By the government's standards, Casper, Wyo., is the worst place in the country to get banking services.

The city has a concentration rating of 6,863, or nearly four times the level that worries the Justice Department and Federal Reserve Board. Yet Casper's 47,000 residents are served by six banks, six credit unions, 23 insurance agencies, 10 mortgage brokers, and five investment firms.

"We have plenty of banks for the size of the community we have," said Richard J. Bratton, former president of the Casper Chamber of Commerce and chief financial officer of Wyoming Financial Group, a finance company. "They offer pretty much everything required."

Casper is just one example of how U.S. markets remain surprisingly competitive and open to significantly more consolidation despite a record boom in mergers.

An analysis of Federal Reserve and Sheshunoff Information Services data finds that even markets the government considers highly concentrated are served by dozens of financial firms offering services to consumers and businesses.

"It is hard to point to markets where there would be a huge competitive effect from a merger," said James B. Thomson, a vice president at the Federal Reserve Bank of Cleveland who directs the financial research group.

But consolidation has become a hot political issue this year as the number and size of merger partners climb.

Just eight months ago, First Union Corp. shocked the industry with its record $17 billion deal for CoreStates Financial Corp. That deal pales next to the $70 billion price tag on Citicorp's merger with Travelers Group or the $60 billion combination of NationsBank Corp. and BankAmerica Corp.

Lawmakers are voicing concern about the impact consolidation will have on consumers, and advocates are filing protests against most of the deals.

"The more competitors there are, the more banks pay on savings deposits and the more friendly are their ATM charges," said Matthew Lee, executive director of the Bronx, N.Y.-based Inner City Press/Community on the Move.

But economists, academics, and industry officials question the traditional view that there must be a lot of banks in a market to ensure competition.

"People are overreacting to consolidation," said Cynthia Glassman, an Ernst & Young partner. "The underlying assumption is that competition for banking services is just banks and thrifts, but in today's marketplace that is not a good assumption. Every service a bank provides is also provided by nonbank financial institutions."

"There is room for further consolidation," agreed Bernard Shull, an economics professor at Hunter College in New York. "Concentration levels can be high and even rise and there will still be large numbers of depository institutions and other financial institutions in these markets."

Even regulators concede the gauge is flawed. Mitch Mertens, a senior attorney at the Office of the Comptroller of the Currency who reviews bank mergers, said competition for deposits is used as a proxy for all banking services.

"Deposits are only one aspect of banking," he said. "To use that as the principal number for building your HHI means you are bound to have some inaccurate concentration figures."

The HHI is the Herfindahl-Hirschmann Index, which regulators use to gauge the competitiveness of a market. The index is computed by taking the sum of the square of 100% of each bank's share of deposits in the market and 50% of each thrift's share. A market with only one bank would have a ranking of 10,000, while a city with 10 banks each with 10% of the market would have an HHI of 1,000.

Any merger for which the resulting HHI exceeds 1,800, or increases more than 200 points, draws scrutiny from regulators.

During the past decade, U.S. urban markets have become slightly less competitive by this measure. The average HHI rose to 1,611 in 1997, from 1,402 in 1987, according to the American Bankers Association.

Nearly 100 urban markets-about 30% of the total-have HHIs above 1,800. They tend to be smaller cities, such as Amarillo, Tex., Buffalo, and Flint, Mich. Most bigger metropolitan areas, such as Philadelphia, New York, Boston, Dallas, and Los Angeles have HHIs between 1,000 and 1,800.

Eight markets-Anchorage, Casper, Cumberland, Md., Jacksonville, Fla., Laredo, Tex., Pine Bluff, Ark., Portland, Ore., and Terre Haute, Ind.-have HHIs above 3,000. This means the Department of Justice would be unlikely to approve any bank merger in these markets unless the institutions agreed to divest a significant number of branches.

Mergers of the biggest banks in a market often may have a dramatic effect on its HHI. For instance, the merger of Banc One Corp. and First Chicago NBD Corp. would cause the HHI for Indianapolis to jump to 2,408, from 1,386. On Monday, American Banker will explore how Indianapolis is responding to the deal.

Banks often soften the impact by divesting branches. But even with divestitures, HHIs can remain high. When it bought Barnett Banks Inc., NationsBank Corp. agreed to divest $300.7 million of deposits in Fort Myers, Fla. The city's HHI hit 2,035, but regulators approved the deal because Fort Myers still has 17 banks and thrifts including giants First Union Corp. and Sun Trust Banks Inc.

The cities with the highest concentration readings are on the West Coast. Besides Portland, San Francisco and Seattle have concentration scores above 2,000. Yet these markets appear well-served. San Francisco has 72 banks and thrifts, including eight institutions with more than $1 billion of deposits.

The Cleveland Fed's Mr. Thomson said the competitiveness gauge was devised in an era when banks could not branch across county lines, much less state lines. This means it ignores the potential competition from banks in neighboring areas that could move in if the local bank raises fees or cuts deposit rates, he said.

"If there is the potential for someone else to come in the market, then the bank will act more like it is a competitive market," he said.

Also nonexistent when the HHI was developed in 1950 were telephone banking, supermarket branches, Internet banking, and fierce nonbank competition for business and consumer customers, he said.

"There are a lot of people chasing this business," he said. "An HHI that only includes traditional banks and thrifts is becoming increasingly less relevant."

Alan Fisher, executive director of the San Francisco-based California Reinvestment Committee, argues that not all of these bank and nonbank companies are pursuing customers throughout the market. Some areas, particularly low-income neighborhoods, are served by only a few banks, so these communities are more vulnerable to mergers.

"Banking is a neighborhood by neighborhood issue," Mr. Fisher said. "The issue for merchants, consumers, and homeowners is whether they have access to a branch, not whether there are branches in some other part of the city."

The government should recognize this and block mergers that hurt competition in specific neighborhoods, he said.

Jim Chessen, chief economist at the ABA, said it is impractical to weigh the effects of mergers of specific communities. "It would take enormous resources to look at the effects of every merger on every block," he said.

In fact, he questions the need for geographic-based reviews. "The nature of financial services is changing rapidly to provide products in innovative ways using technology," Mr. Chessen said. "The notion of national, state, or local boundaries is anachronistic."

Still, Mr. Chessen said he favors retaining the HHI, saying it provides an easy-to-calculate way to separate mergers that raise competitive issues from those that do not. "You have to make cuts somewhere," he said. "Otherwise you could spend hundreds and thousands of dollars looking at every merger that occurs. That would not be a good use of taxpayer dollars."

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