agricultural and small
business lender.  When that bank was acquired by a large bank, this
participant said that it stopped providing many agricultural-related
loans, which hurt small business. 


--------------------
\13 The markets we selected were San Francisco; Los Angeles; Fresno;
and rural northern California, which consisted of 14 northern rural
counties.  See appendix I for a brief description of each market. 


      CREDIT AVAILABILITY PROBLEMS
      REPORTED IN CERTAIN TYPES OF
      MARKETS
------------------------------------------------------ Appendix II:7.5

Centralization and standardization and industry consolidation were
seen by focus group participants as a problem in markets where they
perceived that there were not sufficient alternatives to large banks. 
Types of markets specifically mentioned by participants were inner
cities; depressed markets, where smaller banks were experiencing an
economic downturn; and rural areas. 

Several focus group participants expressed concern that certain large
banks, with loan centers located in other areas, do not make certain
loans because the decisionmakers are unfamiliar with the inner city
markets.  The participants believed that inner cities are
particularly susceptible to this problem because of a built-in
predisposition for banks to view these communities as "high risk"
areas, regardless of the creditworthiness of the businesses located
within them. 

One participant related the following example.  An owner of three
small food markets in Los Angeles, who had been in business for 25
years and had excellent collateral, needed an $800,000 loan to
renovate one of his stores in a poor section of the city.  Working
with the Los Angeles Department of Community Development, the owner
approached the community reinvestment officers of five large and
midsized banks, all of whom felt that it was a good loan.  According
to the focus group participant who worked with the owner to obtain
financing, the commercial lending groups of each bank, however,
turned down the loan because they viewed the community in which the
store was located as a risky area.  After turning it down twice, a
large bank finally agreed to fund $500,000 of the request because the
city's development department agreed to fund the rest of the loan, or
$300,000. 

The focus group participant relating this story believed that
communities such as this one suffered because they contained few
locally based banks.  He contended that local banks were more likely
than those who made lending decisions outside of the community to
look beyond a neighborhood's problems or "riskiness" and place more
emphasis on whether the loans were good and the value that such loans
might bring to the community. 

Similar difficulties were seen for small businesses in depressed
markets, where smaller banks were experiencing an economic downturn. 
Some focus group participants and bankers we spoke with mentioned
that smaller banks had cut back on their small business lending as a
result of this downturn. 

The final areas about which credit access problems were frequently
mentioned by focus group participants and some bankers were rural
areas.  These localities typically had fewer banks, regardless of
branching laws.  Mergers and new entries were also comparatively
rare.  In California, as of year-end 1992, 5 of 27 rural counties
lacked smaller banks, and in another one, smaller banks had less than
a 5-percent share of the market. 

A Department of Agriculture study noted that under interstate banking
and in-state branching, while the number of banks in rural areas was
declining, bank branches were becoming more numerous.\14

In 1986, almost 69 percent of the rural bank offices in California
were controlled by urban-based bank organizations (banks and bank
holding companies).  The study viewed this trend as broadening the
choices of rural borrowers and also noted that for many it raised
concern about the loss of local decisionmaking for loans.  In
addition, rural focus group participants mentioned more stringent
regulatory requirements as another factor in the credit difficulties
of small businesses. 

Rural focus group participants also noted difficulties in small
businesses obtaining credit that were usually attributed, at least in
part, to centralized and standardized decisionmaking and the scarcity
of smaller banks.  Under this type of decisionmaking, these
participants believed that urban bank policies might be misapplied to
rural markets. 

For example, in Del Norte County, an urgent-care doctor's facility
needed a $1.3 million loan to buy the property.  One of the banks in
town could justify lending only $950,000.  According to a participant
who was the administrator of a loan fund, the problem was that this
bank analyzed the loan using criteria that were appropriate for an
urban, not a rural, area.  The bank emphasized the lease analysis in
its decisionmaking and was concerned because there were few other
potential occupants for this type of building should the facility
fail and the building become vacant.  In the participant's opinion,
the bank should have focused instead on the cash flow of the urgent
care center.  Eventually, a smaller bank provided the entire amount. 


--------------------
\14 Deregulation and the Structure of Rural Financial Markets, Rural
Development Research Report No.  75, Economic Research Service. 


THE BANKING STRUCTURE AND SMALL
BUSINESS LENDING IN WASHINGTON
========================================================= Appendix III

Since the introduction of interstate banking in 1987, when
out-of-state holding companies first could acquire healthy banks in
Washington, out-of-state acquisitions have left most of Washington's
banking assets in the hands of large interstate banks.  Because of
their concerns over the planned merger between the two largest banks
in the state, Seattle-First National Bank and Security Pacific Bank,
regulators took action to ensure that the state's banking structure
remained potentially competitive. 

However, interstate banking did not alter the distribution of the
market share of large and smaller banks.\1 Despite some reduction in
number among smaller banks, the distribution of market share between
large and smaller banks changed little from December 1984 to June
1993.  Further, smaller banks as a group remained profitable. 

Because many factors influence the availability of credit to small
businesses, we were unable to determine whether interstate banking in
and of itself made more or less credit available to small businesses. 
While interstate banking and branching has the potential to increase
credit availability, some small business experts who work with small
businesses on financing issues were concerned about how large banks
were making their loans.  As borrowers in some markets have become
more reliant on large banks, the centralized and standardized
decisionmaking practices used by these banks reportedly have made it
more difficult for some small businesses to obtain credit.  Some
bankers, however, told us that overall centralization and
standardization allow large banks to increase their total amount of
small business lending. 


--------------------
\1 In appendix II we used the term "large banks" to refer to those
with assets of more than $10 billion.  However, only one such bank
existed in either Washington or Arizona for all but 1 of the years on
which we focused.  Therefore, in appendixes III and IV, we used the
term "large banks" to refer to banks with assets of more than $1
billion.  Thus, we do not discuss "midsized" banks in these
appendixes.  As we did in appendix II, we used current dollars to
determine which categories banks belonged in and used constant
dollars when comparing growth trends across several years. 


   WASHINGTON'S ECONOMY
------------------------------------------------------- Appendix III:1

Since becoming a state, Washington's economic growth rate has
generally exceeded the growth rate of the nation as a whole.  Its
economy was the 17th largest in the nation in 1989, with the total
value of goods and services produced within its borders totaling $96
billion. 

The last 2 decades in Washington have generally been marked by strong
economic growth.  The state's economy has diversified beyond its
primary goods-producing industries of aerospace, forest products,
food processing, primary metals, and agriculture into other
manufacturing and service industries.  Moreover, real personal income
growth for the state accelerated to 5 percent in fiscal year 1990,
the strongest annual increase since the 1970s. 

While Washington also experienced the effects of the national
recession in 1992, the recession was not as deep or as prolonged as
it was in California.  For example, although the employment level
declined in both states and in the nation in the early 1990s,
Washington increased employment overall, despite losing jobs in some
sectors.  From 1990 through 1992, the nation's employment level
decreased by more than 1 percent and California's decreased by nearly
5.4 percent, but Washington's increased by 3 percent. 


   WASHINGTON'S BANKING HISTORY
------------------------------------------------------- Appendix III:2

Washington passed interstate banking in two phases.  In 1983,
out-of-state bank holding companies could purchase failing in-state
banks as long as no banks operating in the state were willing to
purchase these failing banks under terms at least as favorable as
those of the out-of-state bank holding company.  In this manner, Bank
of America acquired financially troubled Seattle-First National Bank
in 1984 (commonly known as SeaFirst Bank), the state's largest bank. 

The only other out-of-state banks in 1984 were a smaller bank,
Western National Bank, and a large bank, First Interstate Bank
Washington, which was also California based.  First Interstate Bank
entered the state before the Douglas Amendment to the Bank Holding
Company Act of 1956 was passed.\2 As such, First Interstate Bank in
Washington and several other states were grandfathered under this
act.  In 1984, the three out-of-state banks accounted for 39.7
percent of the state's banking assets. 

All remaining banks in 1984 were in-state and consisted of

  -- four large banks with assets ranging from $1.3 billion to $7.3
     billion that operated in either one-half of the state or
     statewide and

  -- ninety-five smaller banks, 86 of which had assets of less than
     $100 million and 9 with assets ranging from $100 million to $1
     billion. 

In 1987, the second phase of interstate banking began when Washington
permitted out-of-state acquisition of any bank that had operated for
3 years or more, regardless of its financial condition, provided the
acquiring bank was from a state that also permitted reciprocal
out-of-state acquisitions.  This phase began a string of acquisitions
by out-of-state banks, the biggest of which was the merger between
Security Pacific Corporation and BankAmerica Corporation, the parent
holding companies of Washington's two largest banks.  By mid-1993,
82.4 percent of Washington's banking assets were owned by
out-of-state banks.  Out-of-state bank holding companies owned all of
the state's large banks and 4 of the 85 smaller banks. 


--------------------
\2 The Douglas Amendment prohibited bank holding companies from
crossing state lines unless specifically permitted by the state the
company wished to enter. 


   INTERSTATE BANKING HAS NOT
   INCREASED DOMINATION BY LARGE
   BANKS STATEWIDE
------------------------------------------------------- Appendix III:3

Despite the influx of out-of-state banks, removal of interstate
banking restrictions has not resulted in large banks consistently
increasing their market share relative to smaller banks statewide. 
Table III.1 shows that there has been little change in the total
market share of large and smaller banks when December 1984--about 3
years before Washington permitted interstate acquisition of healthy
banks--is compared to June 1993.\3 However, table III.1 does show a
substantial and steady shift to out-of-state ownership of large banks
after 1987, when interstate acquisition of healthy banks was
permitted. 



                              Table III.1
                
                Comparison of Market Share of Washington
                             Banks by Size


                        Intersta     In-  Tota  Intersta     In-  Tota
Year                          te   state     l        te   state     l
----------------------  --------  ------  ----  --------  ------  ----
1984                      39.67%  42.19%  81.8     0.02%  18.11%  18.1
                                            6%                      3%
1985                       41.79   41.68  83.4      0.00   16.54  16.5
                                             6                       4
1986                       40.52   42.68  83.2      0.16   16.64  16.8
                                             0                       0
1987                       71.92   10.94  82.8      3.23   13.90  17.1
                                             6                       3
1988                       75.40    6.33  81.7      4.06   14.22  18.2
                                             3                       8
1989                       78.36    6.89  85.2      1.00   13.81  14.8
                                             4                       1
1990                       77.22    7.06  84.2      1.00   14.71  15.7
                                             8                       1
1991                       74.36    7.88  82.2      1.04   16.73  17.7
                                             3                       7
1992                       73.48    7.62  81.1      0.67   18.23  18.9
                                             0                       0
1993\a                     81.75    0.00  81.7       .65   17.59  18.2
                                             5                       5
----------------------------------------------------------------------
Note:  Numbers may not add due to rounding. 

\a 1993 data are as of June 30.  All other data are as of December
31. 

Source:  FDIC call report data. 

Table III.1 also shows that out-of-state holding companies acquired
several smaller banks, most notably in 1987 and 1988.\4 The decline
of the market share of out-of-state smaller banks, beginning in 1989,
occurred largely because one bank, Key Bank of Washington, became a
large bank through acquisitions. 


--------------------
\3 In table III.1, the market share of large banks was measured on
the basis of all banks with more than $1 billion in assets, and the
market share of smaller banks was measured on the basis of all banks
with $1 billion or less in assets. 

\4 Depending upon the year, between two and three holding companies
that owned large banks also owned smaller banks.  The trends in large
bank market share do not change if these smaller banks are added into
the large bank market share.  The total market share of large banks,
however, would increase while that of smaller banks would decrease. 
Depending upon the year, these changes ranged from .94 percent to 1.7
percent and averaged 1.3 percent. 


      PROFILE OF LARGE
      OUT-OF-STATE BANKS IN
      WASHINGTON
----------------------------------------------------- Appendix III:3.1

Although large banks as a group have not increasingly dominated
Washington's banking market, major changes have occurred within the
group.  For example, several large banks grew between 1984 and mid-
1993, usually through major acquisitions, while others disappeared as
they were bought.  As a result of these changes, some large banks
have become more dominant within the state and this trend could
continue. 

We divided interstate banking in Washington into (1) the entry and
expansion of out-of-state banks before BankAmerica Corporation merged
with Security Pacific Corporation and (2) changes resulting from this
merger.  The merger was a watershed because it greatly altered the
banking structure in Washington.  In the state, after the merger, the
largest bank increased its size by almost one-fourth, the second
largest bank disappeared, and two smaller banks became more
significant players. 


         PROFILE OF OUT-OF-STATE
         BANKS BEFORE THE
         BANKAMERICA/SECURITY
         PACIFIC MERGER
--------------------------------------------------- Appendix III:3.1.1

The five large out-of-state holding companies developed major
institutions in Washington in one of two ways:  (1) by establishing a
sizable presence immediately by buying one or more large Washington
banks or (2) by entering on a smaller scale by first buying several
smaller banks and, once established, making larger acquisitions. 
Once in the state, when measured in 1992 dollars, three of the five
banks grew moderately through 1991; one increased nearly eightfold in
size over this time; and the fifth experienced a decline. 

In 1984, BankAmerica Corporation bought financially troubled SeaFirst
Bank.  From the time of acquisition through March 1994, it has
remained the state's largest bank.  Overall, its growth was modest
during this period, although in some years it expanded and in other
years contracted.  Table III.2 shows that, in 1984, when measured in
constant 1992 dollars, it had $11.9 billion in assets and a market
share of more than 30 percent.  By 1991, its assets increased to
$12.5 billion, while its market share increased only slightly. 



                                   Table III.2
                     
                      Entry of Major Out-of-State Banks Into
                                    Washington

                       (Constant 1992 dollars in billions)


              Acquiring
              bank holding  Acquired                  Market              Market
Year          company       bank          Assets       share  Assets       share
------------  ------------  ------------  ------  ----------  ------  ----------
1984          BankAmerica   SeaFirst       $11.9       30.2%   $12.5       30.3%
              Corporation   Bank

1987          Security      Rainier         10.1        24.3     7.3        17.7
              Pacific       National
              Corporation   Bank

1987          U.S. Bancorp  People's         3.1         7.3     5.5        13.5
                            Bank and Old     2.2         5.0
                            National
                            Bank

1987          Keycorp       3 smaller        1.1         2.6     1.6         3.8
                            banks

1988          West One      1 smaller       0.03        0.08   0.3\a         0.6
              Bancorp       bank
--------------------------------------------------------------------------------
\a West One Bank's actual size was $253 million in assets, which was
rounded to $300 million in the table.  Thus, it increased more than
eightfold in size between 1988 (when it had approximately $300,000 in
assets) and 1991 (when it had more than $250 million). 

Source:  FDIC call report data. 

In 1987, Security Pacific Corporation, another California bank
holding company, purchased the state's second largest bank, Rainier
National Bank.  Although it remained the second largest bank from
1984 through 1991, its assets and market share declined.  It had
$10.1 billion in assets and a market share of 24.3 percent statewide
in 1984.  By 1991, its assets had declined to $7.3 billion and its
market share to 17.7 percent.  (See table III.2.)

The Oregon holding company U.S.  Bancorp also entered Washington in
1987 by buying the state's fourth and sixth largest banks--People's
Bank and Old National Bank--whose combined assets totaled $5.3
billion.  Regulators had little concern that U.S.  Bancorp's
acquisition of these two banks would affect competition in the state
because the two banks operated in different parts of the state and
thus served different customers. 

After its acquisition of these two banks, U.S.  Bank immediately
became the third largest bank in the state.  Between 1987 and 1991 it
grew, in part, because its holding company purchased four smaller
banks with assets totaling $345.2 million.  By year-end 1991, U.S. 
Bank had assets totaling $5.5 billion and controlled 13.5 percent of
the market.  (See table III.2.)

Keycorp and West One Bancorp were different from BankAmerica
Corporation, Security Pacific Corporation, and U.S.  Bancorp.  They
entered Washington on a small scale in 1987 and 1988, respectively,
by buying smaller banks and then made major acquisitions in 1992 and
early 1993. 

In 1987, Keycorp, a New York holding company, entered the state by
buying three smaller banks with assets totaling $1.1 billion and a
market share of 2.6 percent.  As table III.2 shows, Keycorp's growth
through 1991 was modest, with its assets increasing by $500 million
and its market share by slightly more than 1 percent. 

In 1988, West One Bancorp entered by buying one smaller bank with $30
million in assets and a market share of 0.08 percent.  Through 1991,
it bought three more smaller banks, which helped to increase its
assets and market share more than eightfold.  (See table III.2.)


         PROFILE OF OUT-OF-STATE
         BANKS AFTER THE
         BANKAMERICA/SECURITY
         PACIFIC MERGER
--------------------------------------------------- Appendix III:3.1.2

In 1992, BankAmerica Corporation and Security Pacific Corporation,
the two largest bank holding companies in the West, merged.  The
surviving bank in Washington, a subsidiary of BankAmerica
Corporation, retained the name SeaFirst Bank and grew from a bank
with $12.5 billion in assets and a 30.3 percent market share in 1991
to a bank with $15.4 billion in assets with a 37.4 percent market
share in 1992.  (See table III.3.) SeaFirst would have become larger,
but state and federal regulators intervened.  The second largest
bank, as of mid-1993, was Key Bank of Washington, a bank with $6.7
billion in assets with a 16.3 percent market share. 



                                   Table III.3
                     
                          Major Acquisitions Since 1991

                       (Constant 1992 dollars in billions)


              Acquiring
              holding       Acquired                  Market              Market
Year          company bank  bank          Assets       share  Assets       share
------------  ------------  ------------  ------  ----------  ------  ----------
1992          BankAmerica   Security       $12.5       30.3%   $15.4       37.4%
              Corporation   Pacific Bank

1992          West One      SeaFirst         0.3         0.6     1.8         4.3
              Bancorp       Bank
                            divested
                            branches

1992          Keycorp       SeaFirst         1.6         3.8     3.0         7.3
                            Bank
                            divested
                            branches

1993\a        Keycorp       Puget Sound      3.0         7.3     6.7        16.3
                            National
                            Bank
--------------------------------------------------------------------------------
\a 1993 data are as of June 30.  All other data are as of December
31. 

Source:  FDIC call report data. 

In absorbing the second largest bank in Washington--Security Pacific
Bank--SeaFirst Bank enhanced its position in the state's banking
market.  Before the merger, the gap between SeaFirst and the second
largest bank was $5.2 billion in assets and 12.6 percent in market
share.  After the merger, the gap in assets between SeaFirst Bank and
Key Bank of Washington, now the second largest, increased to $8.7
billion and the gap in market share increased to 21 percent. 

State and federal regulators were concerned that this merger could be
anticompetitive because SeaFirst Bank would dwarf its competitors. 
According to competition theory, when a market contains one large
firm (be it a bank or any type of company) in the midst of smaller
firms, the chances increase that the large firm can establish prices
without fear of being undercut by the smaller firms, its competitors. 
To maintain the potential for competition in Washington, regulators
obtained an agreement from BankAmerica Corporation that it would
divest some of its branches to other banks, thereby shrinking
SeaFirst while building up the acquiring banks as competitors.  Had
regulators approved the merger without this divestiture, SeaFirst
Bank would have become $1.5 billion larger in assets than it had been
as of mid-1993, an almost 10 percent increase. 

Competitive concerns in Washington focused on two major areas, small-
to medium-sized business lending and banking services in rural
markets.  According to Washington's Assistant Attorney General,
SeaFirst Bank and Security Pacific Bank provided a significant amount
of small business loans in the state, and the amount of these loans
could decline because the merger would cause a decrease in the number
of loan providers.  Also, rural areas were the most likely to be
harmed by the merger because Security Pacific Bank and SeaFirst Bank
were the primary competitors in many rural markets. 

As a result of state and federal regulators reviewing the proposed
merger, BankAmerica Corporation agreed to divest 86 branches in the
state, many of which were located in rural areas, to other banks. 
The goal of this divestiture of branches, according to the Washington
Assistant Attorney General, was to approximate the banking structure
that had existed before the merger by creating larger institutions,
with more of a statewide presence, that could take the place of
Security Pacific Bank in competition against SeaFirst Bank. 

As part of its merger review, the Department of Justice conducted an
HHI analysis.\5 The results of this analysis led to BankAmerica
Corporation divesting branches in 24 markets.  Nine of these markets
were above the 1,800 HHI cutoff before the merger and with the
divestiture were projected to have either no change or a change of
less than 45 points.  In the remaining 15 markets, 6 experienced no
change in the HHI after the divestiture, and 9 had a change of
between -81 and 426 points.  The largest increase of 426 points was
in Seattle.  Before the merger, its HHI was 1,340 and after the
merger and divestiture it was projected to be 1,766.  Although this
was close to the 1,800 cutoff, there was no cause for concern,
according to regulators, because a sufficient number of competitors
existed. 

Two bank holding companies, Keycorp and West One Bancorp, bought the
86 divested branches.  West One, which primarily acquired branches in
western Washington, is now the fifth largest bank in the state.  From
year-end 1991 to mid-1993, it grew from about $253 million in assets
to $1.8 billion and from 0.6 percent in market share to 4.3 percent. 
It purchased 38 divested branches with $1.2 billion in deposits and
more than $750 million in assets. 

Key Bank of Washington catapulted from $1.6 billion in assets to
become the second largest bank in the state, with $6.7 billion in
assets and a 16.3 percent market share.  Its holding company (1)
acquired 48 divested branches from the BankAmerica/Security Pacific
merger that consisted of $1.35 billion in deposits and more than $760
million in assets and (2) in early 1993, bought the state's last
remaining large in-state bank, Puget Sound, with $3.1 billion in
assets. 

Keycorp's purchase of Puget Sound Bank did not cause anticompetitive
concerns on the part of regulators because the two banks tended to
operate in different markets.  Thus, in most of these markets, no
providers of financial services were lost.  In the few markets where
the two banks' operations overlapped, government officials felt
sufficient competition would continue despite the merger. 

At the time of our review, there had not been any studies as to
whether the BankAmerica Corporation/Security Pacific Corporation
merger had impaired competition, according to antitrust regulators. 
One official told us that the degree of competition will depend on
how Key Bank and West One Bank operate the divested assets and, at
the time of our review, this was too early to assess. 


--------------------
\5 HHI measures the concentration of market share.  See appendix II
for a background discussion on HHI. 


   SMALLER BANKS HAD A CONTINUED
   STRONG PRESENCE
------------------------------------------------------- Appendix III:4

Smaller banks remained a viable segment of Washington's banking
industry, as evidenced by trends in new smaller bank entry, market
share, and profitability.  Although their numbers declined, primarily
because of healthy acquisitions by out-of-state and in-state banks,
new bank entry had offset much of the consolidation. 

When the state lifted interstate banking restrictions less than a
decade ago, smaller banks often became desirable acquisition targets. 
Their persistence, as evidenced by trends in new smaller bank entry,
market share, and profitability nevertheless showed that they
successfully competed against large banks entering the state, at
least within the first decade after interstate banking restrictions
were lifted. 


      CONSOLIDATION OF SMALLER
      BANKS
----------------------------------------------------- Appendix III:4.1

The number of smaller banks in Washington declined from a high of 96
in 1984 to a low of 88 in 1992, mainly because healthy banks were
absorbed by larger banks during this period.  Table III.4 shows that
in 1985 and 1986 there were more in-state than out-of-state mergers. 
Some of these mergers resulted in the replacement of one bank with
another because the acquirer was not previously present in the
market.  This was always the case when an interstate bank holding
company made its first acquisition.  Subsequent acquisitions,
however, resulted in the disappearance of a smaller bank within the
state because both the acquirer and acquired were already operating
within its borders. 



                              Table III.4
                
                   Number of Mergers and New Charters
                Involving In-State Smaller Banks, 1985-
                                  1992

                                                            In-
                                                Out-of-   state
                                                  state  merger    New
2-year period                                   mergers       s  banks
-------------------------------------------  ----------  ------  -----
1985-1986                                             3       9      3
1987-1988                                             9       4      5
1989-1990                                             4       3     11
1991-1992                                             1       2      7
======================================================================
Total                                                17    18\a     26
----------------------------------------------------------------------
\a The assets from 13 of the 18 in-state acquisitions were owned
out-of-state as of June 30, 1992, due to subsequent purchases of the
in-state acquirers by out-of-state bank holding companies. 

Source:  FDIC call report data. 

After the state passed reciprocal interstate banking in 1987,
out-of-state acquisitions became more frequent for a time and then
decreased.  In all but one instance, the acquirer was one of three
large out-of-state holding companies:  U.S.  Bancorp, Keycorp, or
West One Bancorp.  These acquisitions were of healthy banks, whereas
the three out-of-state purchases from 1985 through 1986 were of
failed banks, the only type of bank that Washington permitted
out-of-state bank holding companies to acquire at that time. 

New bank entry offset much, and in some years all, of the decline in
the number of banks in the state.  New entry was especially strong in
the late 1980s through early 1990s.  (See table III.4.) The formation
of these banks indicated that interstate banking did not necessarily
threaten smaller banking in the first years after interstate banking
restrictions were lifted. 


      SMALLER BANKS
      REMAINED VIABLE DESPITE
      CONSOLIDATION
----------------------------------------------------- Appendix III:4.2

Consolidation among smaller banks by no means signaled the beginning
of their demise in the state.  After the state removed interstate
banking restrictions in the mid-1980s, changes in this group's market
share were minimal and its return on assets either remained stable or
improved. 

Smaller banks' market share increased slightly, from 18.1 percent in
1984 to 18.25 percent by mid-1993, after interstate banking began in
Washington.  The market share of smaller banks owned within the
state, however, declined once interstate banking legislation passed. 
As shown in table III.1, the decline mostly took place during the
years 1984 through 1987, when the state was removing interstate
banking restrictions.  In the early 1990s, new smaller bank entry and
growth of existing smaller banks offset this initial decline. 

While smaller banks as a group were recapturing market share, a
divergent trend was occurring within the group.  For example, the
market share held by banks with under $100 million in assets declined
from 9.8 percent to 6.4 percent, while the market share for banks
with assets from $100 million to $1 billion increased from 8.3
percent to 11.8 percent. 

Interstate banking appeared not to have impaired the profitability of
smaller banks in Washington when measured by in-state and
out-of-state return on assets.  Figure III.1 shows that in-state
smaller banks with assets from $100 million to $1 billion earned the
most consistently strong ROAs from 1984 through 1992, followed by
large in-state banks with assets of more than $1 billion.  Although
smaller in-state banks with assets of less than $100 million
typically had the lowest ROAs, they maintained positive ROAs and on
occasion surpassed the out-of-state banks and large in-state banks. 
These results may have had more to do with the relationship between
profitability and bank size than with the removal of interstate
banking restrictions. 

   Figure III.1:  ROA for
   Out-of-State Versus In-State
   Washington Banks

   (See figure in printed
   edition.)

\a Out-of-state banks included smaller banks and large banks.  The
number of smaller banks ranged from 0 to 7 depending on the year. 
Most were owned by bank holding companies of the large out-of-state
banks and were operated separately from them for a period of time. 

\b From 1987 through 1992, Puget Sound was the only large in-state
bank. 

Source:  FDIC call report data. 

In addition, as shown in table III.5, the profitability of in-state
smaller banks did not decrease after interstate banking was
introduced.  It shows that these banks had higher ROAs after the
state passed reciprocal interstate banking laws than they did before. 
Although many factors influence ROA, making it difficult to assess
the effect of interstate banking in a simple before-and-after
comparison, it is nevertheless interesting that no negative effect is
discernible. 



                              Table III.5
                
                    ROA Comparison Before and After
                           Interstate Banking


                                               Large in-     Small in-
                                                   state         state
                                                 smaller       smaller
Interstate banking status                        banks\a       banks\b
------------------------------------------  ------------  ------------
Before 1984-1986                                   1.04%         0.59%
After 1987-1989                                     1.16          0.72
After 1990-1992                                     1.27          0.80
----------------------------------------------------------------------
\a From $100 million to $1 billion. 

\b Less than $100 million. 

Source:  FDIC call report data. 


   SMALL BUSINESS LENDING IN
   WASHINGTON UNDER ITS INTERSTATE
   BANKING LAWS
------------------------------------------------------- Appendix III:5

During our discussions in selected local markets in Washington, we
were told that some small businesses may have been having difficulty
in obtaining loans.  As in California, however, we were unable to
determine if this was the direct result of removing geographic
restrictions, because other factors, such as regulation, may have
played a role in credit availability problems. 

Nevertheless, by-products of in-state and interstate geographic
deregulation, namely industry consolidation and standardized and
centralized loan decisionmaking practices of large banks (which in
Washington are interstate banks) led some small business experts,
bankers, and government officials to have the following concerns: 

  -- Will small businesses become more dependent on large banks for
     credit as the industry continues to consolidate? 

  -- If so, will these large banks have the necessary flexibility to
     meet all small business needs? 

Others, such as bankers from large banks, however, responded to these
concerns by noting that large banks were becoming much more active in
the small business market. 


      DATA ON SMALL BUSINESS
      LENDING IS INCOMPLETE
----------------------------------------------------- Appendix III:5.1

As in California, our first step in collecting information on whether
unrestricted branching had affected small business lending in
Washington was to ascertain which category of bank was the more
common provider of small business loans--large banks with extensive
branch networks or smaller banks.  The most complete sources of
information available on small business lending in Washington were
call reports and SBA data.  Neither of these sources, however, gave a
complete picture of small business lending.  Call reports were
limited because the data included all commercial lending, until June
1993, when outstanding small business loans were separately
categorized.\6 SBA data were limited because the data only pertained
to one type of small business lending, loans backed by an SBA
guaranty.  Although analyzing these two information sources neither
reflected the total amount of small business lending nor established
conclusively which categories of banks were the most common providers
of small business loans, the information provided us with an insight
into commercial lending. 

Our analysis of call report data from 1985 through 1992 indicated
that large banks made more loans (both consumer and commercial), as a
percentage of assets, than did smaller banks.  For example, in 1992
large banks invested 74 percent of their assets in loans, compared to
57 percent for smaller banks. 

Figure III.2 shows that depending upon the year, large banks had
invested about 35 percent to 39 percent of their assets in commercial
loans, and smaller banks had invested about 31 percent to 33 percent. 

   Figure III.2:  Percentage of
   Assets in Commercial Lending in
   Washington

   (See figure in printed
   edition.)

Note:  Commercial lending included C&I loans and commercial real
estate loans. 

Source:  FDIC call report data. 

Regarding the type of commercial bank lending, figure III.3 shows
that large banks usually made more C&I and commercial real estate
loans than did smaller banks.\7 The only exception was 1992, when
both made a similar amount of commercial real estate loans, about
17.5 and 18 percent respectively.  The figure also shows that both
large and smaller banks decreased their C&I lending and increased
their commercial real estate lending over the period, with smaller
banks having the greater changes. 

   Figure III.3:  Commercial
   Lending in Washington

   (See figure in printed
   edition.)

Source:  FDIC call report data. 

Our analysis of the quarterly June 1993 call report data on small
business lending showed that large banks devoted a greater dollar
amount than smaller banks to small business lending (i.e., C&I and
commercial real estate loans) during the 3 months, but that smaller
banks devoted a greater portion of their assets to small business
lending than large banks.  Large banks had $4.1 million in small
business loans or 12.4 percent of their assets.  Smaller banks, on
the other hand, had a total of $1.5 million in small business loans
or 20.7 percent of their assets.  Moreover, this pattern did not
change when C&I loans and commercial real estate loans were analyzed
separately. 

As for SBA lending, table III.6 shows that, as in California, smaller
banks were the strongest lenders.  However, large banks accounted for
a much higher percentage of total SBA loans, and nonbanks a lower
percentage, than they did in California. 



                              Table III.6
                
                 SBA Lending by Type of Institution in
                         Washington, 1988-1992

                                             Number of   Percentage of
Type of institution                              loans           total
--------------------------------------  --------------  --------------
Smaller banks                                    1,358           51.8%
Large banks                                        854            32.6
Nonbanks                                           368            14.0
Thrifts and saving banks                            41             1.6
======================================================================
Total                                            2,621          100.0%
----------------------------------------------------------------------
Source:  SBA data. 

The top SBA lenders in Washington from January 1988 to June 1992 were
two large banks, Security Pacific and U.S.  Bank, followed by a
nonbank and two smaller banks.  However, Security Pacific's
percentage of total SBA loans declined over the period, from 26
percent in 1988 to 3.3 percent in 1992, while that of U.S.  Bank
increased from 7.5 percent to 18.8 percent. 

According to an SBA official, a bank's participation in the SBA
program depends upon its priorities; thus it is not surprising that
subsidiaries of a given bank holding company in different states vary
in their amount of SBA lending.  For example, SBA officials told us
that U.S.  Bank has been an active SBA lender in Washington from the
time it first entered the state to the time of our review.  However,
U.S.  Bancorp's original subsidiary in Oregon made little use of the
SBA program over this time period. 


--------------------
\6 For a discussion of limitations pertaining to the 1993 call report
data on small business lending, see appendix II. 

\7 C&I loans are commercial loans that were secured by something
other than real estate or were unsecured.  Commercial real estate
loans were commercial loans that were secured by commercial real
estate. 


      OTHER SOURCES OF SMALL
      BUSINESS LENDING
----------------------------------------------------- Appendix III:5.2

Small businesses may also seek credit from loan funds managed by
state and city governments and private, nonprofit agencies.  One
program, for example, made 96 loans totaling $34.1 million in a
little over 2 years.  In another example, the city of Spokane began a
small business loan program in 1991 for loans of less than $50,000. 
According to its administrator, the program had filled a gap left
because banks did not find it economically viable to make small
business loans of less than $50,000.  The administrator estimated
that almost $1.7 million in loans were funded in 2 years. 


      TREND TOWARD CENTRALIZED AND
      STANDARDIZED LOAN DECISIONS
----------------------------------------------------- Appendix III:5.3

According to officials, interstate banks in Washington made small
business loans in much the same way that large banks with statewide
branch networks did in California.  That is, they used centralized
and standardized decisionmaking practices to make a large volume of
low cost loans. 

The majority of small business lending decisions are made in the
state where the loan originates, according to an official at one of
the Washington interstate banks.  However, the broad policies and
procedures governing these decisions tend to be formulated
out-of-state at corporate headquarters with input from state
subsidiary banks. 

Some examples of policies formulated at the corporate level are
"concentration ratios" and "risk ratings" of industries. 
Concentration ratios measure how much of a bank's loan portfolio can
be concentrated within a particular type of lending, for example,
real estate.  Risk ratings classify industries as those that are the
most or least desirable to lend to, on the basis of the overall
health of the particular industry.  In the case of interstate banks,
a corporate headquarters may stipulate the concentration ratios and
industry risk ratings used by its subsidiary banks in the various
states of operation. 

Officials at the interstate subsidiary banks in Washington said they
did not automatically deny a loan that was for a risky industry or
was of a type in which the bank's loan portfolio was already heavily
concentrated.  Rather, they may have (1) carefully reviewed such
loans, (2) refrained from actively pursuing such loans, or (3)
continued to fund these types of loans for existing customers who had
a history of repayment with the bank but generally denied them to new
applicants. 


      CENTRALIZATION AND
      STANDARDIZATION MAY AFFECT
      CREDIT AVAILABILITY
----------------------------------------------------- Appendix III:5.4

To better understand credit availability concerns in Washington, we
focused on four markets\8 to ascertain whether small businesses were
having difficulty obtaining loans and what role, if any, interstate
banking and industry consolidation played.  We (1) held focus group
discussions in each market with individuals who worked closely with
small businesses on financing issues, (2) interviewed regulators, and
(3) interviewed officials from interstate and smaller banks who were
major providers of small business loans. 

Most of the focus group participants and some bankers in all four
markets reported that certain types of small businesses were
experiencing increased difficulty obtaining loans.  These
difficulties were similar to those reported in California.  That is,
some businesses that formerly could get credit could no longer do so,
and others could do so only after approaching several banks. 

Two possible reasons for increased difficulties indirectly linked to
interstate banking and branching were mentioned:  (1) centralized and
standardized decisionmaking practices of large banks and (2) mergers
that caused strong business lenders to disappear in some communities. 
Additional reasons were cited that were unrelated to interstate
banking, such as the tightening of bank regulation.  The economy,
however, was generally not cited as a major factor in credit
availability problems.  This may have been because Washington's
economy remained relatively healthy throughout most of the 1980s and
early 1990s. 

Two types of centralized and standardized decisionmaking practices
were mentioned--loan decisions and policies set at a corporate level. 
Bankers from smaller banks and focus group participants frequently
told us that centralized and standardized practices hurt some small
businesses seeking credit in much the same way as was reported in
California.  These practices depersonalized the relationship between
the loan applicant and the banker making the decision, thereby
creating difficulty for certain businesses that did not meet the
banks' preestablished criteria.  Focus group participants and some
bankers told us that centralized and standardized decisionmaking
practices often did not allow the flexibility found in "relationship
banking," in which local market conditions, unique business needs,
and the character of the loan applicant were assessed. 

In regard to policies set at a corporate level, which in Washington
usually meant in another state, a frequent complaint concerned
requirements that loan officers more closely evaluate applications
for loans in industries that the corporate level designated as risky. 
Some focus group participants and bankers believed that these closer
evaluations impeded lending even for the "good deals" in these
industries.  Participants also speculated that some corporate level
restrictive policies may have been driven by bank subsidiary
experiences in other states and therefore should not be applied to
banks in Washington, where the economy had remained relatively
healthy. 

Two focus group participants related the following experiences to
illustrate how centralized and standardized loan practices or loan
decisions can hinder small businesses seeking credit. 

One local government official who helped small businesses obtain
financing in the Tacoma area, found large interstate banks less
willing than smaller banks to fund risky industries, such as those
related to timber or those located near areas with environmental
problems.  Interstate banks, she believed, had such a steady stream
of applications that they could afford to fund those that presented
the least risk and devote less time and effort to evaluating the
riskier applications.  She found smaller banks more receptive to
these types of applications because these banks took the time to
analyze each loan application, taking into account, for example, the
results of environmental impact studies. 

One loan fund administrator in Spokane described a restaurant that
had successfully been in business for 20 years.  The restaurant had
approached three or four banks before finding a loan officer at an
interstate bank who agreed to fund the loan with an SBA guaranty. 
First, however, the loan officer had to send the application to his
managers for final approval because the restaurant industry was
classified as high risk.  On the basis of the experience of
restaurants in major cities, such as Portland and Seattle, the
managers denied the loan, which was eventually provided by a smaller
bank in Spokane. 

Several bankers from large banks also agreed that centralization and
standardization can result in certain loan applicants being denied
loans.  One such banker noted that this problem especially affected
rural areas because centrally located decisionmakers did not
understand the businesses or industries in such areas. 

The types of businesses regarded as susceptible to credit
availability problems by focus group participants and some bankers
were similar to those described in California.  They included

  -- businesses that were not easily understood by bankers and did
     not fit easily into banks' standardized criteria, such as
     nonprofit firms;

  -- businesses needing certain types of loans, such as loans of less
     than $100,000 or unsecured working capital lines; and

  -- well-run, established businesses in "high-risk areas," which in
     Washington included commercial real estate, timber and fishing
     industries, and general business start-ups. 

Several bankers we spoke with from Washington's interstate banks
echoed the views of California's large bankers.  These bankers said
that centralization and standardization practices had allowed banks
with extensive branch networks to become more active in the small
business market because these practices lowered the banks'
administrative costs of providing small business loans.  Although
this may be the case, focus group participants felt that there were
still some small businesses that were not being served.  This may
have been because these participants tended to work with small
businesses that did not easily fit standardized criteria. 


--------------------
\8 The markets were Seattle, Spokane, Olympia, and Yakima.  Appendix
I briefly describes them. 


      INDUSTRY CONSOLIDATION MAY
      HAVE VARYING EFFECTS ON
      CREDIT AVAILABILITY
----------------------------------------------------- Appendix III:5.5

A second effect on small business credit availability indirectly
linked to interstate banking and branching was industry consolidation
through mergers.  The focus groups and bankers from smaller banks
cited two differing effects of mergers on small business credit
availability: 

  -- Some mergers were seen as increasing the funds available to
     small businesses.  For example, a Yakima participant viewed a
     recent purchase of a smaller bank by an interstate bank as
     positive because the acquirer was a strong business lender and
     should bring more capital into the area. 

  -- The more common opinion, however, was that mergers involving
     large banks, most of which were interstate, tended to make less
     credit available to small businesses within a local area because
     (1) large banks were less interested in small business loans or
     (2) newly merged banks had different lending philosophies than
     did smaller banks. 

Several focus group participants stated that when large banks entered
a rural area and took over their branches, the large banks were
interested in consumer lending and deposits, rather than in
commercial lending.  According to the focus groups, rural areas in
particular witnessed large banks decreasing their commercial lending. 
For example, one focus group participant described a successful
business that had maintained deposits at a large bank for 25 years. 
When the business applied for an expansion loan at the bank, which
had recently merged, the application was denied.  An in-state bank
eventually provided the loan. 

Because data were only available on an aggregate basis, we could not
determine what loans were made within local markets or to what types
of businesses these loans were made.  However, we did look at the
aggregated data to determine whether banks acquired by out-of-state
bank holding companies had changed their total loans or their overall
lending strategy.  To do so, we examined the total value of loans
made by out-of-state banks after they acquired one or more in-state
banks.  Unfortunately, our analysis cannot confirm or refute focus
group perceptions because it aggregated the lending of these banks,
while focus groups tended to discuss lending in local markets. 

We did an analysis\9 and looked at the loan portfolios of banks
acquired by Security Pacific Bank, U.S.  Bank, and Key Bank of
Washington to determine the yearly average of these loans from 1984
through 1986, when these banks entered Washington.  We compared these
yearly loan averages with the yearly average loans made by their new
subsidiaries--Security Pacific Bank, U.S.  Bank, and Key Bank of
Washington--during 1988 through 1992.  Specifically, we looked at
C&I, commercial real estate, and consumer loans (see table III.7). 

Our analysis shows that Security Pacific Bank made fewer loans than
the bank its holding company acquired, while U.S.  Bank and Key Bank
of Washington made more loans than the banks their holding companies
acquired.  Moreover, each of the three banks differed in the types of
loans they focused on.  Security Pacific Bank made fewer C&I and
consumer loans than Rainier Bank, but significantly more commercial
real estate loans.  The increased lending provided by U.S.  Bank was
fairly evenly distributed among C&I loans, commercial real estate
loans, and consumer loans.  Finally, Key Bank of Washington, although
it provided more loans in all three categories than did its acquired
banks, focused particularly on consumer loans.  (See table III.7.)



                              Table III.7
                
                  Comparison of Average Annual Lending
                  Patterns of Out-of-State Banks With
                          Their Acquired Banks

                  (Constant 1992 dollars in millions)


                                                    Commercial
Acquired bank (1984-1986) New                             real  Consum
subsidiary (1988-1991)\a             Total     C&I      estate      er
----------------------------------  ------  ------  ----------  ------
Rainier National Bank                                     $944
 Security Pacific Bank\b            $6,970  $2,166       1,899  $1,851
                                     6,503   1,621               1,803
People's National Bank &             3,512   1,188         613   1,207
 Old National Bank
 US Bank\c                           4,176   1,478         917   1,313
Seattle Trust and Savings Bank,        658     134         134     275
 Northwest Bank, and Cascade
 Security Bank                         971     173         243     540
 Key Bank of Washington\d
----------------------------------------------------------------------
\a We included 1992 data for U.S.  Bank.  Data for 1992 was not
relevant for Security Pacific Bank, because it was acquired by
BankAmerica Corporation, or for Key Bank of Washington, because the
1992 figures included the divested assets it purchased from
BankAmerica Corporation. 

\b In 1986 Security Pacific Corporation also purchased a failed
smaller bank, which had loans of $10.7 million at year-end 1985. 

\c U.S.  Bancorp also acquired two smaller banks in 1988, which had
loans of $70 million at year-end 1987. 

\d Keycorp also acquired one smaller bank in 1990, which had loans of
$64 million at year-end 1989. 

Source:  FDIC call report data. 

We were unable to determine if changes in the amount of lending
before and after acquisitions was due to interstate banking because
many factors, such as the economy, influence lending. 


--------------------
\9 We considered 1987--the year that these banks entered the
state--to be transitional and thus excluded it from our analysis. 
Also, we did not include West One Bank, First Interstate Washington,
and SeaFirst Bank in our analysis.  From 1988 though 1990, West One
Bank entered the state by acquiring only smaller banks, and not
enough years had passed for us to make a valid comparison.  At the
end of 1984--the first year of our review--First Interstate
Washington and SeaFirst Bank were already operating in the state. 


      CREDIT AVAILABILITY PROBLEMS
      REPORTED IN CERTAIN TYPES OF
      MARKETS
----------------------------------------------------- Appendix III:5.6

Focus group participants and some bankers said that centralization,
standardization, and industry consolidation were problems in markets
where they felt there were insufficient credit alternatives to large
banks.  For example, all of the focus groups and many bankers from
smaller banks viewed unmet credit demand as a problem in rural areas. 
Several individuals explained that because outlying areas could have
a difficult time supporting more than one bank, these areas would
have no credit alternatives to branches of the large, interstate
banks.  Moreover, high capital requirements often made it difficult
to start new banks in these areas. 

Spokane and Olympia focus group participants noted that few credit
alternatives to large banks existed in the outlying rural areas
surrounding their cities.  The Olympia group also mentioned that many
of the rural smaller banks that were thriving had very small capital
bases.  Thus, some nonstandard businesses may have had difficulty
obtaining loans over the lending limits of rural smaller banks that
had more flexible decisionmaking processes than did the large banks. 
In addition, the Seattle focus group noted that loan programs tended
to be available in urban rather than rural areas. 

Overall, few concerns about urban areas were expressed in Washington
focus groups.  This may have been because during the time of our
review smaller banks as a group within Washington remained relatively
healthy because of Washington's strong economy.  Thus, concerns about
smaller banks making fewer small business loans than they had in the
past did not arise. 

However, some Washington focus group participants said they thought
credit availability in urban areas was a problem, while others did
not.  For example, most participants in the Spokane focus group
thought that most small businesses in Spokane could eventually find
funding.  Most in the Seattle group, however, felt that there was
unmet credit demand within both urban and rural areas.  This
difference of opinion may be attributable to the amount of
alternative financing available to small businesses in these three
areas.  That is, although both Spokane and Seattle have nonprofit
loan funds, Spokane is a much smaller city; thus, its nonprofit funds
may be better able to meet any creditworthy demand not funded by
banks or other financial institutions. 


THE BANKING STRUCTURE AND SMALL
BUSINESS LENDING IN ARIZONA
========================================================== Appendix IV

Although it is not possible to separate the effects of interstate
banking from those of Arizona's recession, the interplay between
these two forces has altered Arizona's banking structure. 
Out-of-state bank holding companies acquired nearly all large banks
and a substantial portion of smaller banks in the state.  The merger
between BankAmerica Corporation and Security Pacific Corporation
raised concerns in Arizona, as it did in the other states we studied,
and again regulators interceded to prevent undue concentrations in
specific bank markets. 

While smaller banks lost market share to the large, mostly interstate
banks during the state's economic decline, their resurgence,
beginning in the early 1990s, showed that they can maintain a viable
presence. 

As in the other two states we reviewed--California and
Washington--many factors influence small business credit
availability.  Therefore, we were unable to determine whether
interstate banking in and of itself made credit more difficult for
small businesses to obtain.  Nevertheless, two indirect consequences
of interstate banking--centralized and standardized decisionmaking
and bank industry consolidation--were reported by focus group
participants and some bankers to have made it more difficult for some
small businesses to obtain credit.  Others, however, believed that
these consequences could increase small business credit. 
Difficulties were mainly reported in markets where there might have
been insufficient alternatives to large banks. 


   ARIZONA'S ECONOMY
-------------------------------------------------------- Appendix IV:1

Between the 1950s and the first half of the 1980s, Arizona was
recognized as one of the fastest growing states in the nation.  As
people and companies moved to Arizona, retail trade, business and
consumer services, financial services, and real estate rapidly grew
to serve the increasing population and businesses. 

After decades of rapid growth, Arizona experienced an economic
slowdown in the latter half of the 1980s.  The state's economic
growth rate began to deteriorate in 1986, dropping well below the
state's historical average by 1988.  Further deterioration occurred
in 1990 and 1991, in conjunction with the national recession. 

In the early 1980s, a boom occurred in commercial real estate and
construction.  Rapidly, an out-of-equilibrium situation developed,
with real estate values rising to unsustainable levels and over-
building leading to high vacancy rates.  The crash began in the late
1980s.  Vacancy rates remained unusually high in 1993.  The
over-building and high vacancy rates contributed to financial
industry woes, particularly the demise of the thrift industry, and
economic difficulties for businesses and individuals. 

As we mentioned, Arizona's economy experienced economic problems in
the late 1980s, well before the national recession began in 1990,
such as the collapse of its real estate and financial industries
markets.  However, Arizona has started its economic recovery. 


   ARIZONA'S BANKING HISTORY
-------------------------------------------------------- Appendix IV:2

In 1986, Arizona passed full nationwide interstate banking, with the
stipulation that interstate banks could enter only by buying existing
institutions.\1 According to industry experts, at the time no one
anticipated that interstate banking would save the banking industry
in Arizona from the effects of the economic downturn that was to
follow. 

From the late 1980s through 1990, the banking industry, which
invested heavily in real estate loans, felt the most serious effects
of the downturn.  During this time, interstate banks that had already
entered the state contributed much-needed capital to their Arizona
subsidiaries, while others entered by acquiring failed institutions. 
Thus the collapse of Arizona's banking industry was prevented by
interstate banking. 

By June 1993, out-of-state holding companies owned 88.4 percent of
Arizona's banking assets.  Their subsidiaries included all five large
banks with assets of more than $1 billion, except one recently formed
to purchase the BankAmerica Corporation divestiture, and 12 of the 32
smaller banks in the state. 


--------------------
\1 The law allowed "de novo" entry after June 30, 1992. 


      INTERSTATE BANKING AND
      ECONOMIC CYCLES ALTERED
      MARKET SHARE OF LARGE AND
      SMALLER BANKS
------------------------------------------------------ Appendix IV:2.1

The fluctuating market share trends of large and smaller banks\2

reflected the effects of Arizona's boom-and-bust economy, the passage
of interstate banking, and the fact that interstate banks were active
acquirers of both large and smaller banks.  Through 1987, smaller
banks gained market share at the expense of large banks.  This
coincided with Arizona's real estate boom and occurred largely
because out-of-state banks entered the smaller bank category through
acquisition and then increased the market share of those they
acquired.\3



                               Table IV.1
                
                  Market Share Comparisons of Arizona
                                 Banks



                        Intersta     In-  Tota  Intersta     In-  Tota
Year                          te   state     l        te   state     l
----------------------  --------  ------  ----  --------  ------  ----
1984                       26.6%   62.5%  89.1      0.0%   10.9%  10.9
                                             %                       %
1985                        24.9    63.9  88.8       0.0    11.2  11.2
1986                        39.8    46.8  86.6       6.9     6.5  13.4
1987                        49.6    35.9  85.5     9.0\a     5.5  14.5
1988                        52.5    36.1  88.6       5.9     5.5  11.4
1989                        53.0    35.5  88.5       6.7     4.8  11.5
1990                        61.4    28.9  90.3       6.5     3.2   9.7
1991                        63.0    27.1  90.1       5.5     4.4   9.9
1992                        60.2    28.8  89.0       4.6     6.3  10.9
1993\b                      83.6     4.8  88.4       4.8     6.8  11.6
----------------------------------------------------------------------
\a Includes the only foreign bank in Arizona from 1987 through 1993. 
It was a smaller bank and in 1993 it had .2 percent of the market. 

\b 1993 data are as of June 30.  All other data are as of December
31. 

Source:  FDIC call report data. 

The economic collapse in Arizona occurred in the late 1980s and, as
the table shows, large banks increased in market share as smaller
banks decreased, with the increases occurring from 1987 through 1988
and from 1989 through 1990.  Three "newly entered" interstate banks
were primarily responsible for these increases:  Security Pacific
Bank Arizona, Citibank Arizona, and Bank of America Arizona. 

By June 1992, smaller banks were once again gaining in market share
and large banks were losing, coinciding with the improving Arizona
economy. 


--------------------
\2 The market share of large banks was based on all banks with more
than $1 billion in assets, and the market share of smaller banks was
based on all banks with $1 billion or less in assets. 

\3 Two major out-of-state banks were primarily responsible for
increasing the market share of smaller banks between 1986 and 1987,
Chase Bank of Arizona and Citicorp Arizona.  Their entry and growth
patterns are discussed later in this appendix. 


   INTERSTATE BANKING HAS CHANGED
   OWNERSHIP OF LARGE BANKS
-------------------------------------------------------- Appendix IV:3

Interstate banking in Arizona resulted in out-of-state ownership of
every major bank but one.  Over the period we studied, after the
introduction of interstate banking, some interstate banks became a
major presence in the state, while others declined or remained more
moderate in size within the state, and still others were acquired. 

Table IV.2 shows when the major banks entered Arizona, the
institutions they initially acquired, and the percentage of the
state's banking assets they controlled as of June 1993.  Except for
three thrifts purchased by BankAmerica Corporation, all acquisitions
were of institutions that had not failed. 



                                    Table IV.2
                     
                     Entry of Out-of-State Banks Into Arizona

                       (Constant 1992 dollars in billions)


Acquiring bank        Yea                                 Market          Market
holding company         r  Acquired bank\a        Assets   share  Assets   share
--------------------  ---  ---------------------  ------  ------  ------  ------
First Interstate      187  N/A\b                   N/A\b   N/A\b    $7.1   19.4%
 Bancorp                7
Security Pacific      198  The Arizona Bank         $5.8   16.2%   8.1\c  22.0\c
 Corporation            6
Citicorp              198  Great Western Bank        1.0     2.9     2.3     6.3
                        6
                            United Bank of         3.4\d  10.0\d
                      198   Arizona
                        8
Chase Manhattan       198  Continental Bank          1.0     2.7     0.5     1.5
 Corporation            6
BankAmerica           199  Sun State Savings &       6.0    16.9  10.4\f  28.3\f
 Corporation            0   Loan Association,
                            MeraBank Federal
                            Savings Bank, and
                            Western Savings &
                            Loan Association       8.1\e  22.0\e
                      199
                        2   Security Pacific
                            Bank Arizona
Bank One Corporation  199  Valley National Bank     10.5    28.8    10.9    29.7
                        3   of Arizona
--------------------------------------------------------------------------------
N/A - Data not available. 

\a Includes thrifts. 

\b First Interstate Bancorp did not acquire a bank in Arizona from
1984 through 1992, our period of study. 

\c Size as of year-end 1991, Security Pacific Bank's last year of
operation before its merger with BankAmerica Corporation. 

\d Includes the size of Citibank after the purchase of Great Western
Bank. 

\e Size of Security Pacific in 1991, before its merger with Bank of
America Arizona. 

\f The size of Bank of America Arizona after its merger with Security
Pacific. 

Source:  FDIC call report data. 

As of June 1993, First Interstate Bancorp of California was the bank
holding company for the state's oldest major bank and its third
largest, First Interstate Bank Arizona.  It entered the state in 1877
and was grandfathered under the Douglas Amendment to the Bank Holding
Company Act of 1956.  It steadily lost market share during both the
economically prosperous times of the mid-1980s and the subsequent
economic downturn.  In 1984, it had about 27 percent of the banking
market and in June 1993, about 19 percent. 

The other longstanding bank in the state, established at least a
century ago, was Valley National Bank of Arizona.  In all except 1
year, it was the state's largest bank until it was acquired in 1993
by Bank One Corporation, an Ohio based bank holding company.\4 Valley
National Bank of Arizona, similar to First Interstate Bank Arizona,
steadily lost market share but its decline was more dramatic.  Its
share of the market fell from 40 percent in 1984 to 29 percent by
1992.  By June 1993, the newly acquired bank, Valley National Bank,
now known as Bank One, had $10.9 billion in assets and nearly 30
percent of the banking market. 

For the most part, the three bank holding companies entering in 1986
(Security Pacific Corporation, Chase Manhattan Corporation, and
Citicorp) exhibited similar trends:  increasing in size and market
share when first entering the state and decreasing in size and market
share during the economic downturn.  Decreases in size and market
share did not necessarily mean, however, that resources were being
taken out of the state.  In fact, out-of-state bank holding companies
were contributing capital to their Arizona subsidiaries to ensure
their viability. 

Security Pacific Corporation was the only one of the three bank
holding companies to establish an immediately sizable presence
because it acquired the state's third largest bank--The Arizona Bank,
which became known as Security Pacific Bank Arizona.  Over the next 2
years, Security Pacific Bank Arizona remained the state's third
largest bank, increasing by more than $550 million in assets and 2.5
percent in market share.  Although it continued to be the state's
third largest bank, by 1990, it was slightly smaller than it was when
it entered in 1986, with $5.5 billion in assets and 15.6 percent in
market share.  It was also the only major bank to grow in 1991,
increasing to its largest size before its merger with BankAmerica
Corporation in 1992. 

Citicorp, in contrast to Security Pacific Corporation's immediately
establishing a large presence, initially entered when its bank
holding company purchased Great Western Bank, with $1 billion in
assets and almost 3 percent in market share.  Great Western Bank
became known as Citibank Arizona.\5 This purchase made Citibank
Arizona the fifth largest bank in the state.  Two years later, in
1988, Citibank Arizona tripled in size and became the fourth largest
bank because its bank holding company purchased a bank with close to
$3 billion in assets and 8.6 percent in market share.  Citibank
Arizona also declined in assets and market share once the state
encountered economic problems.  Between 1988 and mid-1993, Citibank
Arizona's assets and market share had declined by approximately
one-third.  (See table IV.2.)

In 1986, Chase Manhattan Corporation was the last major bank holding
company to enter the state when it bought Continental Bank, a smaller
bank, with about $1 billion in assets and 2.7 percent in market
share.  Continental Bank became known as Chase Bank of Arizona. 
Through mid-1993, Chase Bank of Arizona fluctuated between being the
fifth and seventh largest, with a maximum of almost $1.2 billion in
assets and 3.4 percent in market share in 1987.  From the late 1980s
through June 1993, it lost about 50 percent of its assets and market
share.  (See table IV.2.)

In 1990, BankAmerica Corporation entered Arizona by buying three
failed thrifts.  Its bank, Bank of America Arizona, immediately
became the third largest bank in the state, with $6 billion in assets
and about 17 percent in market share.  By chartering a bank out of
the assets of failed thrifts, Bank of America Arizona increased
financial assets owned by banks and boosted the market share of large
banks by about 2 percent.  In 1992, it became Arizona's largest bank
when its bank holding company acquired Security Pacific Bank Arizona. 
This acquisition approximately doubled its size in constant dollars
to $12.6 billion in assets and 34.7 percent in market share in 1992. 

This increase in size was only temporary, however, because
BankAmerica Corporation agreed to divest itself of 49 branches
(consisting of $1.6 billion in deposits and $1.7 billion in assets in
current dollars), in response to concerns that its increased size
would be potentially anticompetitive.\6 A new bank holding company,
Independent Bancorp of Arizona, was created to buy the branches.  The
purchase, however, did not take place until a year later, in April
1993, because Independent had difficulty raising the required
capital.  As of this date, Independent was Arizona's fifth largest
bank company--the only large in-state bank--and was operating its
banks under the name Caliber Bank. 

As a result of the divestiture, Bank of America Arizona became the
state's second largest bank with approximately $10 billion in assets
and 28 percent in market share. 

As had been the case in Washington, at the time of our review there
had not been a study on whether competition within the state had
declined because of the merger, according to federal regulators. 
However, one regulator expressed hope that the newly formed bank
would be a viable competitor to Bank of America Arizona. 


--------------------
\4 Bank One is now the largest bank in Arizona. 

\5 The size of Citicorp's acquisition in real 1986 dollars was
approximately $806 million, which is the size of a smaller bank.  Its
assets did not increase to more than $1 billion until 1988 when it
purchased United Bank of Arizona.  We, therefore, placed it in the
smaller bank category for the years 1986 through 1987. 

\6 These concerns were similar to those of regulators in Washington
state discussed in appendix III. 


   INTERSTATE BANKING HAS CHANGED
   OWNERSHIP OF SMALLER BANKS BUT
   NOT CAUSED THEIR DEMISE
-------------------------------------------------------- Appendix IV:4

Although they are expected to continue to fill a niche in the Arizona
banking industry, smaller banks played less of a role during the late
1980s and early 1990s than they had in earlier years.  As in
California, their numbers fluctuated greatly with the state's
economic changes.  When the economy was strong in the early to middle
1980s, many new smaller banks were formed.  After the economic
collapse, several smaller banks failed and were mostly bought by
out-of-state bank holding companies.  Few new smaller banks have
taken their place, a fact that regulators and bankers attributed to a
lack of capital, not interstate banking. 


      CONSOLIDATION AND
      ACQUISITIONS OF SMALLER
      BANKS
------------------------------------------------------ Appendix IV:4.1

Smaller banks increased in number from 42 in 1984 to a peak of 50 in
1986, and then declined to 32 in mid-1993.  Acquisitions occurred in
all years, and in most were partially offset by new bank entry.  New
bank formation was particularly strong in the mid-1980s when the
economy was still strong.  From 1985 through 1987, 12 new banks were
formed, in contrast with only 4 between 1988 and 1992.  All new
smaller bank charters were for in-state banks, because de novo entry
was prohibited for interstate banks until mid-1992.  Capital
availability, not a saturated banking market, was the primary reason
for the decline in the creation of new smaller banks, according to a
state banking regulator. 

Table IV.3 shows the number of in-state and out-of-state acquisitions
of smaller banks from 1986 through 1992.  Some of these acquisitions
resulted in a change of ownership from in-state to out-of-state,
while others resulted in the disappearance of a bank, because the
acquirer was already present in the Arizona market.  Twenty-nine of
the 39 acquisitions were in-state smaller banks purchased by
out-of-state holding companies.  Many were single smaller banks that
continued to be operated as single entities after the acquisitions. 



                               Table IV.3
                
                     Consolidation of Smaller Banks


                        Solven          Solven          Solven
Year                         t  Failed       t  Failed       t  Failed
----------------------  ------  ------  ------  ------  ------  ------
1986-88                     16       1       4       1      20       2
1989-92                      4       8       0       5       4      13
======================================================================
Total                       20       9       4       6      24      15
----------------------------------------------------------------------
Source:  FDIC call report data. 

Table IV.3 also shows that the greatest number of acquisitions
occurred from 1986 through 1988, almost all of which were of solvent
institutions.  From 1989 through 1992, the frequency of acquisitions
declined somewhat and most were of failed institutions. 

Table IV.4 shows the market share trends for interstate and in-state
smaller banks.  Between 1985 and 1990, in-state smaller banks
steadily lost market share, with their greatest losses occurring in
1986, when the economy was still healthy and interstate banking first
passed.  Interstate smaller banks, on the other hand, gained in
market share until 1989 and then declined as the economy faltered. 
Nevertheless, throughout the middle to late 1980s, interstate smaller
banks held a larger share of the market than did in-state smaller
banks.  It was not until 1991, when in-state smaller banks began to
increase in market share (partly through the creation of three new
banks) and interstate banks continued to decrease, that this trend
was reversed. 



                               Table IV.4
                
                Market Share Comparison of Out-of-State
                       and In-State Smaller Banks

                          Market share
                            of out-of-    Market share    Market share
                         state smaller     of in-state  of all smaller
Year                             banks   smaller banks           banks
----------------------  --------------  --------------  --------------
1985                              0.0%           11.2%           11.2%
1986                               6.9             6.6            13.5
1987                             9.0\a             5.6            14.6
1988                               5.9             5.5            11.4
1989                               6.7             4.8            11.5
1990                               6.5             3.2             9.7
1991                               5.5             4.4             9.9
1992                               4.6             6.3            10.9
1993\b                             4.8             6.8            11.6
----------------------------------------------------------------------
\a Includes the only foreign bank in Arizona from 1987 through 1993. 
It was a smaller bank and in 1993 had .2 percent share of the market. 

\b 1993 data are as of June 30.  All other data are as of December
31. 

Source:  FDIC call report data. 

While smaller banks as a group were recapturing market share, a
divergent trend was occurring within the group.  For example, the
market share held by banks with less than $100 million in assets
declined from 3.8 percent to 2.7 percent, while the market share for
banks with assets from $100 million to $1 billion increased from 7.1
percent to 8.8 percent. 


   INTERSTATE BANKING AND SMALL
   BUSINESS LENDING IN ARIZONA
-------------------------------------------------------- Appendix IV:5

Our discussions in selected local markets with regulators, focus
group participants, and bankers in Arizona revealed that, as in
California and Washington, some small businesses have had difficulty
obtaining loans.  However, as before, we were unable to determine
whether this was a direct result of interstate banking, because other
factors (i.e., poor economic conditions and changes in bank
regulation) were seen as playing a role. 


      DATA ON SMALL BUSINESS
      LENDING IS INCOMPLETE
------------------------------------------------------ Appendix IV:5.1

Similar to our review of the other two states, we began by using the
most complete data on bank lending (i.e., call reports and SBA data)
to assess the total amount of commercial lending to businesses and
the amount of one type of small business lending.\7

As mentioned previously, in Arizona, out-of-state bank holding
companies owned banks of all sizes.  Therefore, we looked at lending
patterns by both bank size and ownership to determine whether
significant differences existed between (1) large and smaller banks
and (2) out-of-state banks and in-state banks.  We found that Arizona
banks did not completely follow the trend in Washington, where large
banks invested a higher percentage of their assets in loans than did
smaller banks. 

Figure IV.1 shows that in Arizona smaller banks normally provided
higher percentages of loans to assets prior to the state's economic
downturn in 1988.  Although, after the effects of the downturn were
felt and both large and smaller banks decreased their total lending,
large banks tended to provide higher percentages of loans to assets
than did smaller banks. 

   Figure IV.1:  Lending in
   Arizona

   (See figure in printed
   edition.)

Source:  FDIC call report data. 

Our analysis of the quarterly June 1993 call report data on small
business lending showed that large banks invested a greater dollar
amount than did smaller banks to small business lending (i.e., C&I
and commercial real estate) during the 3 months, but that smaller
banks devoted a greater portion of their assets to this type of
lending than did larger banks.  Large banks had $2.1 million invested
in small business loans, or 6.7 percent of their assets.  Smaller
banks, on the other hand, had invested nearly $500,000 in these types
of loans, or 10.8 percent of their assets.  Moreover, this
relationship did not change when C&I and commercial real estate loans
were analyzed separately. 

Table IV.5 compares the loan portfolios of Arizona's in-state and
out-of-state banks of various sizes.  Significant observations
include the following: 

  -- Among large banks, those owned out-of-state invested a larger
     portion of their assets in loans than those owned in-state.\8

However, among smaller banks, those owned in-state tended to provide
more loans. 

  -- In each size category, in-state banks provided proportionately
     more commercial loans overall than did their out-of-state
     counterparts.\9

  -- In regard to the types of commercial lending, in-state banks
     tended to make more commercial real estate loans and either more
     or about the same amount of C&I loans as out-of-state banks. 



                                    Table IV.5
                     
                          Loan Portfolio Comparison as a
                               Percentage of Assets

                           (1984-92 average percentage)

                                                        Commercial
                                          Commercial   real estate
                                Loans/        loans/        loans/    C&I loans/
Bank type                       assets        assets        assets        assets
------------------------  ------------  ------------  ------------  ------------
Large banks
--------------------------------------------------------------------------------
Out-of-state                   66.2%\a         26.3%         11.9%         14.4%
In-state                          64.6          29.3          14.6          14.7

Smaller banks: assets from
$100 million to $1 billion
--------------------------------------------------------------------------------
Out-of-state                      69.6          28.3          15.8          12.5
In-state                          70.6          38.0          14.7          23.3

Smaller banks: assets less
than $100 million
--------------------------------------------------------------------------------
Out-of-state                      58.5          33.8          11.8          21.9
In-state                          61.5          36.8          15.1          21.7
--------------------------------------------------------------------------------
Note:  In-state bank averages were calculated as the average of the
weighted annual means for each category from 1984 through 1992.  The
average for out-of-state banks was calculated from 1986 through 1992
because interstate banking legislation was not passed until 1986. 

\a From 1991 through 1992, the percentage of assets large
out-of-state banks invested in total loans dropped from 66.3 percent
to 48.5 percent.  If 1992 were excluded from the average, this
average would rise to 68.4 percent from 1984 through 1991. 

Source:  FDIC call report data. 

As for SBA-guaranteed loans, nonbanks had a greater role in Arizona
than they did in Washington and California (see table IV.6).  They
were the strongest providers, followed very closely by smaller banks. 
As in California, large banks accounted for a relatively low
percentage of total SBA loans.  The top five individual lenders
included two nonbanks and three smaller banks. 



                               Table IV.6
                
                 SBA Lending by Type of Institution in
                           Arizona, 1988-1992

                                             Number of      Percent of
Type of institution                              loans           total
--------------------------------------  --------------  --------------
Nonbanks                                           440            44.9
Smaller banks                                      435            44.3
Large banks                                        100            10.2
Thrifts and saving banks                             6             0.6
----------------------------------------------------------------------
Source:  SBA data. 


--------------------
\7 For a discussion of the data limitations, see appendix II. 

\8 From 1984 through 1985, there was only one out-of-state large
bank.  From 1988 through 1992, there was only one in-state large
bank. 

\9 Although not shown in table IV.5, the commercial loans-to-assets
ratio of all the bank categories declined over time and that of
out-of-state banks showed the greater decrease. 


      TREND TOWARD CENTRALIZED AND
      STANDARDIZED LOAN PRACTICES
------------------------------------------------------ Appendix IV:5.2

Centralized and standardized loan processes used by the two large
interstate banks and one large in-state bank we visited in Arizona
worked similarly to processes used in California and Washington. 
That is, small business loan decisions were made primarily by
comparing the loan application to standardized loan criteria.  The
smaller small business loan applications were usually handled in loan
processing centers, while applications for larger loans were usually
handled by loan officers spread across the state. 

Many interstate bankers we spoke with believed that centralization
and standardization had increased, not decreased, credit access for
small businesses because large banks could now make a vast number of
small business loans in a cost-effective manner.  Moreover, two
officials mentioned that personnel at centralized locations
specialized geographically and supplemented their expertise through
contact with branch personnel. 

As in Washington, Arizona interstate bankers mentioned that the broad
credit policies that governed their overall lending strategies were
developed by their corporate managers out-of-state and applied to all
lending centers.  Examples of corporate policies included (1)
categories of riskiness for various types of lending or industries
and (2) procedures and approval levels for loans of various types or
amounts.  Industries and types of lending characterized as "high
risk" included commercial real estate related lending, restaurants,
and high-technology companies.  Interstate bankers noted that they
might influence these broad guidelines, but typically, the only
state-to-state variations taken into account were differences in laws
and regulations. 


      CENTRALIZATION AND
      STANDARDIZATION MAY AFFECT
      CREDIT AVAILABILITY
------------------------------------------------------ Appendix IV:5.3

To enhance our understanding of credit availability concerns in
Arizona, we focused on three markets to see if we could ascertain
whether small businesses were having difficulty obtaining loans and
what role, if any, interstate banking and industry consolidation
played.\10 We (1) held focus group discussions in each market with
individuals who worked closely with small businesses on financing
issues, (2) interviewed regulators, and (3) interviewed officials
from interstate and smaller banks who were major providers of small
business loans. 

The overall perceptions expressed in the Arizona focus groups and
among some bankers and government officials were similar to those
expressed in California and Washington.  That is, some small
businesses that were once able to get loans can no longer do so. 

Arizona focus groups strongly believed that remote
decisionmaking--whether in evaluating individual loans at centralized
locations or in setting broad credit policies at a corporate
level--led banks to refuse some loans.  Each group explained in
detail how centralization and standardization impeded loans to small
businesses. 

One focus group participant, a senior credit officer at a major loan
fund, described a successful general contractor based in Sierra
Vista, a rural town about 60 miles south of Tucson.  This contractor
needed a $300,000 loan to buy the building and the attached land that
he rented for the company's Tucson projects.  The credit officer
evaluated the loan, found it to be a solid, creditworthy deal, and
committed his fund to financing one-half of the amount.  However, he
was unable to obtain funding of the remaining half from one of the
large banks whose branches were the only banks in Sierra Vista.  For
several reasons, the contractor found it impractical to use a bank
outside of Sierra Vista, thus, he had no financial alternatives to
the large banks.  According to the credit officer, a local loan
officer of one of the large banks agreed that the loan was
creditworthy but was unable to convince the bank's officials in
Phoenix to approve the loan. 

The credit officer blamed centralized decisionmaking processes for
preventing the large banks from funding the loan.  Corporate-level
polices requiring additional layers of review and documentation for
construction-related loans, he believed, led subsidiaries in Arizona
to turn down most construction loans, even when they were, in his
view, creditworthy. 

A second experience was related by the executive director of a loan
fund to illustrate that the borrower's character and community
commitment was not always taken into account by large banks.  A
well-established Tucson construction company, which had been
profitable during the 1980s, suffered a 1-year significant loss in
the early 1990s.  Over the objections of local loan officers at the
bank where this company had long been a customer, the bank's final
decisionmakers in Phoenix decided not to renew the company's $200,000
line of credit.  The local loan officers felt that, given the
long-term relationship, the character of the borrower, and the fact
that the company was a major employer in the community, the credit
line should have been extended.  The Phoenix officials, however,
based their decision on the fact that the company was in a high-risk
industry and had suffered a serious loss.  The loan fund director,
who provided a loan so that the company could pay off the large bank
and make necessary changes to return to profitability, viewed this
case as an example of how remote decisionmaking could lead large
banks to abandon long-term customers facing temporary financial
problems. 

Several interstate bankers also shared the perspective that, in some
respects, centralization and standardization had made it more
difficult for some small businesses to obtain credit.  Two noted the
necessity of having lending officers in local areas because personnel
housed at centralized locations did not always understand the unique
features of a local market.  A third mentioned that standardization
and centralization could impair credit access because some small
businesses did not maintain the type of documentation centralized and
standardized systems required to make loan decisions. 

Participants did not, however, perceive large banks as uniformly
unresponsive to small business needs.  On the basis of their
experiences with individual banks, they saw some as better than
others.  The overriding determinant, according to not only focus
group participants but several bankers as well, is a bank's
management philosophy and the degree to which it maintains a local
market presence. 

Further, several bankers we spoke with from Arizona's interstate
banks echoed the perspective of large bankers in the other two states
that centralization and standardization had allowed banks with
extensive branch networks to become more active in the small business
market because it lowered their internal cost of providing small
business loans.  Focus group participants, however, tended to work
with small businesses that were, in their view, creditworthy but did
not easily fit standardized criteria or policies found in a
centralized and standardized system. 

The types of small businesses seen as susceptible to credit
availability problems were similar to those described in California
and Washington.  These included businesses that

  -- needed loans for less than $100,000,

  -- could not easily be evaluated according to standardized
     criteria, or

  -- were in industries that were classified as "high risk."


--------------------
\10 The markets were Phoenix, Tucson, and Yuma.  Appendix I briefly
describes these locations. 


      INDUSTRY CONSOLIDATION MAY
      HAVE VARYING EFFECTS ON
      CREDIT AVAILABILITY
------------------------------------------------------ Appendix IV:5.4

Industry consolidation within Arizona occurred both through the
acquisition of solvent financial institutions and through the
disappearance or acquisition of failed financial institutions. 
Between 1986 and 1992, the majority of the acquisitions were by
out-of-state bank holding companies. 

Because out-of-state bank holding companies have purchased so many
banks and thrifts, several focus group participants and bankers noted
that interstate banking increased the availability of capital to the
extent of saving the banking industry after the economy faltered.  In
regard to small business lending, however, many focus group
participants felt that out-of-state banks had centralized their
operations to such an extent that they lost touch with the community
and that this had made small business credit more difficult in some
areas.  Acquisition-related reasons cited for credit difficulty
included (1) temporary inefficiencies during the transition in
management, (2) a decrease in the number of banks in local
communities, and (3) changes in the newly formed bank's lending
philosophy. 

A focus group participant involved in attracting new businesses to
Arizona explained how transitional inefficiencies can make it more
time consuming for small businesses to obtain credit.  He believed
that these types of difficulties could temporarily hinder the
economic growth of a market.  For example, a California-based company
that manufactured and refurbished railroad cars needed a $700,000
loan to expand into Arizona.  An Arizona bank approved the loan but
was bought by another bank before the loan could be made.  The
acquiring bank, which had just centralized its approval process,
required the company to submit a new application to the loan-making
center because the loan pertained to a high-risk lending area.  The
company, feeling that it had already spent more than enough time
trying to get a loan from the first bank, went instead to a smaller
bank in the area. 

A second merger-related cause of small business credit difficulty
mentioned in some markets was a reduction in competition that could
occur when an out-of-state bank already in an area acquires another
bank in the same area.  This scenario is more likely to occur after a
state has permitted interstate banking for several years, when
out-of-state banks have already entered a state and are looking to
expand their market share in communities in which they are already
located. 

A well-known example of the loss of a competitor is the merger
between BankAmerica Corporation and Security Pacific Corporation in
1992, because both had bank branches located in many of the same
markets across the state.  Apart from this merger, in 4 of the
state's 15 counties between 1985 and 1990, large out-of-state banks
absorbed smaller banks that had not been replaced by new local banks
as of year-end 1992. 

A third case in which mergers can impair small business credit in
local markets is when a bank that de-emphasizes small business
lending takes over a local bank that has been an active small
business lender.  Unfortunately, we were unable to determine whether
out-of-state banks altered the lending strategies of the banks they
took over in particular local markets or in regard specifically to
small business lending, because data were unavailable.  However, we
were able to determine whether these banks altered the total amount
of lending or the overall lending strategy statewide upon entering
the state by comparing loan portfolios before and after acquisitions. 
We limited this analysis to the three largest interstate
banks--Security Pacific Bank Arizona, Citibank Arizona, and Chase
Bank of Arizona--that bought institutions between 1986 and 1988 so we
could compare acquiring banks with sound acquired banks. 

Table IV.7 shows that Security Pacific Bank Arizona and Chase Bank of
Arizona made more total loans on average than did the banks their
holding companies took over, but that Citibank Arizona made somewhat
less.  Security Pacific Bank Arizona increased its total lending by
increasing all three types of loans:  consumer, commercial real
estate, and C&I loans.  Security Pacific Bank Arizona was also the
only one of the three banks that undertook more total commercial
lending than consumer lending.  Chase Bank of Arizona, on the other
hand, increased total lending by increasing its consumer lending and
made fewer commercial loans than the bank it acquired.  Finally,
Citibank Arizona made fewer loans than the banks it acquired, and
like Chase Bank Arizona, emphasized consumer over commercial lending. 
The strategy of these two banks began before the recession in Arizona
eliminated many of the commercial lending opportunities. 



                                    Table IV.7
                     
                      Comparison of Average Lending Patterns
                         of Out-of-State Banks With Their
                                  Acquired Banks

                       (Constant 1992 dollars in thousands)


                                   Total         Total                Commercial
Acquired bank          Total    consumer    commercial               real estate
New subsidiary       loans\a       loans         loans   C&I loans         loans
--------------  ------------  ----------  ------------  ----------  ------------
Arizona Bank          $3,353      $1,348        $1,623        $723          $900
 Security              4,940       1,621         2,097         865         1,233
 Pacific Bank
 Arizona\b
Continental              499         101           383         115           268
 Bank                    632         400           219          64           155
 Chase Bank of
 Arizona
Great Western          2,247         534         1,488         822           666
 Bank and              1,917         912           796         266           530
 United Bank
 Citibank
 Arizona\c
--------------------------------------------------------------------------------
Note:  The table compares the yearly average of the loans made during
1984 through 1985 by the banks acquired by the holding companies of
Security Pacific Bank Arizona, Chase Bank of Arizona, and Citibank
Arizona when they entered Arizona with the yearly average loans made
by Security Pacific Bank Arizona from 1987 to 1991 (the year before
its merger with Bank of America), by Chase Bank of Arizona from 1987
to 1992, and by Citibank Arizona from 1988 (the year it acquired
United Bank) to 1992.  The table does not include First Interstate
Bank Arizona, because it was already operating in Arizona in 1984, or
Bank of America Arizona, because it entered the state in 1990 when
its holding company acquired failed thrifts. 

\a Total lending includes other types of loans besides consumer and
commercial; therefore, it does not equal total consumer lending plus
total commercial lending. 

\b Security Pacific Corporation also purchased two smaller banks in
1989 and 1990 with total loans of $21.1 million and two thrifts in
1991 with total assets of $1,544.3 million (loan data were not
available). 

\c Citicorp also purchased four smaller banks between 1989 and 1990
with loans totaling $60.2 million. 

Source:  FDIC call report data. 


      CREDIT SEEN AS TIGHT IN
      MARKETS THAT REPORTEDLY
      LACKED SUFFICIENT
      ALTERNATIVES TO LARGE BANKS
------------------------------------------------------ Appendix IV:5.5

As in California and Washington, standardization, centralization, and
consolidation were seen as causing problems for small business credit
availability, particularly where it was believed that there were
insufficient alternatives to large banks.  Some focus group
participants and some bankers thought that smaller banks, often seen
as one of the most crucial providers of small business loans, were
insufficiently spread throughout the state.  Also, the total number
of smaller banks had diminished by 36 percent from 1986 through
mid-1993, and those that remained reportedly had small capital bases. 

Rural areas were often highlighted as experiencing the most severe
credit problems.  In contrast, one area in the state specifically
mentioned by several participants as having little unmet demand was
Tucson. 

Focus group participants contended that rural areas in particular
lacked sufficient numbers of smaller banks.  Our review of local
market deposit data showed that as of June 1992, 3 of 12 rural
counties lacked a smaller bank, while in 6 more counties, smaller
banks held less than 5 percent of the deposits. 

Problems associated with centralized and standardized practices of
large banks are exacerbated in rural areas that must rely on these
banks for the bulk of small business credit, according to focus group
participants and others we spoke with.  They cited two reasons:  (1)
decisionmaking can be further removed from rural than urban areas and
(2) the criteria and policies and procedures used to evaluate loans
may not take into account the unique nature of rural businesses. 

In Tucson, credit availability might have been seen as sufficient
because the city had a strong economic development infrastructure and
well-established loan funds.  Tucson focus group participants
mentioned, for example, that Tucson had more financing alternatives
for small businesses than did other markets in Arizona, including
Phoenix, which is larger.  According to one participant, these
alternatives developed because Tucson had an aggressive economic
development department that had, as far back as the late 1970s,
recognized that small businesses were having difficulty obtaining
credit. 




(See figure in printed edition.)Appendix V
COMMENTS FROM FDIC
========================================================== Appendix IV



(See figure in printed edition.)



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(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



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(See figure in printed edition.)



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(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Kane Wong, Assistant Director
Barry Reed, Senior Social Science Analyst
Hazel Bailey, Writer-Editor

SAN FRANCISCO REGIONAL OFFICE

Nancy Cosentino, Evaluator-in-Charge
Allene Cooley, Evaluator
Kathryn Mathisen, Evaluator
Christine McIntyre, Evaluator
Jon Silverman, Reports Analyst


GLOSSARY
=========================================================== Appendix 0


      BANK HOLDING COMPANY
------------------------------------------------------- Appendix 0:0.1

A corporation that controls at least one bank. 


      BANKING COMPANY
------------------------------------------------------- Appendix 0:0.2

One or many banks that belong to a single entity. 


      COMMUNITY BANK
------------------------------------------------------- Appendix 0:0.3

A banking company with less than $1 billion in banking assets. 


      CONCENTRATION RATIO
------------------------------------------------------- Appendix 0:0.4

A measure of the amount of business handled by a specified number of
the largest banking companies. 


      BANKING INDUSTRY
      CONSOLIDATION
------------------------------------------------------- Appendix 0:0.5

Banking industry consolidation is characterized by a greater
concentration of assets among the largest banking companies within a
local market, a state, or the nation. 


      DE NOVO
------------------------------------------------------- Appendix 0:0.6

A new bank or branch office. 


      HERFINDAHL-HIRSCHMAN INDEX
      (HHI)
------------------------------------------------------- Appendix 0:0.7

An index of concentration computed by summing the square of the
market share of each firm in the industry. 


      INDEPENDENT BANK
------------------------------------------------------- Appendix 0:0.8

A bank that is not controlled by a bank holding company. 


      IN-MARKET MERGER
------------------------------------------------------- Appendix 0:0.9

A merger between banks that operate in substantially overlapping
markets. 


      INTERSTATE BRANCHING
------------------------------------------------------ Appendix 0:0.10

An arrangement that permits banks to branch across state borders. 


      LIMITED BRANCHING
------------------------------------------------------ Appendix 0:0.11

An arrangement that restricts in-state bank branches, usually by
number or by distance from where they are headquartered. 


      MARKET EXTENSION MERGER
------------------------------------------------------ Appendix 0:0.12

A merger between banks that operate in minimally overlapping markets. 


      NATIONWIDE BANKING
------------------------------------------------------ Appendix 0:0.13

An arrangement that permits bank holding companies to operate
subsidiary banks in any state regardless of where the holding
companies are headquartered. 


      NATIONWIDE RECIPROCAL
      BANKING
------------------------------------------------------ Appendix 0:0.14

An arrangement whereby a state limits the entry of out-of-state bank
holding companies to those states where its bank holding companies
are permitted to enter. 


      NONBANK SUBSIDIARY
------------------------------------------------------ Appendix 0:0.15

Any business other than a commercial bank operated by a bank holding
company. 


      REGIONAL RECIPROCAL BANKING
------------------------------------------------------ Appendix 0:0.16

An arrangement whereby a state designates from which states it will
permit the entry of bank holding companies.  Entry is limited to
banks from states within a specific region and is permitted only if
those states offer reciprocity. 


      RESERVE BANK
------------------------------------------------------ Appendix 0:0.17

Any of the 12 district Federal Reserve Banks. 


      STATEWIDE BRANCHING
------------------------------------------------------ Appendix 0:0.18

An arrangement that allows banks to operate a branch anywhere within
a state. 


      SUBSIDIARY
------------------------------------------------------ Appendix 0:0.19

A separately chartered and regulated bank that is part of a bank
holding company. 


      UNIT BANKING
------------------------------------------------------ Appendix 0:0.20

An arrangement that prohibits banks from offering full services
anywhere but their headquarters.  Branching is not permitted. 


*** End of document. ***