On the Size Distribution of Banks

I n recent years, important changes to the U.S. banking regulatory framework have been introduced that were expected to affect the size distribution of banks. These changes in regulation had a clear objective: to allow for a higher degree of horizontal and vertical integration in the banking industry. While horizontal integration takes place when different firms that are producing the same product merge, vertical integration takes place when firms producing certain inputs merge with the firms that use those inputs. The Riegle-Neal Interstate Banking and Branching Efficiency Act was passed in September 1994. The act allows banks and bank-holding companies to freely establish branches across state lines. In fact, the act came as the final step in a long process of gradual removal of interstate branching restrictions that took place at the state level during the late eighties and early nineties. This new flexibility in the branching regulation has opened the door to the possibility of substantial geographical consolidation in the banking industry. Indeed, geographical consolidation has always been one of the main channels used to achieve horizontal integration at an industry level. In November 1999 Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act. It allows affiliations among banks, securities firms, and insurance companies, removing many long-standing restrictions over the horizontal and vertical integration of firms providing financial services. Both of these regulatory changes were expected to have substantial effects on the overall structure of the U.S. banking sector, and in particular, on the size