Real-life Case Study: Big Banks and Small

Economic Institutions

Since the 1980s, bank mergers have been taking place at a rapid rate. By 2001, there were fewer than half as many banks in existence as there had been 20 years earlier. Larger banks mean larger profits, as banks acquire more customers through each successive merger. This certainly benefits the banks' shareholders, but what about consumers?

Large Banks These giant banks offer many benefits to their customers, such as computerized banking, conveniently located branch banks, and far-reaching ATM networks. Although there are fewer banks than in 1980, there are now more bank branches. However, after mergers, many banks have increased fees for services or tightened credit restrictions. Many customers are unhappy about the impersonal nature of some larger banks.

Small-Bank Networks A positive outcome of the merger mania has been growth among small banks. The federal government has forced many large banks to divest some of their branch banks in order to avoid having a monopoly in any given location. In some areas, banking companies have formed small regional networks by buying some of these banks.

Some small depositors like the personalized service of a small bank.

Community Banks In the 1990s, an average of 200 charters were issued every year to new community banks. Small banks have capitalized on their small size, emphasizing personalized service and their ties to the local community.

The merger mania has made some people fear the end of competition in the banking industry. But as large banks grow ever larger, new community banks have stepped in to ensure that many people still have a choice of where to bank.

Applying Economic Ideas

1. What are the benefits and drawbacks of using one of the big banks?
2. The chart shows some of the major banking mergers since 1990. What do you think are the advantages and disadvantages to a bank entering into a major merger?

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