Researchers are fascinated with the merger wave. Nearly 3,000 deals -- 2,975 to be exact -- were struck from January 1994 through the end of the first quarter, reducing the number of companies in the banking industry by 20% to 8,721, according to the Federal Deposit Insurance Corp.

One of the reports highlighted here notes that roughly 5% of commercial banks have been acquired per year since the mid-1980s.

Cost, competition, and efficiency are among the many implications of the consolidation trend examined in the three items below.

Two Federal Reserve Bank of San Francisco researchers decided to test the conventional wisdom among economists that bank mergers do not produce significant cost savings.

Simon H. Kwan, a senior economist at the San Francisco Fed, and James A. Wilcox, a visiting scholar at the Fed bank and finance professor at the University of California, Berkeley, find the purchase method of accounting can distort cost savings, particularly occupancy and amortization expenses.

"Merger accounting can hide a significant portion of cost cuts," they conclude. Adjusting data to eliminate the accounting effects, Mr. Simon and Mr. Wilcox find that mergers do reduce operating costs. "We also find that the size of the merger did not have a significant effect on the amount of cost savings."

They studied more than 1,000 mergers completed between 1985 and 1997, a third of which used purchase accounting. For a copy of working paper 99-10, "Hidden Costs Reductions in Bank Mergers: Accounting for More Productive Banks," call 415-974-2163 or visit

Mergers may be reducing the number of correspondent banks, but that does not necessarily imply a decline in competition, two economists at the Federal Reserve Bank of Cleveland say.

William P. Osterberg and James B. Thomson write that the geographic reach of the remaining correspondent banks is growing. As a result, they argue, the number of providers operating in any given area of the country or world may actually increase, even as the overall number of such banks diminishes.

Competitiveness among correspondent has important public-policy implications, the authors say.

As more banks -- correspondent and otherwise -- go national, there might be less need for correspondent banking services provided by the Federal Reserve banks, they write.

For a copy of "Banking Consolidation and Correspondent Banking," visit

Federal Reserve Bank of Chicago senior economist Robert DeYoung takes a sweeping look at bank mergers and finds consolidation has not led to a concentration of market power, reduced small-business access to credit, or higher prices for retail financial services.

In the September issue of the Chicago Fed Letter, Mr. DeYoung also looks at why banks merge and how acquisitions have changed the industry's structure. In a forthcoming Letter, he plans to analyze the prospects for small banks in a postmerger-wave banking industry.

Finally, Mr. DeYoung examines the sharp rise in bank start-ups in "The Birth, Growth, and Life or Death of Newly Chartered Banks," which will be published in the Chicago Fed's quarterly publication, Economic Perspectives. The Letter is available now on the Chicago Fed's Web site. The quarterly will be available once published. Visit 145.pdf.

Research Scan runs on the second and last Friday of the month. Submissions should be sent to Scott Barancik, American Banker, 1325 G. St., N.W., Suite 900, Washington, D.C. 20005.

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