USING COUNTY-BASED MARKETS TO SUPPORT AND FEDERAL RESERVE MARKETS TO IMPLEMENT BANK MERGER POLICY

In this paper, we consider three issues raised by the apparentinconsistency between the current research practice of usingcounty-based markets (Metropolitan Statistical Areas (MSAs)and non-MSA counties) to investigate the validity of the theoreticalunderpinnings of bank merger policy and the current regulatorypractice of using Federal Reserve (FR) banking markets, whichoften do not follow county lines, to implement that policy.Using a national sample of bank and thrift branch deposit data,we find that county-based areas cannot simply substitute forFR markets in the implementation of bank merger policy. Forexample, numerous potential mergers would raise competitiveissues in county-based areas, but not in FR markets, and viceversa. We also conclude that, because of the relative difficultyof assembling demographic data for non-county-based areas, itis impractical to consistently use FR markets in bank mergerpolicy research. However, we do find that, despite the inconsistenciesbetween the two types of markets, analysis that uses county-basedareas is relevant for bank merger policy that is implementedwith FR markets. For example, we find that profitability regressionresults using variables based on FR markets are similar to thosefound using variables based on MSAs and non-MSA counties.