A new study finds large banks price services for entire states or regions, not individual cities, implying competition may remain fierce even in concentrated markets.

The author, Lawrence J. Radecki, assistant vice president for banking studies at the Federal Reserve Bank of New York, found large banks ignore local market conditions when setting rates.

Instead, Mr. Radecki said, these banks charge the same prices throughout a state or region because they consider the market for financial services to be either statewide or regional.

"Many banks set uniform interest rates for both retail loans and deposits," Mr. Radecki wrote. "If banks were still operating in distinct local markets, their retail interest rates would show substantial inter- city variation."

The finding challenges the government's antitrust policy, which focuses on local markets and assumes that banks will charge higher prices if there are not enough competitors.

"This suggests that competitiveness is probably two or three times as great as what regulators have been assuming," said Mike ter Maat, senior economist at the American Bankers Association.

"Regulators should take into consideration the local market effects of financial services providers statewide and possibly regionwide."

For the study, Mr. Radecki looked at the prices charged by banks in New York, Michigan, Texas, California, Pennsylvania, and Florida, where about 40% of the U.S. population lives.

He found little variation from city to city in the prices charged by individual banks. For instance, KeyCorp charges the same rates in the New York cities of Buffalo, Rochester, Syracuse, Albany, and New York City. Also, Fleet Financial Group sets uniform rates for Maine, New Hampshire, Massachusetts, Rhode Island, Connecticut, and upstate New York.

To verify these anecdotal findings, Mr. Radecki used a computer model to analyze deposit data on 400 banks. He first simulated what would happen to interest rates paid on savings accounts if the three largest banks in a metropolitan area increased their market share by 20 percentage points.

Previous studies based on deposit data from 1983 to 1987 found that these banks would lower rates paid on savings accounts. These studies were used to support the government's focus on local markets in bank mergers.

But Mr. Radecki, who analyzed 1996 data, found that the three biggest banks left rates unchanged, even if their share of the market rose by 20 percentage points.

He next looked at what would happen if the three largest banks increased their share of the statewide market for banking services by 20 percentage points.

He found the banks would lower the interest paid on savings accounts by 20 basis points.

This finding, Mr. Radecki said, shows that banks no longer compete in local markets but instead set their prices based on competition statewide.

For a copy of "The Expanding Geographic Reach of Retail Banking Markets," call 212-720-6134 or visit www.ny.frb.org.

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