Bucking conventional wisdom, a new government study finds that markets hit hard by consolidation are less likely to spawn new banks.

The surge in de novo charters has largely been explained as new banks' following active acquirers into markets in the hope of capitalizing on consumer unrest caused by deals.

But two Federal Deposit Insurance Corp. researchers have concluded after statistical analysis of mergers nationwide that they actually make it harder for start-up banks to succeed.

"Economic theory suggests that the primary impetus for de novo entry should be expected future profitability," according to the study, titled "Determinants of De Novo Entry in Banking."

Heavy merger activity creates large competitors with more resources, the study said, and "reduces the opportunities for the level of profits needed to encourage de novos."

The study, released Tuesday, compared new banks chartered and merger activity from 1995 through 1997 in 322 metropolitan statistical areas.

More than 400 banks and thrifts were chartered during those three years, up from only 40 in 1992.

"This dramatic increase in new charters has occurred during a period when there has been considerable consolidation," the study said.

But instead of the mergers' spurring new charters, the FDIC researchers concluded, a single factor-the health of the economy-is fueling both trends.

"When there are profits to be earned, there are going to be de novos, regardless of merger activity," said Steven A. Seelig, who co-wrote the study with Timothy Critchfield. De novos will continue to pop up in markets where there is economic expansion, he said.

To be sure, new banks are being formed in areas hit by consolidation, Mr. Seelig added. But those organizing efforts are based on the health of that market's economy, not the number of mergers.

"If everything else were constant, mergers would probably have a neutral effect, or discourage entry," he said. "But if the market is profitable enough, you will see de novos."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.