An empirical test of the impact of potential competition on banking structure /

Abstract

The specific purpose of this study is to test the hypothesis that markets which experience foothold acquisitions experience deconcentration, or less of an increase in concentration than markets which do not experience foothold entry. Since multibank holding companies are largely responsible for the increased merger activity in recent years, the analysis focuses on foothold acquisitions by these organizations during the period 1970-76. This study uses multiple regression analysis to test the relationship between foothold entry and changes in market structure. Some of the most widely used procedures for selecting variables for the regression model are forward selection, backward elimination, and stepwise regression. Each of these methods was utilized in this study. The results of this study do not give support to the contention that adherence to the potential competition hypothesis will yield more competitively structured banking markets. Markets which experienced foothold entry did not produce any statistically significant difference in deconcentration than markets which did not.

The application of the potential competition doctrine to the banking industry, a highly regulated industry, will, no doubt, differ in major respects from its application to non-regulated markets. This study seeks to establish a framework for empirically testing the major assumption of the doctrine when applied to a regulated industry such as banking.

In analyzing merger and acquisition proposals, regulatory agencies rely on two distinct theories of competition: the theory of existing competition and the theory of potential competition. The theory of existing competition applies only to mergers involving firms in the same market. When the regulatory authorities must assess the competitive impact of a merger involving firms in different markets--a market extension merger--they often employ the theory of potential competition. Unfortunately, the validity of applying the concept may be questioned because there is virtually no valid empirical research supporting its major assumption. The basic assumption of the potential competition theory, particularly as it is applied to bank holding company acquisitions, is that foothold entry, as opposed to the acquisition of a leading bank, is more likely to yield less concentrated markets.