the effect of state banking laws on holding company - research

The Effect of State Banking Laws onHolding Company BanksDONALD M. BROWN

B ANK holding companies are subject to a vañety ofstate banking laws that govern the extent of branchbanking and the number of banks that can be owned.In response todifferent legal environments, significantdifferences may result between the reported operatingresults of independent banks and holding companybanks; as one consequence, bank financial ratios maybe affected significantly by state banking laws.’ Thesefinancial ratios include measures of bank profitability,efficiency and portfolio composition. Variables repre-senting the characteristics of a bank’s market also maybe affected by state banking laws. These market vari-ables include measures of market structure, size andgrowth.

This article has two purposes. The first is to deter-mine whether bank financial ratios and market vari-ables are related to bank holding company ownershipor state laws limiting the number of banks owned byany one holding company. The second is to determinewhether there are significant economic incentivesfavoring the formation of multi-bank holding com-panies over one-bank holding companies.

WHY DO BANK HOLDINCCOMPANIES EXIST?

Bank holding companies have specific advantagesoyer independent banks. They generally avoid being

tmflank financial ratios haye been examined extensively by econ-

omists. A lengthy bibliography ofthis literature, including citationsthrough part of 1978, may he found in Ronald L. Schillereff,Multihank Holding Company Pemformance (UMI Research Press,1982).

As used herein, “state banking laws” refer specifically to statelaws governing branch banking and bank holding companies.

taxed on internal dividend payments, they can engagein a wider range ofnon-banking activities, they are lesshampered by geographical restrictions, and they canraise funds by selling the commercial paper of theparent corporation; they also can circumvent statebranching restrictions, These advantages are more im-portant to some bank holding companies than toothers; likewise, they are more fully realized by own-ing some banks rather than others,. The economicvalueof these advantages is reflected in the prices that hold-ing companies offer for different banks,

If the costs associated with holding company own-ership were low relative to the potential gains, allbanks would be owned by holding companies. This, ofcourse, is not the case. Bank holding companies incur avariety of costs: regulatory, administrative, even theone-time cost ofgetting permission to acquire banks. Abank will remain independent until the discountedpresent value of the advantages of holding companyownership outweigh the discounted present value ofthe costs.

Regardless of the number of banks they own, allholding companies are subject to the same federalregulations. Consequently, any gain realized by multi-bank holding companies must be associated with own-ership of the banks themselves; it is not related to theprofits associated with the permissible range of non-bank activities.

THE EFEE-CT OF RE.CUL&TION ONBANK HOLDING COMPANIE.S

Federal Regulatory Constraints-

Federal regulatory policy may prevent multi-bankholding companies from owning certain banks, The

26

FEDERAL RESERVE BANKOF ST. LOUIS AUGUST/SEPTEMBER 1983

Board of Governors of the Federal Reserve System islikely to prevent an acquisitionby a multi-bank holdingcompany if that company already has a large marketshare or if the acquisition would substantially increaseconcentration in a banking market. The Board also mayprevent acquisitions or holding company formationsfor reasons other than competition. For example, itmay rule unfavorably ifthe holding company is thoughtto be financially weak. Consequently, some banks maybe either independent or owned by one-bank holdingcompanies solely because of actual or anticipated reg-ulatory denials.

The Adaptation of Bank HoldingCompanies- to State Banking Law’s

State banking laws also may affect bank ownership.Table 1 categorizes states according to their restric-tions oil branching and bank holding companies andshows the distribution of the 50 states among thesecategories. If the legal constraints imposed by statelaws are binding, banks and bank holding companieswill attempt to circumvent them.2 Multi-bank holding

2We cannot know the eRect of a constraint with certainty until it isremoved; however, the existence ofunit banks and one-bank hold-ing companies in states that allow both statewide branching andmulti-bank holding companies is strong circumstantial evidencethat state banking laws are not binding on all organizations.

In unit-banking and limited-branching states thatpermit multi-bank holding companies, bank holdingcompanies are not constrained to own only one bank;each one-bank holding company does so by choice.Because both one-bank and multi-bank holding com-panies exist simultaneously in these states, their own-ers must face different incentives. Consequently, theymay own different types of banks or manage theirbanks in ways that produce different operating resultsand portfolio compositions.

Any prohibition of branching is more effective ifmulti-bank holding companies also are prohibited.3

Even though some holding companies in states pro-hibiting both types of organizations might wish to ownonlyone bank, others would choose toown more banksin the absence of the constraint. The constrained andunconstrained one-bank holding companies in thesestates may have different financial and market charac-teristics,

In states that allow statewide branclnng, bothbranch banks and multi-bank holding companies

‘Table 1 offers some eirenmstantial evidence, None of the 24 statesthat allow statewide branching prohibit multi-bank holding com-panies. Apparently, once banks are allowed to branch throughout astate, preventing holding companies from owning more than asingle bank is not an effective constraint.

companies represent one way to circumvent the statebranching restrictions described in table 1.

27

FEDERAL RESERVE BANK OF ST. LOUIS AUGUST/SEPTEMBER 1983

potentially can achieve the same geographic scope.4

Consequently, multi-bank holding companies andone-bank holding companies that own branch banksmay not displaysignificant differences in terms oftheirfinancial and market characteristics, On the otherhand, there may be significant differences between aone-bank holding company that owns a branch bankand another in the same state that owns a unit bank.

Distortions of Reported Financial Results

Differences in reported financial characteristics donot necessarily reflect actual operating differences.Comparisons of the financial ratios of unit and branchbanks, whether located in the same or different states,are distorted by financial reporting conventions. Be-cause the financial results of a bank’s branches areaggregated for reporting purposes, differences be-tween the reported financial characteristics of branchand unit banks may be due partly to lumping different-sized branches in different locations into a single re-porting entity. The problem exists if the state allowslimited or statewide branching, It is compounded inbranching states that allow multi-bank holding com-panics because a multi-bank holding company (subjectto regulaton- approval) may choose either to charter asubsidiary bank separately or make it the bramich ofanother subsidiary bank. Thus, the reported financialcharacteristics will depend upon the permissible legalforms.

Ls There an Economic Incentive forMulti—Bank Holding Companies?

Although it might be argued that the existence ofmulti-bank holding companies is prima facie evidencethat some companies have an economic incentive toown more than one bank, multi-bank holding com-panies could arise by chance. Assume, for example,

4Federal law effectively prevents interstate branching and inter-state banking expansiots by holding companies. States can extend astatutory invitation to out-of-state bank holding companies, hutonly a handful actnally have done so. Alaska allows ont-of-statecompanies to buy Alaskan banks that have operated for at leastthree years. Maine, Massachusetts and New York permit holdingcompanies from states that reciprocate; the Massachusetts lawlimits reciprocity to only New England states, Washington allowsout-of-state holding companies to purchase banks in the state thatare in financial difficulty. Finally, Delaware and South Dakotaallow out-of-state holding cosnpanies to own special-purposebanks, which are operated under rules that prevent them fromactively soliciting deposits from the public. (Information on thesestate laws was provided by the staffofthe Board ofGovernors oftheFederal Reserve System.)

that owning two or more banks conferred no net gain toa bank holding company. It should then make no differ-ence whether a bank is owned by a one-bank or multi-bank holding company. Even if banks with certainobservable characteristics typically are owned by bankholding companies, any specific holding companycould hold either one or several of these banks. In thisexample, whether a bank is owned by a holding com-pany depends upon the bank’s own observed financialand market characteristics alone.

Assume, now, that some bank holding companiesderive some net advantage from owning several banks.These advantages may arise from the nature of eitherthe bank or the bank holding company; they are dis-tinct, however, from the advantages realized by one-bank holding companies. Under this assumption, mul-ti-bank holding companies would own some banks thatwould not be owned by one-bank holding companies.Therefore, a bank’s chance ofbeing owned by a holdingcompany would depend on state laws regarding multi-bank holding companies, as well as its individual finan-cial and market characteristics.

We cannot say a priori that there are economic in-centives for some bank holding companies to ownseveral banks, The issue must be decided on the basisof empirical evidence. Although a variety of empiricaltests could be chosen, the tests used in this article focuson the relationship between bank holding companyownership and a bank’s financial and market character-istics in unit-banking states.°

EMPIRICAL TESTS OF THREEPROPOSITIONS ABOUT HOLDINGCO!-1PANY BANKS IN UNIT-BANKINGSTATES

Three testable propositions regarding certain bankcharacteristics in unit-banking states can be derived

3Sinee this study is confined to a sample ofbanks from unit-bankingstates, it does not provide direct evidence on whether multi-bankholding companies circumvent state branching restrictions. Aworthwhile direction for future research would be to expand thesample to include banks from states that allow limited andstatewide branch banking. Empirical tests on the expanded samplecould determine whether the incentives of multi-hank holdingcompanies are reduced or eliminated in states having less stringentrestrictions on branching.

This study also does not explore the nature of the economicincentive to own several bank~.Theevidence presented in the nextsection indicates that, whether the incentive arises from costadvantages, control over price or some other source, it is apparent-ly qeiite strong. Another worthwhile direction l’or future researchwould lse to investigate its source.

28

FEDERAL RESERVE BANKOF St LOUIS AUGUST/SEPTEMBER 1983

2. The financial and market characteristics of banksowned by one-bank holding companies will differfrom those of other banks; they will dependon statelaws regarding multi-bank holding companies.

3’ A bank is more likely to be owned by a holdingcompany if the state permits multi-bank holdingcompanies-

Methodology and Sampie Characteristics

These propositions are tested by probit analysis toestimate the effect ofcertain independent variables onthe likelihood that a bank is owned by a bank holdingcompany.6 The following are the dependent variablesin three probit regression models, each ofwhich repre-sents a choice between alternative forms ofownership:

Y1

= 1, if a bank is owned by a multi-bank holdingcompany,

= 0, otherwise;

= 1, if a bank is owned by a one-bank holding

company,= 0, otherwise;

= 1, if a bank is owned by either a one-bank ormulti-bank holding company,

0, otherwise.

The sample on which the probit models are esti-mated consists of all insured commercial banks in sixwestern and midwestern unit-banking states. The sam-ple is divided into two subsamples of three states,States in one subsample permit multi-bank holdingcompanies; states in the other prohibit them.7 Anyholding company that owns two or more banks in anystate is defined as a multi-bank holding company; theothers are one-bank holding companies.

Four probit regression equations are estimated foreach of the years 1978 and 1981, The Y1 model is

6Probit analysis is a non-linear estimation technique frequentlyused when a model’s dependent variable represents the choicebetween two alternatives, For explanations of the probit model,see Robert 5, Pindyck and Daniel L. Rubinfeld, EconometricModels and Economic Forecasts, 2nd ed, (McGraw-Hill RookCompany, 1981), pp. 280—87; and George C. Judge and others,The Theory and Practice of Econometrics (John Wiley and Sons,1980), pp. 591—92.

7ln the six states used in this study, Colorado, Missouri and Wyo-ming permit multi-bank holding companies; Kansas, Nebraska andOklahoma prohibit them.

estimated on the subsample permitting multi-bankholding companies; the Y2 model is estimated sepa-rately on each subsample; and the Y3 model is esti-mated on the full sample.

independent Variables

Table 2 defines the independent variables used inthe probit models and reports their summary statisticsfor both 1978 and 1981,8 The same financial variableshave been used in many empirical studies that haveinvestigated differences between independent andholding company banks. These variables were con-structed from financial data in annual bank call reportsand income statements for the years ending December31, 1978, and December 31, 1981. The variablesmeasuring market characteristics were computed byaggregating bank financial data across banking mar-kets, which were defined as either Standard Metro-politan Statistical Areas (SIVISAs) or counties (in thecase of counties not part of SMSAs),

A comparison of the variables’ means in 1978 and1981 shows that the ratios of operating expense and netfederal hinds sold to total assets (ROE and RNFFS)were markedly higher in 1981, and the ratio of totalloans to total assets (RTL) was lower in 1981. Thesedifferences may be explained by the economic condi-tions prevailing in 1981, when interest rates reachedhistorically high levels and loan demand (partly reflec-tive ofinterest rates) was low. Increases in the means ofdummy variables SMSA and MBHC between 1978and 1981 indicate increases in the proportion ofsamplebanks located in SMSAs and states that allow multi-bank holding companies -

Full Sample

ROE, RN! 0.41 —0.41 —CR, SMSA —0.42 —0.61 —0.50CR, DCRMBHC — — 0,41MBHC, DCRMBHC — — 0.55

1981Correlations

OBEICsubsample

MBHCSubsample

ROE, RN! —0.48 —CR, SMSA —0.43 —0.63CR, DCRMBHC — —MBHC. DCRMBHC — —REQ, RNFFS — 0.42

Full Sample

from the preceding discussion:

1. The financial and market characteristics of banksowned by multi-bank holding companies will differfrom those of other banks.

8Some independent variables were considered for inclusion in themodels but were dropped because they were highly correlatedwith other independent variables- In each subsample and in thefull sample, most simple correlations between included indepen-dent variables were less than 0.20 in absolute value in both 1978and 1981. The simple correlations exceeding 0,40 are reportedbelow:

1978Correlations

081-IC MIllICSubsample Subsample

—0.510.410.56

29


-‘ N N N N N N

/ \// /

‘table2 N N N N / NN

Deftt$ttoáai~Estn~imarystarisut~of inspendent V ab~es N

N N N

~ N

OetIt Meas t4S lMn tstloit

~\iietti$* unett~*l$sete Ifl Seerasp!pensnnssssts edsaN ~4aa 100

HEO~ s__N ~: N~N NNN NN Set5~ OSN>N\tOP7NN \\m~. pn~

Mi. tott s~s osskotInsseh P 18 0t22-Westt$sbo*tesaderntnds N \N ‘~ N>

N ~UV4ssetOW bb6~ Ngal tans*~sts0o0 N ao~ N

SM$A >=t tbskacatitit ins$$$A ass e~ p480* *t~rwlS N N N

N N Otab*hereb*~lcisto~asN N N N N> N N N

N S~5MBtO N N N 44fl~ N LbS NN 4 ‘~ ~4S5N N ~ N N N N

OR N ~t1tt fl57 N 648$ CS

N S*isgS~rflsms ~ N N ~

N ass N N-~ ~Nt~ N N.

N DORIA N N OCR \fl’ N / 9 N OjflN

N~R~8MM p N N rn> 44$ N 94N1Z~

1IMSt N N N afla ~P~$5 N Y~!

~~hma~ dónttte~ssâttotitsset N>

n\ ntA~ (F

N j N N

where ma the total assets t!~ti-tot tning orgsotzSon tt ii-* Inaiket ~‘4t~tl~ ~< N

~Thevariable boa wasnot rtcluded the probtt rpode$ because itis hØIy copeleted with R Itdoes stile in the three interactionvariables

A positive (negative) sign on an independent vari-able’s coefficient indicates that higher values of thevariable increase (decrease) the likelihood that a bankis owned by the specified type of bank holding com-pany. The coefficient ofTA is expected to be positive inthe Y1 model. This expectation is based not on theory,but on previous empirical study.9 It assumes that as abank’s size increases, eeteris paribus, the likelihoodthat the bank is owned by a multi-bank holding com-pany also increases.

No predictions can be made as to the signs of othercoefficients in the Y1 and Y2 models. Although many

°Multi-bankholding companies tend to own larger banks. Many ofthese organizations own lead banks that are among a state’s largestbanks. Subsidiary banks other than lead banks often are larger thanthe average bank in their markets and seldom are among the verysmall banks.

empirical studies have investigated the relationshipbetween holding company ownership and bankfinancial ratios, they have potentially important weak-nesses, including a nearly universal failure to controlfor the potential effects of diverse state banking laws.Moreover, they frequently have produced conflictingresults.

The variables MBHC and DCRMBHC are includedin only the Y3 model.10 As the following section ex-plains, the estimated coefficient of MBHC is predicted

‘°In the subsample on which the Yi and first Y2

models wereestimated, MBHC took on the value of1 bra

11observations, while

DCRM I3HC took on the value of 1 or zero, In the subsample onwhich the second Y

2model was estimated, both variables took on

the value of zero for all observations,

30


to be positive, and the estimated coefficient ofDCIIMBHC is predicted to be negative.

The Criteria for Accepting or Rejecting thePropositions

The first proposition is “accepted” (in the statisticalsense) if the likelihood ratio of the Y1 estimation isstatistically significant in both 1978 and 1981. Thiswould indicate that, in unit-banking states that permitmulti-bank holding companies, banks owned by multi-bank holding companies differ from other banks on thebasis of their financial and market characteristics.

For the first proposition to be accepted, neither thesizes, statistical significance, nor the signs of the esti-mated coefficients need to be invariant over the twoyears. Coefficients may differ between 1978 and 1981because changing economic conditions affected multi-bank holding company subsidiaries and other banksdifferently; because the modest increase in the totalnumber of banks and/or the proportionately large in-crease in multi-bank holding company subsidiariesoccurring in the subsample between 1978 and 1981(see tables 3a and 3b) altered the compositions of thetwo groups of banks; because the financial and marketcharacteristics of the two groups of banks are followingdifferent long-term trends; or for a combination ofthese reasons. None of these possibilities would obvi-ate the conclusion that banks owned by multi-bankholding companies differ from other banks.

The second proposition is accepted if, in both 1978and 1981, the likelihood ratios of the two Y2 eStima-tions are statistically significant and if the signs orstatistical significance ofthe coefficients differ betweenthe two estimations. The former would show that one-bank holding company banks differ from other banks intheir financialand market characteristics, regardless ofwhether multi-bank holding companies are permitted.The latter would show that the financial and marketcharacteristics ofone-bank holding company banks de-pend on whether a state allows or prohibits multi-bankholding companies. Differences in financial and mar-ket characteristics between one-bank holding com-pany banks in the two subsamples would be the resultof differences between constrained and unconstrainedholding companies in the states that prohibit multi-bank holding companies. Like the first proposition, thesecond proposition is not refuted by different coef-ficient estimates in the 1978 and 1981 estimations.

The coefficients in the Y1 and Y2 estimations can becompared in the same manner. If, in states that allow

multi-bank holding companies, the signs or statisticalsignificance of the coefficients differ between the Y1andY2 estimations, then banks owned by the two typesof holding companies have different financial and mar-ket characteristics.

The third proposition depends on the coefficient ofMBHC in theY3 estimation. It is accepted if the esti-mated coefficient is positive and significantly greaterthan zero in both 1978 and 1981. A positive sign wouldindicate that, given its financial and market character-istics, a bank is more likely to be owned by a bankholding company (either a one-bank or multi-bankholding company) if it is located in the unit-bankingstates that permit multi-bank holding companies.

The interaction variable DCRMBHC is included inthe Y3 model to account for the possible effect offeder-al regulation on the likelihood of holding companyownership. The Board of Governors is more likely toprevent acquisitions by multi-bank holding companiesin highly concentrated markets (DCR = 1) than in lessconcentrated markets (DCR = 0); therefore, the coef-ficient of DCRMBHC is predicted to be negative inboth 1978 and 1981.

Empirical Results

Y1 Estimations — The results of the Y1 estimationsare reported in column 1 of tables 3a and 3b. Bothlikelihood ratios are highly significant, indicating thatbanks owned by multi-bank holding companies differfrom other banks in terms of the independent variablesincluded in the Y1 model. Moreover, most estimatedcoefficients also are statistically significant, which indi-cates that the corresponding independent variables aredifferent for multi-bank holding company subsidiariesthan for other banks -

Several coefficients had the same sign and werestatistically significant in both years. The estimatedcoefficients of TA are positive and statistically signifi-cant, as predicted. The results also show that, evenafter controlling for the influence of bank size (TA),banks owned by multi-bank holding companies arelocated more often in metropolitan areas and less con-centrated banking markets. The positive coefficientson the interaction variable DCRTA imply that, ceterisparibus, a larger bank in a highly concentrated marketis more likely to be owned by a multi-bank holdingcompany than a smaller bank in the same market.

Other coefficients differed between the two years.In 1978, banks owned by multi-bank holding com-

31

FEDERAL RESERVE BANKOF ST. LOUIS AUGUST/SEPTEMBER 1983

TablaSa N N NN N N

Coefficient Estimate ROulis of Ptobit Anatjls 0978)(t-statlstics in pnffi~ N N \N

431\ N

- CN

-Weabtes V >N -N\ N - N

N N

N jpjN\\N ‘25 /N4NI/Th N NN 843?~ NN fl7t

N N NN>N N~ ~-tW NN~NLN\ N~N Ntm ‘N’’

N N N,&$S\N ‘\\ trNNN N

N N fl NN aN

N Nea S/~fl~NN ~ N ~-~am N

N paN aN —aN Rt ‘~tW ‘$~5~1N ‘1W

N N/N fl7l /0*/ N ~N N —_ / 142~ — ~ N N N

N / N / / /t~ N / N N ~ /NTkY ~4/ So N

N N N N / a ~. N/ N

-\ N NN “N,~ NN NN,N N N NN , N N N

N N N N N NN NN N N’N-N’////N’/’ ,/, / /N / NN’ / ‘/N>/N’NN / N’ / -

N N $MS& 44r 412 N N

N N N N d N N 4$ N

N N NM~ N N /

N NN N N N ‘~~tN N

CR NNIr N N..

N 17*~N j~S ** - N

N 420 t-OS 1W

NN 1t2*< N -444 N 1—MI)

N teRrA N iflV 77 107 N

N kS fl-N

N aC#tSMaAN a N N\flt N N

N N 4$ /4th8~N a-~ 31*

N N N ~N / N N N *S N

NN NN N N N N

N N Nir

N N N S an N

N ‘N /NN~N’ N N NNN’/, N> - NN NNNN N N N N N N N N / NNN - N’~ ‘ - N N~- N N -

N fl$~1tSI nts— ~-~p N ;szar sasr N

• 301 N 14S 647

N N~jN -at~ $flN’ ttGN,N N

N N N N NN NN / N

lStflflpeitentcontidetitneel N N N N

Sates i~— mtati’ba*hotdittg ~pmp~~Sat~~instp n-bankbplSln~conipanieo - N /

N N

%mberobsetvatkfnsonlhedependentyatiabl4s ty V orYjat 1 OlhitrobsewattgpIatzerq 11*tiumSisdo notaddaorossbecatiseterflra2l at bapksctmultpbankbotdlnq cooljIanres inthe One-bank holding company aubsam~t- N

32


NNNN-NN//N N N -N _ ~ / N ~ \/// /// N N~ /N/ N N////N~— / N>-N / N / — / NN/ /

/ /// / 4- / — // / / / /-/ / / /N N>/ /-/ / NN//N/N / N/ N/ // ~/~N N

tablèSbN / N ‘4- /N / N N /

N N ~ tIhwatEt~esufts*f~robftAtsyqs (jflqN N N N N

N N N NN NN * NM 5-.

o~cN N N N ~~*N NNN ~ N

N N ~NN: V N -N~ -N N Y N\

N N~kmc~IVãSN N N N NNN N

N N —‘ N N N N N N ss~ N NN N4 N N N N N

N N NN NN -IN $~N N NtSNTIY Nj A~ N N N N:

N N N N ROE N N N442N N 20 N N NNN$~~tN N N ~3~N N N NN

N N N N N N N NN N NN N: na. N N 23 NN N - NN N NN NN N N N_NN N N

N NN N2S*N N Nflr N N N N NNnr N~N N N

N 4-N NNNNI 240YN N NN~aN NN ~ NN/ N N

N N N N: St / N NN N N ~Ng-~~ \N N *•*N N N N N N NN

N NN NN N N NN: N N N N NN N N3*N ± N~/~~NcN N/NN N

N RUES OS N N,,4$ N er nON N N NN NN NC N LOaN N N~t N N NN j~N N N

N N N N NNN N N - N NNN N N NN N N - N

N N N~ N N TANK N NNNN flflN N N4r N’ N N t~NNNNNN NN N N N

N NNN fll~

N / N N ~ S~$~N NN N N N N N N N N NN’NNN N N N N N N N NN N N NN N ~N N NNNN N N NN / N

N $MSA N1C *08 O*’~ N N

N N N4e~ iN 1* ‘aNNNN N/ N N NNN N N N N N N

N &Ø’~ N NNN N N N N N N N N~$Ø~,

N ~ N N / tàt~~‘N N ~rNN NN:N N N N N NN

NNNNNN~NNNNN NNN NNNN\~NNNN\L~~NN~ N4SN

M14* N *24 *IN ~ NN ON

N N jN ~N ‘-044 N

NN NNN OQWFA / s-e —S N

N N 3 N~N S N Ne82/ N OCRS*~A Nfl/s a N N47

N N N ‘0$) 4)K47) N 04$) N N

/ 4-N / :N / NNNNNe~1~ N N - N N / NN N : N N / N’’-~ N N N - // -e N N / - N N N N N~

// N N N N N

/ :~~-:~ N fl/~ 44 N NON

/ N~fl N N

NN N ti1~’0lh~4 N N

N N ~ N mar N N N NNJ~ N 114> 249

N N yN4

NN 448 N N $81 N N

N ~N N N N

~J~$Nt Ør*~Qflf~4~4~V5I N N

N nnwS~otôthgs N N

N N N N N N N: N N N N N N -N N N 1NSberI*t$~als N NN N N N N N NN N N

N N%n ~ ~QtY)att Qtherobsehtatbnsatzew The N N

N ie,s*nota4d amsneoausethereare sub banttotmSbat*holdlngeompanleswrth~ons4ankbo~te~~p~y ~ N N N N

33


panics devoted a larger share oftheir portfolios to loansand sold fewer net federal funds as a proportion oftotalassets, while their ratios of equity to totalassets did notvary significantly from other banks. On the other hand,in 1981, these banks had significantly lower ratios ofequity to totalassets, while the share of their portfoliosdevoted to loans and net federal hinds sold did not varysignificantly from other banks -

~2 Estimations — The Y2 estimations are reported incolumns 2 and 3 oftables 3a and 3b. The highly signifi-cant likelihood ratios indicate that, regardless of statepolicy toward multi-bank holding companies, banksowned by one-bank holding companies differ fromother banks.

In 1978, the estimated coefficients of the financialvariables had uniformly opposite signs and statisticalsignificance in columns 1 and 2 (see table 3a). Thedifferences between the columns were fewer in 1981.Banks owned by one-bank holding companies earned ahigher return on total assets than other banks in 1981,whereas the return of banks owned by multi-bankholding companies did not vary significantly fromother banks; furthermore, multi-bank holding com-pany subsidiaries tended tobe larger than other banks,and one-bank subsidiaries tended to be smaller (seetable 3b), The findings indicate that one-bank andmulti-bank holding companies had different financialratios in the states that permit multi-bank holdingcompanies.

The estimated coefficients of the market variablesare similar in both 1978 and 1981. In column 2 of thetables, the estimated coefficients of market concentra-tion (CR) are positive and significant, whereas in col-umn 1 the coefficients of CR are negative and signifi-cant. This difference implies that banks owned by one-bank holding companies tend to be located in moreconcentrated markets, while banks owned by multi-bank holding companies tend to be located in lessconcentrated markets. The estimated coefficients ofthe other market variables in column 2 are not statisti-cally significant.

A comparison of column 3 with columns 1 and 2 inthe tables shows that banks owned by one-bank hold-ing companies in unit-banking states that prohibitmulti-bank holding companies exhibit similarities toboth types of holding companies in the other subsam-ple of states. In column 3, the estimated coefficients ofall financial variables, except ROE, are statisticallysignificant at the 5 percent confidence level or better.In 1978, they took the sign ofthe estimated coefficientfrom column 1 or 2 that had the t-statistic of larger

absolute value. In 1981, this was the ease for the esti-mated coefficients of RNI and TA; estimated coef-ficients of other financialvariables were either statisti-cally insignificant in columns 1 and 2 (ROE, RTL,RNFFS) or they had the same sign (REQ). Apparently,some holding company banks in the states that prohibitmulti-bank holding companies have similar financialcharacteristics to one-bank holding company sub-sidiaries in those states that permit multi-bank holdingcompanies; others have similar financialcharacteristicsto multi-bank holding company subsidiaries. Thisinterpretation is consistent with the characterization,in the preceding section, of one-bank holding com-panies in this subsample as either constrained or un-constrained organizations.

The estimated coefficients ofthe market variables donot exhibit the same pattern. In column 3, only thenegative estimated coefficients of the dummy variablerepresenting metropolitan markets (SMSA) and themarket growth variable (M KGR) were statistically sig-nificant in both 1978 and 1981. The latter was notsignificant in either of the other estimations, and theformer was significant hut positive in the Y1 estima-tions. In 1981, the estimated coefficient of CR in col-umn 3 was statistically significant, taking the positivesign of the coefficient estimate in column 2.

Y3 Estimations — The Y3 estimations are reported incolumn 4 of tables 3a and 3b. The high likelihood ratiosindicate that holding company banks, as a group, canbe distinguished from independent banks on the basisof the independent variables. The positive and highlysignificant estimate of the MBHC coefficient in both1978 and 1981 strongly supports the third proposition.The negative and highly significant estimate of theDCRMBHC coefficient in both 1978 and 1981 con-firms the prediction that, ceteris paribus, banks inhighly concentrated markets are less likely to beowned by a holding company ifthe state permits multi-bank holding companies -

CONCLUSIONS

One-bank and multi-bank holding company sub-sidiaries in unit-banking states have different financialand market characteristics than other banks. More-over, the characteristics of the one-bank holding com-pany banks depend on state laws regarding multi-bankholding companies. In addition, a bank is more likelyto be owned by a holding company in unit-bankingstates that permit multi-bank holding companies thanin unit-banking states that prohibit them.

34


These results clearly imply that empirical studiesthat examine the effects ofholding company ownershipon bank financial ratios should control for differencesamong state banking laws, as well as for differencesbetween one-bank and multi-bank holding companies.Though this may not appear to be a startling conclu-sion, recent studies have failed to control for one orboth of these differences.5’ Future studies will have todo so ifthey are tocorrectly assess the factors that causefinancial and market characteristics to differ amongbanks.

“Johnson and Meinster, Jackson, and Mayne fail to control fordifferences in state laws, while Fraas fails to account for differ-ences between one-bank and multi-bank holding companies; Roseand Scott, and Graddy and Kyle, fail on both counts. Only Mingoaccounted for both, by limiting his sample to nine unit-banking

states that permit multi-bank holding companies and excludingsuhsidiary banks that were owned by one-bank holding com-panies. By limiting his sample in this way, the author also avoidedthe aggregation problem with comparing the financial results ofunit and branch banks. See Rodney D. Johnson and David R.Meinster, ~‘ThePerformance ofBank Holding Company Acquisi-tions: A Multivariate Analysis,”Journal of Business (April 1975),pp. 204—12; William Jackson, “Multibank Holding Companiesand Bank Behavior” (Working Paper 75-1, Federal Reserve Bankof Richmond, July 1975); Lucille S. Mayne, “A ComparativeStudy of Bank Holding Company Affiliates and IndependentBanks, 1969—1972, “Journal of Finance (March 1977), pp. 147—58;Arthur C. Fraas, The Performance of Individual Bank HoldingCompanies, Staff Economic Studies 84 (Board of Governors oftheFederal Reserve System, 1974); Peter S. Rose and William L.Scott, “The Performance of Banks Acquired by Holding Com-panies, -- Review of Business and Economic Research (Spring1979), pp. 18-37; Duane B. Graddy and Reuben Kyle, III, “Aflili-ated Bank Performance and the Simultaneity of Financial Deci-sion-Making, “Journal of Finance (September 1980), pp. 951—57;and John J. Mingo, “Managerial Motives, Market Structures andthe Performance ofHolding Company Banks,” Economic Inquiry(September 1976), pp. 411—24.

35

the effect of state banking laws on holding company - research

Documents