Bank Concentration and Performance

Regulatory change not seen since the Great Depression swept the U.S. banking industry beginning in the early 1980s, culminating with the Interstate Banking and Branching Efficiency Act of 1994. Significant consolidations have occurred in the banking industry. This paper considers the correlation, if any, between banking concentration on a state-by-state basis and average bank profitability within a state, finding strong support for a positive correlation. Moreover, temporal causality tests imply that bank concentration leads bank profitability. Our finding suggests that bank regulators need to monitor the consolidation process to head off the accumulation of monopoly power.