Florida Banking: Present Market Structure and Performance
and an Inquiry into the Probable Effects of
Alternative Forms of Bank Organization
WILLIAM ANDREW MCCOLLOUGH
A Dissertation Presented to the Graduate Council
of the University of Florida
in Partial Fulfillment of the Requirements for the
Degree of Doctor of Philosophy
UNIVERSITY OF FLORIDA
The author wishes to express his sincere appreciation for
the assistance provided by his supervisory chairman, Dr. C. Arnoid
Matthews, whose initial suggestions led to this study. Th- con-
tinuing guidance, patience, and helpful criticisms offeredd by
Dr. Matthews were invaluable in the development cf his disserta-
Appreciation is also extended to the other =e'-ers of the
dissertation committee, Dr. Ralph H. Blodgett, D r. ohn IcFerri.
and Dr. John B. Wallace, for their comments and su-estions.
~t ..* ,i. --. :. :,-.-.~... :~-.~
TABLE OF CONTENTS
ACKNOWLEDGMENTS . .. ii
LIST OF TABLES . . v
LIST OF FIGURES . . .. viii
ABSTRACT . . .. ix
I. INTRODUCTION . . 1
Methodology . . 5
II. BANK REGULATION: ITS FUNCTION AND A MODEL FC
TESTING ITS OPTIMALITY. .. .. 9
The Nature of the System ....... .. 10
A Model of the Optimal Structure .... 15
III. FLORIDA BANKING: THE CHANGING ENVIRONMENT. ... 26
History of Banking in Florida. .. . 26
Current Environment. . . 31
Manufacturing. .. . 39
Agriculture. . .42
Wholesale and Retail Trade . ... .42
Services. . .... .44,
IV. FLORIDA BANKING: MARKET STRUCTURE . 51
Bank Markets. ................ ... .52
Multi-Product, Multi-Area Approach .. 52
Uni-Product, Uni-Area Approach . .. 61
The Regulatory Set. . . 62
Bank Numbers . ..... . 67
Bank Numbers in National and Regional Markets. 75
Bank Numbers in a Local, Non-Metropolitan Area. 78
Bank Numbers in a Local, Metropolitan Area. 80
Concentration Ratios. . .. .84
Local Markets. . . ... 88
Entry. . . ... .. 94
Summary. . . ... .99
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TABLE OF CONTENTS (Continued)
V. FLORIDA BANKING: MARKET PERFORMANCE. 126
Input Market . . 127
Compensation for Highly Liquid Funds .. 128
Rates on Time and Savings Deposits .. 136
Deposit Structure .... .. 142
Capital Structure . .... .. 160
Efficiency ... . 166
Economies of Scale . .... 167
Capacity Utilization . .. 173
Summary . . .... 186
VI. FLORIDA BANKING: OUTPUT MARKET . ... 193
Output Composition . ... 195
Bank Rates . .... .. 200
Bank Services . .... 20
Loan Limits . . 211
Bank Earnings . .... ... 217
Summary ; ..... ... .. .. 222
VII. SUMMARY AND CONCLUSIONS ........ 228
BIBLIOGRAPHY . .
BIOGRAPHICAL SKETCH .
LIST OF TABLES
1. Development of Florida banking and its changing
structure ... . . 30
2. Ten largest states, population and bank structure,1970. .33
3. Population and urbanization, Florida, 1900-1970. 33
4. Percentage of total employed workers by major
industry group in Florida and the United Staees.
March, 1968 . .... .. 36
5. Percentage distribution of personal income -.ae
and salary disbursements by major sources, --rida
and United States. 1968 . 38
6. Percentage distribution of personal income, ; class,
Florida and the United States, 1968 ... 38
7. Personal income per capital, Florida and the Liced
States, selected years, 1950-1969 ... . 39
8. General statistics on manufacturing, by major industry
group, in Florida: 1958 and 1966 .... .. .. 41
9. Bank markets: products, geographic range and parti-
cipants . ... . 54
10.. The possible combinations of charter and office
regulations . . 63
11. Classification of states by the regulations limiting
the number of offices per bank charter, March, 1970 65
12. Number of commercial banking offices, population, and
population rank of Florida counties, February, 1971 69
13. Number of banks and banking offices in the United
States by states, 1950 and 1969 . .... 72
14. Population per banking office and percentage change,
Florida and United States, 1950-1970 ... ....... 74
- jk .- .' p 11 '19-V ; '' '. -B
LIST OF TABLES (Continued)
15. Largest banks in the southeast by total deposits,
December 31, 1970 . ... 77
16. Average number of banking organizations and banking
offices in metropolitan areas, 1970 ... 82
17. Average population per banking office and per county
in Florida by number of banking offices in county,
1970 . . .. 82
18. Population per banking office, five highest county
ratios in Florida, 1950 and 1970 . 83
19. Concentration ratios in states, December 31, 196- and
1969, by type of office regulation .. 87
20. Concentration of total deposits in standard
metropolitan areas,December 31, 1969, by
regulatory set . .... 89
21 A summary of demand deposit concentration in Florida,
by county, December, 1969 .. 93
22. De novo branches and branches established thr-~- h mer-
gers, 1946-1971 . . ... 95
23. Certain data for specified rapid growth states.
1950-1969. . ....... .... 98
24. Concentration of demand deposits in Floridaby
county, December, 1969 . .. ...... 102
25. Banking relationships in Florida, December 31, 1970 106
26. Ratio of service charges to demand deposits
for all banks by states, December, 1970 .. 130
27. Ratio of interest paid to time deposits for all banks
by state, December, 1970 .. .. .. .. .... 138
28. Time and savings deposits as a percentage of total
deposits by states and bank size, December 31, 1970 144
29. Ratio of savings held in local financial institutions
to personal income by state, December 31, 1969 148
30. Florida banks with deposits over $115,000,000,
December 31, 1970 . ... 152
LIST OF TABLES (Continued) Page
31. Ratio of savings held in local financial institu-
tions to personal income in Florida, by counties,
1969 . . .. 153
32. Distribution of Florida counties by savings ratios,
1969 . . .. 156
33. Certain aspects of savings and loan associations in
Florida,other specified Southeastern states, and
United States, December 31, 1969 ... 158
34. Sources of capital funds, commercial banks 163
35. Average and median size banks by states .. 169
36. Selected balance sheet items as a percent of
total assets of commercial banks, December 31,1970 176
37. Certain assets and total capital account as Der-
centage of total assets . ...... 184
38. Loan composition for various sized banks, Ficr:
and North Carolina ..... .. . 197
39. Selected income figures commercial banks 202
40. Automation status of surveyed banks . 210
41. Loan limit of the largest bank in each county
Florida . . 214
42. Bank earnings ratios by states .... .... .. 219
43. Summary of market structure and performance data
for uni-office and multi-office banking .. 229
LIST OF FIGURES
1, A schematic of the banking regulative system .. 13
2. The relationship of average cost per unit of
output to bank size .................. 172
3. Hypothetical trade-off between allocative and
operative costs as the number of firms is reduced,
number of facilities constant ... ..... 174
Abstract of Dissertation Presented to the Graduate Council
of the University of Florida in Partial Fulfillment of the
Requirements for the Degree of Doctor of Philosophy
FLORIDA BANKING: PRESENT MARKET STRUCTURE AND PERFORMANCE
AND AN INQUIRY INTO THE PROBABLE EFFECTS OF
ALTERNATIVE FORMS OF BANK ORGANIZATION
William Andrew McCollough
Chairman: Dr. C.A. Matthews
Major Department: Finance
The purpose of this study is an audit of Florida's bank reguiatrry
set. The emphasis is on that part of the regulatory set w~ich specifies
or controls bank structure within the state. The rrfirry concern
is whether the existing structural constraint, uni--afice banking,
is optimal from the point of view of minimizing the _ost of inter-
mediation or whether this objective could be better achieved with
fewer structural constraints.
A theoretical framework is developed around a concept of the
regulatory system which envisions the task of regulation as one of
increasing the coincidence of the extant set of outputs and inputs
associated with the banking industry at any point in time with some
optimal set. The best structural regulation is seen as that which
facilitates this regulatory goal of equilibration.
The optimal set of outputs and inputs is defined in terms of
a function whose objective is minimization of the price of inter-
mediation. This objective is specified in terms of four desiderata:
(1) Productive efficiency;
(2) Allocative neutrality;
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(3) Responsiveness to changes in technology and consumer
(4) Deposit protection.
These were found to be consistent with the minimization of the
price of intermediation and were collapsed into a single function
min T k ok i j
Ok > 0
I > 0
Ok Pok Ij E.
This model was then used to measure the coincidence between
the existing and desired sets of inputs and outputs-
Published banking data provide the basis for establishing
the characteristic input/output sets associated with the uni-office
banking of Florida and the multi-office alternative. lMarket struc-
ture is viewed as a separate and identifiable subset of the universe
of characteristics associated with Florida banking. The relation-
ship between market structure and the objective function is identi-
fied and the optimal condition is compared with those market
characterisitcs found under the alternative structural regulations.
From this comparison, the cost and/or benefits of Florida's uni-
office constraint in terms of market structure is derived.
I \ r s .** w ~ : *; : ? -' .' ^ -. .
The focus of the analysis then shifts from structure to
performance. The study compiles and analyzes bank performance data
under the various regulatory sets in both the input and output
markets. Optimal performance in terms of minimizing the price of
intermediation is compared with the performance characteristics
of the alternatives. The results of such a comparison are again
indicative of the cost/benefit trade-offs involved in Florida's
The conclusion that is drawn after examining t-e data in
terms of the objective function is that Florida's uni-cffice
constraint is less efficient as an equilibrator than te allow-
ance of multi-office banking would be. Florida's current structure
regulations were drawn up in 1913. The economic e-.-ro-nct in
which they were attempting the equilibrating task -cas dominated by
agriculture and what little manufacturing was preserz -was concentrate.
in lumber and timber. Population was small and widely dispersed
with little in-migration and a relatively low growth rate.
The same regulative set is attempting the equilibrating task
in today's environment. Almost every characteristic of the state
has undergone radical change over the ensuing 60 years. Population
is among the largest in the nation and is growing rapidly due
to a high level of in-migration. Service and trade is the major
industry in the state while food and kindred products dominate
the manufacturing sector.
While the uni-office constraint may have been relevant to the
intermediation needs of the state in 1913, today, according to the
.y _^, i .., -.. ^ .. .'..-
evidence examined, this regulation causes an undue divergence
from the optimal set of banking outputs and inputs. A change in
Florida bank laws to allow multi-office banking would allow Florida
bank structure to be more consistent with the existing economic
environment and more responsive to the present and future financial
intermediation needs of the state. Such a result would contribute
to a reduction in the cost of intermediation in Florida.
Few indeed are the areas that have been left un-
touched by industrial dispersion, revolutionary changes
in production and marketing, population shifts, and
new highway and other transportation systems. This
is the time. to take a hard look at our existing
banking structures. Our sights should go higher than
the emotional issues of fifty years ago. Instead we
must look at the form of banking now existing -o our
respective states and determine whether it is s:ill
the most appropriate and best form.l
These remarks are characteristic of a rather import.-z change
which has been taking place in the banking industry i: recent years.
Bankers have begun to show an interest in investigTtin: alernatives
in all facets of the banking business. They have shwn a willing-
ness to expose even the most "sacrosanct" aspects of American
banking to the tests of optimality. This wave of critical self-
examination has coincided with an increased interest on the part
of the general public as well as the government in the "best" bank
structure, the "most competitive" bank markets, and the "most
favorable" bank performance.
Florida has not been immune to this "renaissance". Within the
last few years, the Florida Bankers Association has changed its
stand on multi-office banking from one of opposition to one of
"neutrality". Numerous hours have been spent by the Legislature
considering changes in the bank structure. Several bills have been
introduced in recent sessions of the Legislature which would have
had a direct effect on the Florida banking industry. Although
many of these proposals were defeated, their introduction is in-
dicative of the rising level of concern and interest. In Florida,
as elsewhere, there has been a recent realization that the regu-
latory aspects of banking should be consistent with the optimal
banking system as defined by the existing social, political, and
economic environment. While this realization does not necessarily
mean regulatory change, it does mean a continuous e>a nation and
evaluation of regulations as to their relevance and effectiveness.
It is in response to this increasing banking a--reness that
this dissertation has been conceived. If Florida baring is to
fulfill its function of financial intermediation,' i: standard
that has to be applied must be dynamic. Optimalit-- L_ regulation
cannot be a static notion, but an on-going concept sub ect to con-
tinual audit. This auditing process must constantly ccnsicer
several data inputs:
1) A historical context so that the underlying continuities
may be recognized and evaluated;
2) A definition of the present position of Florida banking
as to structure and performance;
3) An analysis of the effects of various types of bank
regulation on bank market structure and performance;
4) Specific consideration of alternative regulation sets
and how such changes might affect Florida banking.
This dissertation proposes to consider only one element of
the regulation set -- the regulation of bank organization or
structure. This particular subject is of immediate concern to Florida
banking for most of the recent debate is focused on the appropriate-
ness of current bank structure, unit banking, as opposed to its
primary alternative, multi-office banking. This dissertation will
examine the hypothesis that Florida's uni-office constraint causes
an undue divergence from optimality as measured by the cost of inter-
In Chapter II, the theoretical framework for the study will
be developed. One of the major difficulties in dealing with bank-
ing is the general lack of any cohesive conceptual framework. Many
studies are based on a presumed and unspecified set :f relationships.
while others are willing to adopt a verbalized, imrecise representa-
tion. The result of these approaches is, all too cf2an, an in-
vestigation which is internally consistent but of lrried use
because of the lack of rigor in developing the concer'ual model.
Chapter II attempts to avoid these shortcomings vb explicitly
developing a model in a relatively precise manner. The chapter
specifies the relationships between the optimal set of ouCput/input=
the extant set of output/input, and the regulative set. Using the
optimal bank structure as a surrogate variable, a set of associated
characteristics of the industry is developed. It is suggested
how these criteria might be collapsed into a single measure to permit
analysis and measurement of existing output/input, structure, and
regulations in a relatively straightforward manner. The criteria
and resulting model are to be used as benchmarks or general goals.
They will provide a framework for policy action and an indicator of
the direction policy should move in order to approach optimality.
However, application of this theoretical framework requires
an appreciation of the current economic environment as well as some
sense of the historical development of Florida's banking industry.
Chapter III traces this evolution of Florida banking into its
present state with particular emphasis on changes in structural
regulation and the historical context within which these changes
took place. It is also in this chapter that the current economic
environment, to which Florida banking must be resprcsioe, is
described and analyzed.
It is in Chapter IV that we begin to measure -e optimality
of the Florida regulatory set. Market structure is .viewe as a
separate and identifiable subset of the universe of characteristic
associated with Florida banking. Chapter IV identified the reiaticn-
ship between market structure and the objective fun.cn of mini-
mizing the cost of intermediation. The optimal se- 1s then compared
with those market characteristics found under the alternative
structural regulations. From this comparison, the ccst and/or
benefits of Florida's uni-office3 constraint is derived.
In the next chapters (Chapters V and VI), the analysis is
turned directly to market performance rather than market structure.
The purpose will be to look at performance under the various
regulatory sets in either the input market (Chapter V) or the output
market (Chapter VI) and to compare these data with optimality as
prescribed by the overall objective of minimizing the cost of inter-
mediation. The results of such a comparison would again be indicative
of the cost/benefit trade-offs involved with Florida's uni-office
The summary draws together the several strands of thought
and attempts to synthesize these into a general conclusion. The
conclusion that is reached is that present Florida bank organization
regulations were developed in the distinctly different economic
environment of 1913. While these laws may have been relevant to the
financial needs of the state at that time, today these regulations
cause an undue divergence from the optimal banking system. A
change in Florida bank laws to allow branch banking wuld make
Florida bank structure more consistent with the existing economic
environment and more responsive to the present and frure financial
needs of the state.
The methodological approach which is used is rin admiture of
inductive and deductive reasoning with both pcsiti--- d normative
The theoretical framework or model which is developed is a
product of the deductive method. The model is erected on a frame-
work of axioms, propositions and statements which are taken as true
with little empirical verification. Given these premises, the
model's endogenous relationships permit deduction of the set of
characteristics associated with optimal structural regulation.
The empirical content of the study necessitates the use of
inductive reasoning as the structural and performance data are
sorted for generalizations. The collection of facts and figures
regarding the result of banks operating under different regulatory
sets leads to inductive conclusions concerning the structural
'.-; *&. -.-t' T "t-*> <;, y .;.;1.**^ -* '..* ".~ -".*-a,*~ ~?"? ?".
regulation-performance-market structure relationships. From these
induced characteristics, the possible changes in Florida banking,
with a change in the regulatory set,are then deduced.
Within this methodological organization, the statistical tech-
niques used are generally uni-variate in nature,and therefore,
limited in their analytical content. The primary objective of this
study is to develop an integrating theoretical framework within which
existing statistical studies can be recast and structural optimality
can be measured. While there is a limited amount of original statistical
compilation done within the paper, the accompanying analysis is
generally restricted to uni-variate inference. The possible limita-
tions of this ceteris paribus technique are well :---::n. However,
it is not felt that these limits detract in any sub5aitial way
from the conclusions. The alternative, multivariate analysis, is
unwieldy when dealing with banking data because of n;e multitude of
variables and their interrelationships. Further, the uni-variate
analysis is made more analytically acceptable when the several
different tests yield consistent parameters as in this study.
Finally, the emphasis is, again, not on the statistical computations,
but on the theoretical framework which facilitates integration of
the data into a cohesive whole.
The variable which is used most often for grouping is the
structural regulation within a state. The parameters which are
developed are held to be characteristic of the states grouped
according to their structural set. This obviously could be a source
of bias if a structural set group corresponded to groupings by
other variables having an impact on the market structure and perfor-
mance in banking. However, the regulatory grouping brings together
states which are rather heterogeneous in other aspects. In demo-
graphic terms, large states are found in both the uni-office and
multi-office set and those states experiencing rapid growth in popula-
tion as well as stagnation are also found in both sets. The extremes
of personal income are present in both regulatory environments
and a variety of economic situations exist within and bet-:een: tihe
different regulatory sets. While there may be some bias from the
grouping, the heterogeneity tends to minimize this and -he r-sulting
parameters appear to be valid estimates of regulatc-" -haracteristi-.
NOTES TO CHAPTER I
1. Excerpts from a speech by Archie K. Davis, president, American
Bankers Association before the February, 1966, meeting of the Ohio
Bankers Association. Quoted by Gerald C. Fischer, American Banking
Structure (New York: Columbia University Press), 1968, p. 1.
2. Financial intermediation is the process of bringing together
surplus and deficit units in the economy. The financial intermediary
is, therefore, "an institution that has financial or monetary rela-
tions on each side of the balance sheet." See Roland L. Robinson.
Financial Institutions (Homewood, Ill.: R.D. Irwin, Inc., 1960), p. 12
3. The term "uni-office" refers to structural regulation known as
unit banking under which each bank corporate organization is
restricted to one geographical location. The term "nuti-office"
refers to structural regulation known as branch bar-kn. under which
each bank corporate organization may have one or rcr geographical
4. There have been some multivariate studies attemr.:-- in bank data
analysis and these will be used and referred to in 1er chapters.
However, the results have generally been either nu bLe or consiste--
5. A cursory look at the groupings would indicate -Llt each regula-
tory set faces a variety of environments within which: it attempts
to accomplish some assigned objective. It can be seen from the
following listing, the regulatory differences are nct consistently
matched by demographic or economic characteristics. For a complete
listing of the groupings see page 54.
Population Illinois (4)*, Texas (5) California (1), New York (2)
Population Florida (2) Nevada (1)
Growth North Dakota (49) South Dakota (50)
Personal Income Illinois (4) Connecticut (1)
Industrialized Illinois Ohio
States Missouri Pennsylvania
Agricultural Kansas South Dakota
States Nebraska Mississippi
*Numbers in parentheses represent relative rank.
7' .C ** *" .*-* c* -.-.-- -*- '^ f
BANK REGULATION: ITS FUNCTION AND A MODEL
FOR TESTING ITS OPTIMALITY
Structural optimality in social institutions must be associated
with the set of characteristics, outputs and inputs, -hich is deemed
the most desirable by society at some point in time, A given structure
is preferred, not because of its intrinsic value, because of its
associated set. "Competition as a market structure is not an end in
itself. It is desirable because of what it leads .
The set of characteristics, inputs and outpu~.: associated
with the optimal structure tends to change over timo. It is a
function of the existing political, social, and ecrc-.mic environ-
ment and as these factors may change over time, so r-y the desired
The implied association between input-output and structure
suggests some degree of causal correlation between these two elements.
It should be recognized that structure is merely one of a number of
variables which may affect the final set. The degree of correlation
may be reduced or distorted by perverse movement of the unconsidered
variables. It is therefore evident that,when we refer to the optimal
structure, a time dimension is implied. The ideal nature of the
structure may be static in that it relates to a specific point in
time, to, when all other factors affecting the final set are given.
However, structural optimality in a dynamic sense would include the
ch~c~*i~cfe~b~ai~;f.~J~Ai~^ ~i-- ~~7' :-' 5 '"~: '*
flexibility to change appropriately when changes in the other factors
cause a divergence between the actual and optimal set.
The Nature of the System
The importance of these relationships requires a more explicit
statement of their nature. If we define 0" as the set of optimal
output and input, we might then express it as:
0 =f(e,s,p) = f(A)
A = (e,s,p)
e = current economic conditions
s = current social conditions
p = current political conditions.
We then can define On as the current set of output nd i'nu
On = f(e,s,p,x) = f(B)
B = (e,s,p,x}
x = a set of factors, historical or curr -:t within the
the states of nature, which prevent equivalency
of set 0* and On. If x=O then O-=Cj a- if : 0,
then ~ + On.
Such factors as contained in x may be exogenous to tne existi-
order and may be a product of the difference in the rate of change
deC ds < dp
in institutions and practices, i.e., de s d d (where t = time).
dt dt dt
On the other hand, such factors may be endogenous and nay represent
internal conflicts between existing institutions which result in
something other than the optimal set.
If x =E, where E is an empty set, and 0* = On, society generally
evolves a regulative set, r, in an attempt to overcome the perversity
of x and increase the equivalency of 0* and On. Thus we find that:
OnL = f (e, s, p, x, r) = f(C)
C = e, s, p, x, r)
such that if x =6, then r = and if x 4+ then r t It should
be noted that 0nL merely represents On as transformed over time by
the regulative set, r, so that 0nL = 0n(t+l) If rt = rt+l then
OnL = On. Of course, the desired result of intruding r is to increase
the population of the intersection set so that 0*(~0nL > 0*~0n.
The structural characteristics of society are a proper subset
of the existing social, political, and economic conditions. The
optimal structure, S*, is contained in A such that: SC.A.
However, it is necessary in structural considerations that
we recognize, as in our previous discussion, the ezi'cence of factc:r
x, which prevent the evolution of the optimal struc:-re set from tnc
existing social, political, and economic conditions. Thus, Sn, the
existing structure may be seen as:
if x =C, then A = B and S* = Sn.
if x 46, then A # B and S* + Sn.
As before, society's reaction to the existence cf x and the
fact that S* may not be equivalent to Sn is the development of some.
regulative set, r, which attempts to minimize the disruptive effect
of x and maximize the equivalency of S* and Sn. So the actual
SnL C C
if x = r = 0, A = B = C, and S* = SnL;
if x 46, r t 0, A + B 4 C, and S* SnL;
SnL = Sn(t+l); if rt = rt+l then SnL = Sn'
Given the foregoing relationships, we then can say that
0* = f (S* I A S*)
0nL = f (SnL I C SnL).
The members of the intersection set O* ( OnL will vary over
time due to the nature of the members of setsA and C. Economic (e),
social (s), and political (p) conditions are affected by an extremely
large and varied number of factors. Some of these factors are con-
trollable, others are not, and still others are a combination. As
a result, the conditions which affect the optimal outcome are
subject to rather continuous change over time. The same may -e
said of x, the intruding element, which prevents the equivalency o
0* and On. However,this is ne true of r, the regulative set,
While r may change over time, the procedure is discir.-inucus in nature.
A change in r generally requires a specific decision process and
until this process is completed, r is a constant. rha.ges are
discrete in nature, rather than continuous and,a -- result, a given
regulative set, rl, which is imposed to increase th uivalency of
0* and OnL, may become inappropriate or even perverse in effect, as
e, s, p, and x change over time. Changing combinations of the
latter elements will bring variations in 0* and OL and the slow
to change regulative set, r, may become a less efficient equilibraror.
The ability to increase the population of the intersection set is
dependent upon the ability of r to relate to the current x, which
causes the divergence. A slowly changing regulative set faces the
probability of an incomplete set or a number of irrelevant members
in dealing with the more rapidly changing factors affecting the
intersection set. An obvious conclusion from this sequence of
interrelationships is the necessity of a continual monitoring of
the regulative set.
~ '-';-"` -:`':---)-~
INPUT TRANSFORAT ION OUTPUT
The divergence Regulatory The resulting
between set, r -- set f otutt
0* and On in-ut, OnL
0* = f(e, s, p) OnL = f(e, s, p,, r)
On = f(e, s, p, x) OnL = On(t+l)
See text for explanation of symbols.
FIGURE 1: A schematic of the banking regulative system.
r~~d~F3 ?: ~--C~:; ~I r 1~*nr;~47:~U~~ Illiu~j_~yz.::m~m~
The purpose of this thesis is to take these generalizations
and to examine them within the framework of the banking industry in
the state of Florida. In terms of the system's schematic (see Figure 1),
what is desired is to activate the control element through an
examination and analysis of the feedback. Such an examination will
certainly require an identification of the optimal output-input
set, 0*; the existing output-input set, 0nL, and its determinants,
e, s, p; the degree of divergence between 0* and OnL, x; and the
current regulative set, r. The results of such an audit for Floricd
should be an evaluation of the existing regulative set as to how
efficiently it is accomplishing its equilibrating a.
This study will be centered on those members o the regulative
set which directly affect bank structure. While a co-p!ete audit
may be desirable, concentration on a limited number of members will
allow a clearer identification of the output-inputl/reguation
relationship. Further, those members of the regula:ive set which
affect bank structure directly are controllable at the state level
as opposed to national control of most other members. Thus any
need for change in regulation that may be suggested by this study
could be enacted by the Florida Legislature. The basic question to
be examined is the appropriateness of Florida bank structure as
prescribed by the existing regulative set. The hypothesis to be
considered is that the existing regulative set as embodied in current
structural regulations is doingaless than optimal job of equilibrating
OnL and 0*.
A Model of the Optimal Structure
The first task which must be accomplished is an identification
of 0* or the characteristics to be associated with the set of optimal
output and/or input. These characteristics should be rather general
in nature so that they may be used as a standard in a variety of
specific situations where the underlying circumstances or environ-
ment differ. However, these characteristics must also be translatable
into specific terms in order to determine to what e:-:ent an optimui.-
actual divergence is a function of an inappropriate regulative set.
From the relationships previously established, it follcws
that the set of characteristics consistent with G- ,11 also be
consistent with the optimal structure, S*. Therefr,-. :o define the
set of desiderata associated with the optimal ban; y:ruccure is to
define the industry characteristics associated with the optimal
output/input set, ceteris paribus.
There is, in the literature, a paucity of clearly documented
conclusions regarding the nature of the optimal bank structure.
However, most serious writers on the topic have had to grapple with
this problem at some point in their exposition.
In 1911, Eckardt suggested that the optimal banking structure
was the one which dealt most efficiently with "the security of
deposits, the prevention of panics, and the provision of elastic
In response to the economic, social, and political conditions
of the 1920s, Southworth concluded that the desired bank structure
would be the one which met the "evils of the existing system, i.e.,
frequent bank failures and economic inefficiency within the banks."
far.- **t..i- =!S-./-_-rT^. ZWK
Several years later, Beckhart suggested that to function well,
financial institutions had to meet certain structural criteria:
They must be able to provide facilities which are adequate
to the growing needs and the changing requirements of an
economy. They must be able to withstand shock and to
In recent years, Congressional action in the passing of the
Bank Holding Company Act of 1956 and the Bank Merger Acts of 1960
and 1966 has suggested another set of factors to be associated with
the optimal structure. The criteria established by these Acts for
evaluating merger and holding company applications are considered by
some as the structural characteristics associated Ev Conress with
the optimal set of output and/or input. The Bank ergz-er Act of 1960
summarizes these criteria as follows:
In granting or witholding consent ., te Comptroller,
the Board, or the Corporation, as the case mavy :e shall
consider the financial history and condition cf each of the
banks involved, the adequacy of its capital s-ructure, its
future earnings prospects, the general character of its
management, the convenience and needs of the corunity to
be served. The appropriate agency shall also take into
consideration the effect of the transaction on competition
(including any tendency toward monopoly), and shall not
approve the transaction unless, after considering all such
factors, it finds the transaction to be in the public interest.
Although the Bank Merger Act of 1966 shifted the emphasis
somewhat, the 1960 criteria are still a fair measure of Congressional
intent in this area. These factors can be further sorted and classed
rather neatly under three headings: "needs and convenience factors,"
"banking factors," and "competitive factors." The optimal bank
structure would be the one which could be associated with the optimal
conditions in each of these areas.
^A-ife^^^K4^MjM.Mgaife^*>a*****"*^**fe~~- ...; ^ :.^.:! ,-..- *.:- ---: : .?.,, .-- -J-VMSM
Of course, the problem which arises in the use of these
criteria is that of defining the subset of optimal conditions in
each area. This enigma has forced the regulatory agencies to follow
an interpretive policy and as might be expected, there have been
differing opinions as to how a proposed merger might affect optimality
in the several areas of concern. In fact, as Hall and Phillips
suggest, this interpretive requirement has led to three different
philosophies as to the optimal bank structure. The Comptroller
has viewed the optimal structure as one that is "balanced in c-ompos
tion with some small, some medium-sized, and some lare banks. The
FDIC has taken the criteria of the Bank Merger Act r~ mean the
optimal structure is the one with size homogeneity ir crder "'t
strengthen competition." The Federal Reserve Board i'ss interpreted
the criteria to mean an optimal structure is one v_ nI aximizes ".;
variety of banking services" offered to existing customers.
What is evidently needed is a more precise definition of
the characteristics to be associated with the optimal banking structure.
Such a definition requires cognizance of the existing social,
political, and economic conditions as well as a visualization of
the set of optimal output and/or input. The final listing of
characteristics will embody varying degrees of value judgments
depending on how extensively and/or analytically the total welfare
function is developed.
Legislation enacted at the national level is or should be
indicative of the existing social, economic, and political conditions
and their relationship to some desired ends. The regulative set
itself has the previously mentioned problem of lag and thus has
limited value as an indicium. However, the hearings and/or preamble
associated with the laws do contain specific indicators of what the
laws were intended to achieve.
Thus banking legislation should indicate the optimal conditions
which are sought and a survey of such laws and related hearings
should produce a set of characteristics to be associated with the
optimal bank structure. Such a survey was conducted and,while the
resulting set still represents a large degree of n rpretation ard
a number of value judgments, each member of the ser -sc been endorse
by Congress, explicitly or implicitly, as a desired f-eaure of the
Setting aside considerations derived from pmnca ry policy, iz
appears that the optimal banking structure should be defined in
terms of at least four desiderata. First (not necessarily in order
of importance) the optimal banking structure should associated with
maximum productive efficiency. In other words the industry is
envisioned as operating somewhere on its product transformation
curve and the price of intermediation (Pit) (output price-input
price) could not be reduced by a change in structure (Pit )
P i P
Second, the optimal bank structure should be characterized
by allocative neutrality. There should be nothing within the
structural framework itself which would influence the pattern of
allocation. Such neutrality would preclude the possibility of
exploitation in either the input or output market. Third, the
optimal bank structure would permit and encourage maximum responsive-
ii .- ..~-.-~ll---1 L. n -i: .: :iU
ness to changes in technology and/or consumer demands. The
standard or measure that would be relevant would be the time-lag
involved in a response to change and the degree of innovation
apparent within the industry. As Greenbaum has noted, "maximum
responsivity should be thought of as a first approximation to optimal
responsivity, which in fact, may be submaximal." Finally, the
optimal bank structure should contribute to depositor protection
against possible failure.
With this set of characteristics, we have a rtrner broad-scal-
standard against which existing structures can be -rasured. Of
course, what is lacking is a meaningful way of coc inig them so
that situations which involve trade-offs can be ziuted and rank-
in terms of their desirability relative to other situations.
One possible way this could be handled is b- collapsing the
several desiderata into a single objective function ~-ith the
necessary constraints. Thus, an alternative policy goal that
encompasses, to varying degrees, the general criteria previously
established is the minimization of the price of intermediation.
Within this context the price of intermediation -iould be the
difference between the price placed on the fund output of the bank
and the price paid for the fund input.13
PInt i z (OkPk jP ij)
0 = output Po = price output
I = input Pi = price input
Minimization of the price of intermediation coincides with
'the definition of productive efficiency as previously established.
The optimal structure is that which minimizes the net social cost
of intermediation. Productive efficiency is a necessity for an
ongoing firm where the emphasis is on minimizing the spread between
the two market prices. Continuing and/or profitable operations
require the firm to seek the optimal combination of productive
assets so that the differential is not totally dissipated in the
other costs of the firm.
Minimization of the price of intermediation is basically the
raison d'etre for the allocative neutrality criteria.. In seeking
a bank structure which is neutral in the allocativ= -r-cess and
which avoids customer exploitation in all markets, 1: -s evident
the price intent is minimization of the total social ccst or the
input-output spread. It is at this point, however. ,hat one of the
constraints to the objective function must be introduced. While
minimization generally assures lack of exploitation in the markets
served, it does not assure participation in any given market.
There may be some markets, input or output, in which society wants
service regardless of the price effect on the objective function.
Therefore, it is necessary to specify:
Ok > 0 (k = 1,2,3,4,. .. n)
Ij > 0 (j = 1,2,3,4,. .. m)
where k and/or j indicate the various markets or products which the
banking industry services either in pursuit of increased net income
or as a result of various forms of subtle social persuasion.14
The desideratum of responsivity to technological and demand-
oriented change is also includable in the general objective of inter-
mediation price minimization. Response to technological change is
certainly consistent with the objective function. In fact,such
response might well be considered an aspect of productive efficiency
and the stimulus for the latter is therefore relevant to the former.
Further, the responsivity that is sought here is the optimal level
rather than the maximum level which may be non-contr outing to the
Reconciliation of demand-oriented changes an-d -ninmiation o
the price of intermediation is more difficult. ue a-mands
considered socially desirable, which are not met through the
normal allocative process,are generally the subject ofi so-e form
of direct or indirect regulation. Where economic motivation and the
minimization of intermediation price does not answer a demand-
oriented change, then we must again consider the constraint to the
model previously suggested (see page 20).
Finally, it should be recognized that the suggested objective
may not be consistent with the safety of deposits criterion. In
fact, if minimization of the price of intermediation is followed
to its logical conclusion, the spread between input and output
prices would be zero. Bank failure would be a probability and
deposit safety would deteriorate. It would appear, therefore, that
this desideratum would require a constraint to the basic objective
function such that:
".. ^ -^ .' ..* .--^., .* .* .' ..* ... .; m l
, _________. ... __ .. ____ .._ ......________________________________-,O ^
where E equals that level of earnings necessary to produce a rate
of return sufficiently high to minimize the probability of bank
It appears, then, that it is possible to collapse the several
criteria identified with the optimal bank structure into a single
policy goal or objective function subject to some constraints.
We take as our objective minimization of the price of intermediation.
In) = (0kok IjPij
j > 0
yii y (OkPok j.
One additional point that should be observed in :his model is
that the oft-noted conflict between technological efficiency and
allocative neutrality has been ignored in favor of concentration
on market prices. Theory would generally suggest that the minimiza-
tion sought would be most consistent with pure competition in both
markets, subject to the constraint of deposit safety. The model
attempts to avoid the trade-off question by accepting that banking
structure which optimizes the objective function regardless of the
ensuing market structure.
In summary, this chapter has suggested the relationships
between the optimal set of output/input, the extant set of
output/input, and the regulative set. Using the optimal bank
structure as a surrogate variable, a set of associated character-
istics of the industry was developed. It was then suggested how
these criteria might be collapsed into a single measure to permit
analysis and measurement of existing output/input, structure, and
regulations in a relatively straightforward manner. The criteria
and resulting model will be used as benchmarks or general goals.
They provide a framework for policy action and their usefulness is
not contingent upon attainment. Their purpose is : indicate the
direction policy should move in order to increase rne members of
the intersection set O* On.
NOTES TO CHAPTER II
1. P.M. Horvitz, Concentration and Competition in New England Bank-
ing, Research Report No. 2 (Boston: Federal Reserve Bank of Boston, 1958)
p. 165. More recently S. Greenbaum noted, "I submit that ahat we want
from the banking industry is not competition but performance." Federal
Reserve Bank of Chacago, Proceedings of a Conference on Bank Structure,
1968 (Chicago: 1968), p. 122.
2. The structure of banking relates to aspects of the ownership, crgani-
zation and control of the banking industry. It may include the number
and size distribution of banks, the number of bank offices, and extent of
holding company and chain banking, as well as other properties.
3. H.M.P. Eckardt, A Rational Banking System (New Ycrk: Harper &
Brothers, 1911), p 5.
4. S.D. Southworth, Branch Banking in the Unitec zates (New Ycr;
McGraw-Hill Book Co., 1928), p. 207.
5. B.H. Beckhart, "Criteria of a Well-Functioning financial
System," in Readings in Financial Institutions, ediLte by M.D. Ketch,-- ind
L.T. Kendall (Boston: Houghton Mifflin Co., 1965), :. s.
6. Act of May 13, 1960, Public Law 86-463, 74 S:2:. 129, 12 U.S.C.
7. G.R. Hall and C.F. Phillips, Bank Mergers and r:h Regulatory Auv ies
(Washington: U.S. Board of Governors of the Federal Reserve System. i-- ).
8. A number of laws and/or acts were perused in rnis process. Amcn
the more important were: the McFadden Act of 1927, rte Banking Act cf
1933, the Bank Holding Company Act of 1956, the Bank Lerger Act of 190,
and the Bank Merger Act of 1966. The compilation process included
elimination and/or combination of redundant objectives as well as a casting
out of those which have been superseded.
9. For a similar formulation see: S.I. Greenbaum, 'Competiticn and
Efficiency in the Banking System-Empirical Research and its Policy
Implications," The Journal of Political Economy, Vol. 75, No. 4
Part II (August, 1967), pp. 461-478.
10. Ibid., p. 462.
11. Some would argue that this factor should not be included among the
desiderata. They contend that deposit protection has been provided for
through deposti insurance and the Federal Reserve's willingness to
function as lender of the last resort. This view holds that deposit pro-
tectionis, therefore, not a function of alternative bank structure.
The point of view here is that while it is certainly true that
deposit insurance has provided a high degree of deposit protection,
there are several other members of the regulative set, i.e., entry
control, asset control, liability control, whose purpose is deposit
protection. Many of these latter regulations impede the realization
of other desiderata. If the optimal bank structure can
contribute to deposit protection with little or no trade-off of the
other desired factors, then it is possible some of the aforementioned
"deposit-protection" regulations may be relaxed. This might permit
such things as variable insurance rates or a relaxation of asset
control, and the resulting output/input might draw closer to optimal
as some of the required trade-offs are resolved.
12. Mote suggests an alternative policy of output maximization.
However, this policy has particular problems dealing with the
responsivity criteria and virtually ignores the input market. See:
L.R. Mote, "A Conceptual Optimal Banking Structure for the United
States," Proceedings of a Conference on Bank Structure and CompetFitin,
Federal Reserve Bank of Chicago, 1969, p. 25.
13. The input price is seen as the price paid, directly or indirectly,
in the market place for the funds or "raw material" of the bank.
It does not include the costs of land, labor, and ca-itl used in
the productive process.
14. This interpretation appears to be consistent --ii Shll's
idea of banks as multiple-product price-discriminating firs.
Banks are still envisioned as entering a variety f -rke~s in a
sequence approximating relative profitability. cever, it is
suggested that some market entry is by regulation azlher than
economic motivation. For Shull's approach see E, '.1 "Comier:cia
Banks as Multiple-Product Price-Discriminating Fi..:," Eanking
and Monetary Studies, edited by Deane Carson (oewood c 1L: R.D.
Irwin, Inc., 1963), pp. 351-368.
15. Such a situation would be similar to the extreme case suggested
by Gurley and Shaw. Under such conditions, financial inrterediaries
would cease to exist, and the savings-investment process would
proceed without intermediation. "Balanced budgets" would prevail
or the surplus and deficit units would coincide in their needs and
the need for transformation would be eliminated. See John G. Guriey
and Edward S. Shaw,"Financial Intermediaries and the Savings-
Investment Process," The Journal of Finance, Vol. XI. No. 2
(May, 1956), pp. 257-258.
16. If society has an objective, avoidance of market power, regard-
less of resulting price patterns, we might classify this as part of
bank output, Ok, to which we can assign a price, Pok, and thereby include
in the minimization objective.
FLORIDA BANKING: THE CHANGING ENVIRONMENT
Application of the theoretical framework to a particular
regulatory situation requires the development of a set of specific
information. In investigating Florida banking as a particular
regulatory situation, it is evident that the current environment as
well as the past development must be made explicit, :tthin the
general desiderata, there are local environmental inluences which
bear on the optimality of Florida bank structure. F~rzher, the patr-
of evolvement of Florida banking may reveal the ra.riale for the
existing regulative set. The present task, then, is z trace the
historical development of Florida banking and to es-atlish the envir:--
ment to which Florida banking must be responsive.
History of Banking in Florida
From the discovery of Florida in 1513 to the opening of the
Bank of Florida at Tallahassee in 1828, financial activities were
performed by trading houses and private firms. During this period
of "changing flags," Panton, Leslie, and Company (later known as
John Forbes and Company) was the dominant firm which filled what
little need there was for the banking function. The Company
served as "banker and factor to the resident planters and farmers
with loans and credit for the purchase of slaves and promotion of
agriculture."1 The scarcity of population and the agrarian nature
of the economy demanded little more.
As the population increased2 during the Territorial Period
(1828-1850), the Legislative Council chartered a number of banks.3
Only three of these were of any major importance and were endowed
with the public credit through the issuance of "faith bonds" which
were later repudiated. Each of these banks was authorized to establish
branches. There is little doubt that these territorial banks made
significant contributions to the development of the state. In
the almost total absence of capital, it was their loans that allowed
many planters to get land into production. However rheir capital
limitations as well as internal mismanagement led to an eventual
universal failure in 1843. The banking experience -f tis period
resulted in the inclusion of stringent bank regulat.icr i he fire-
state constitution (1830).
These restrictive provisions drove public c:king fro. Florida
until 1855. During this period banking activities ;ere carried on
by agents of New York, Charleston, and Savannah ba-ks. However, a
renewed desire for local banking arose and in 1853 the state's first
general banking law was enacted. Among its many stipulations were
included provisions that note issuance was restricted to those
obtained from the state in exchange for U.S. or state bonds and
branches or agencies were to be allowed. Although this law mitigated
many of the harsher features of the constitutional provisions, public
banking was slow in developing and at the time Florida seceded from
the United States in 1861, there were only three banks in operation.
Florida's participation in the Civil War was disastrous to the
economy of the state and the unsettled conditions of the Reconstruction
' -*_/ 1. 1 -
Period were not conducive to economic rehabilitation. Business was
Virtually at a standstill and there was little need for bank services.
The only banking institutions present during this period were private
banks representing out-of-state interests.
The first national bank in Florida was opened in 1874. As
economic conditions flourished, bank numbers increased so that by
1889 there were forty-five banks6 in operation. A new general
banking law for the state had been passed in 1868 and its severity
continued to reflect the statewide reaction against and distrust of
the banking business. So restrictive were the prcvisIons of this
law, only one bank (Key West) among those operating _n 18S9 had
been able to acquire a state charter.
The apparent slow development of state banking -as attributable,
at least in part, to the harshness of the law. Ho-iver, in 1889, t~r
legislature passed a bill which liberalized the provisions considerab _-
Private banks were discouraged, capital requirements were lowered,
and branch banking was again authorized. The passage cf this law
marked a new era in the history of banking in Florida. The industry
enjoyed a period of uninterrupted growth so that by 1925 there were
some fifty-nine national banks and 271 state banks.
In 1913, at the urging of the State Comptroller, who felt
the existing statute was misleading, the banking laws were amended
so that banks were restricted to a single place of business and branch
banking was forbidden. This provision has been carried over into
present law, but at the time of passage it was of little consequence
for "only fifteen branches had ever been established and of these
only eight were in operation in 1913."7
The deflation of 1926 signalled the downturn of the state's
economy that was followed without respite by the national depression
of 1929-1933. This period of almost a decade of economic stringencies
took its toll on Florida's banking industry. The number of banks
decreased from 336 with resources of $943 million in 1925 to 1I3
with resources of $212 million in 1933.
It was during this time,and somewhat in response to the problems
of the period, that group banking emerged in Florida, While the laws
stipulated one place of business per bank, nothing a-s said regard-
ing the control of more that one bank by a single firr ana/or person.
The group movement gained impetus from the recogniacr tht control
of several banking units might furnish needed fl iblty in tir-es
of financial crisis.8
Federal banking legislation enacted in 1933 ir- 135 rovicec
sweeping changes in national regulation. Among other basic changes
was the provision that national banks with capital of Sj50,000 or
more might engage in statewide branch activity instrzes Dermitting
such operations or as permitted by state law. Floria laws were
revised in accordance with the national legislation except that
branch banking was not allowed.
This was the last major regulatory change at the state level
and while Floridaand Florida banking have grown and changed extensively
since that date, the regulatory set has remained constant. Thus,
the basic legislation shaping the structure of Florida banking is
at least 30 years old and,in some respects, even older. It is evident
that the regulatory features of Florida banking have been heavily
influenced by the traumatic experience of the Depression. This
DEVELOPMENT OF FLORIDA BANKING AND
ITS CHANGING STRUCTURE
Dominant Banking Regulative Structural
Dates Institutions Atmosphere Regulation
1413-1828 Forbes & Co. None Unspecified
- -~ -- -
immediate legacy is reinforced by the older heritage of the uni-
versal failure of "territorial banks". The reaction to these events
has been heavily imprinted, not only in the law, but also in the
Our historical survey stops at this point for the regulatory
aspects of Florida banking, particularly as applied to bank structure,
have been somewhat static over the last fifty years. On the other hand,
Florida has experienced extensive demographic and economic changes
during this period. The environment in which Florida banks operate
today and the financial needs to which they must respond are so
radically different from those of 1913 and/or 1930 C :at a regulatet
audit" appears imperative.
While the intent of national banking legisla-ticr may be used aL
a surrogate variable for the existing social, econciLc. and political
factors affecting the set of optimal output and/or irnur, the local-
ization of banking regulation requires a more intensive lock at the
local environment to determine the population of the intersection
set. Banking regulation permits structural specification at the
state level and full knowledge of the coincidence between the
optimal and actual set of banking input and/or output in Florida
requires some knowledge of the specific environment to which Florida
banking should be responsive.
One of the dominant characteristics of the Florida environment
is the rapidly changing demography. In fact, one of the keys to
the scope of the problems faced by the banking industry in Florida
lies in the rate of population growth since 1900. Reference to the
census tables reveals that Florida has moved from a state with just
over a half-million residents and thirty-third in population size in
1900 to over six million residents and ninth in size in 1970. Florida
led the nation in rate of growth from 1950 to 1960 with an increase
of 78.7 percent. Since 1960, the state's population has increased
by more than one million at an annual average rate of 3.7 percent,
exceeded only by Nevada (7.19%).
It is significant to note that this populaticr increase exhibits
characteristics consistent with an area of continuing. grcowh. A
state's population may increase by migration and/c-b y he natural
gains of its residents. Rapidly growing states can : i:ieve their
high rates only by adding large net migration gains rz their natural
increase. It is this pattern that Florida has recernLy followed,
as the census figures show that of the 942,000 person- gained from
1960 to 1966, 61 percent resulted from migration and 39 percent fror
natural increase. This is in contrast to the period 1910-1919,
when some 53 percent of the total population change of 215,800 was
a result of natural increase.
Another view of Florida's demographic changes reveals a
continuing urbanization as the percent of total population living
in urban areas has increased from 29 percent in 1910 to 76 percent
in 1970 (Table 3). The specifics behind this pattern are particularly
relevant to the structure of the banking industry. The discernible
growth pattern followed is not the pattern of other states where
commerce and industry were the causes of such concentration. Florida
urbanization is primarily residential with industry and commerce
,~.....- ~ -r----~-- i, -. .-L i -- ?~ -- -i ir( i I--~iP~g~ll
TEN LARGEST STATES,
POPULATION AND BANK STRUCTURE, 1970
State Population Bank Structure
California 19,953,134 Branching
New York 18,190,740 Limite'd ranching
Pennsylvania 11,793,909 Limited Branching
Texas 11,196,730 Unit
Illinois 11,113,976 Unit
Ohio 10,652,017 Limized Branching
Michigan 8,875,083 Limited Eranching
New Jersey 7,168,164 Li-itez Eranching
Florida 6,789,443 Unir
Massachusetts 5,689,170 Limitc ranking
Source: U.S. Census of the Population: 1970.
POPULATION AND URBANIZATION, FLORIDA,
Year Population Percent Persons in Places Percent
Increase of 2,500 or More of Total
1900 528,742 132,185 25
1910 752,619 42.4 224,077 29
1920 968,470 28.7 353,315 36
1930 1,468,211 51.6 759,778 51
1940 1,897,714 29.2 1,045,791 55
1950 2,771,305 46.1 1,566,788 56
1960 4,951,560 78.7 3,666,383 73
1970 6,789,443 37.1 4,900,000(est.) 76
Sources: U.S. Census of the Population: 1960; Statistical Abstract
of the United States: 1970; U.S. Census of Population: 1970.
a secondary role. The latter have followed population rather than
the traditional sequence. Further, Florida has reached the upper
ranks of urban states without the aid of large cities and with
the seven largest (over 100,000 in population) comprising less than
13 percent of the state's total population. Statistical investiga-
tion reveals that these distinctive characteristics are the resultant
of two facts.
1) Most of Florida's cities are of relatively snall size,
that is, in the size range of 2,500 to 75,000 population;
2) A high proportion of the urban population lives in suburbbi"
that is, adjacent to, but outside, the corporate limis of a large
city. Florida actually has a higher proportion (38 recent) of
population living in these urban fringe areas than ces New; York.
The relatively dispersed nature of the state's population
is further emphasized when we examine the figures fcr Standard
Metropolitan Statistical Areas. In 1970, Florida's most populous
SMSA, Miami, was twenty-sixth in size in the United States. Several
states, with smaller total populations, had metropolitan areas which
ranked higher due to greater population concentration.
In summary, we see that population growth in Florida displays
unique characteristics to which the banking industry must be responsive.
The rapidity of growth, its migratory nature, and the evolving
urban pattern are all post-1913 characteristics which put special
demands on the banking structure.
Florida's economic structure has also undergone a major
evolution during the last sixty years. In Rostow's terms it would
appear that Florida was largely a "traditional society"l2 up until
Ic.--- ~-:F'. r~~-.1 a -.L-
the early 1900s. In its economic and social dimensions it was
largely an extension of the "Old South". Even the basic industry,
agriculture, lagged behind the nation in the application of science
and technology. Florida had few, and inadequate, railroads in a
period when railroads were perhaps the single most important factor
in the economic expansion of the country. Florida lacked public
utilities, roads, harbors, and even local industries nc supply local
The period, 1900-1960, can be seen as stages t--. and three of
Rostow's stages of economic growth. The pre-condili s for take-ofi
began to develop, "not endogenously, but from the aLanced society.'"-,
The climatic appeal of Florida increased immigra.ic- raLpily in the
early 1900's and the idea spread that economic progress ras not only
possible but necessary for the general welfare of the ztate. The
latter part of this period saw the old blocks and rsi=tances to
steady growth overcome as immigration continued to row rapidly. hs
"take-off stage" was characterized by a relatively narrow economic
complex, focusing primarily on agriculture and the tourist trade.
The momentum of this period allowed the state to open its "drive to
maturity" in the 1960 s.
The economy of Florida today bears little resemblance to the
"traditional society" of the early 1900 s.. The economy has broadened
its focus of the take-off period and has extended its range into
more refined and more complex processes. Maturity is demonstrated
in an economy, according to Rostow,
When it shows the capacity to move beyond original indus-
tries which powered its take-off and to absorb and apply
efficiently over a wide range of resources the most ad-
vanced fruits of modern technology.
It appears that Florida has entered such a stage. The economic
base has broadened considerably and the structural framework now
encompasses a multitude of endeavors. Growth has been experienced
from the application of the latest technological advances in elec-
tronics and rocketry and the dominance of agriculture and tourism
has receded. The major economic sectors of Florida are now whole-
sale and retail trade, service trades, manufacturing and government
In examining this base, employment data are a:ong the best
indicators of the relative importance and size of the different
sectors. By using percentage distribution, we car- r-:e direct
comparisons with the United States as a whole.
PERCENTAGE OF TOTAL EMPLOYED WORKERS BY MAJOR L7\STRY
GROUP IN FLORIDA AND THE UNITED STATES, MARCH, 1- 6
Industry Florida r-ited States
Total Employed 2,058,280 70531,i000
Agriculture 6.0 5.2
Mining 0.4 1.0
Construction 6.8 4.6
Manufacturing 14.9 27.4
and Public Utilitities 6.6 6.1
Trade, Wholesale, and Retail 24.7 19.4
Finance, Insurance, and
Real Estate 5.4 4.3
Services 16.9 14.6
Government 18.1 17.3
Source: Florida Statistical Abstract, 1969; Statistical Abstract
of the United States, 1968.
It is apparent that Florida employment distribution differs
markedly from that of the rest of the country (Table 4). In Florida,
construction, trade, and services are significantly larger sources
of employment than nationally; whereas the proportion employed in
manufacturing is about one half the national figure. The total
employment in these four industry groups accounts for more than
75 percent of all employment in Florida. The 1910 figures for Florida,
while not directly comparable because of changes in sector classifica-
tions, do show some wide differences. Agriculture predominated at
that time with a claim on 43 percent of the work force while trade
and transportation together used only 15 percent.
Another useful approach in examining the ccrroic fabric of
a state is to consider income in terms of its sourc-s and the
state's per capital position. Again, a quick comparison shows
there are significant departures between Florida a:. 'he United
States in percentage distribution. As in employmr>-.. Florida shcw-
a greater fraction derived from construction, finani trade,
services, and government than nationally. Conversely, -he percen-
tage attributable to manufacturing is less than hz]f :hac of the
nation (Table 5).
The emerging structural pattern is reaffirmed w.hen we note the
distribution of income according to type (Table 6). In Florida,
the portion taking the form of wages and salaries is less than in
the nation. On the other hand, property income and transfer pay-
ments are both a larger fraction of the whole in Florida.
One additional dimension of the economic structure is per
capital income. Florida has consistently had per capital income that
is below the nation's average. While there has been an improvement
since 1920, the state's economic growth in the last fifteen years
PERCENTAGE DISTRIBUTION OF PERSONAL INCOME -
WAGE AND SALARY DISBURSEMENTS BY MAJOR SOURCES,
FLORIDA AND UNITED STATES, 1968
Industry Flcrida United States
Total (millions) $12,107 S L60,727
Farming 1.5% 0.6%
Mining 0.5 1.1
Construction 7.5 5.8
Manufacturing 16.9 31.7
Trade, Wholesale, and Retail 20.1 '6.'
Real Estate 5.7 .3
Communication and Utilities 2.9 2.8
Services 15.6 i2.!
Federal Government 10.5 8.3
(Civilian and Military)
State and Local Government 12.9 .
Others 0.4 0.2
Source: Statistical Abstract of the United State. :170., p. 318.
PERCENTAGE DISTRIBUTION OF PERSONAL INCOME,
BY CLASS, FLORIDA AND THE UNITED STATES. 1968
Net Wages Other Labor Proprietor's Property Transfer
& Salaries Income Income Income Payments
Florida 61.7 2.7 9.5 17.7 11.3
United States 67.4 3.5 9.3 14.4 8.6
Source: Statistical Abstract of the United States, 1970, p. 318.
has not been sufficient to close the gap. It is apparent that mere
growth, whether in numbers of people or in employment, cannot be
equated with economic development, a basic measure of which is the
level of income reached. Florida's rapid advance in population
(ninth in the nation) has not been accompanied by a like growth in
per capital income (twenty-eighth in the nation).
PERSONAL INCOME PER CAPITAL,
FLORIDA AND THE UNITED STATES,
SELECTED YEARS, 1950-1969
Year Florida United States -_ rica as a
1950 $1281 $1496 S:
1955 1621 1876
1960 1954 2215 S9
1965 2438 2760 5
1966 2614 2963
1969 3427 3680 91
Source: Statistical Abstract of the United States. 1970, p. 320
The broad sweep of aggregate employment and income figures
tends to obscure industry composition. The dominance of certain
industries in Florida's economic structure compels us to examine
their make-up more closely.
The Census of Manufacturers showed that Florida had some 7,500
manufacturing establishments in existence in 1966. Since 1958 the
number of establishments had increased 17 percent while payrolls
and value added by manufacture had more than doubled, increasing
-.;-- .I. .-i,-ri.--- ...- -- -
109.9 percent and 108.3 percent respectively. Although this rapid
rate of growth is impressive, manufacturing continues to trail
trade, government, and services in the generation of personal
income and/or employment in the state.1
The increasing significance of the manufacturing sector has
been accompanied by a marked change in the makeup of the predominant
industries. The Census of Manufacturers of 1914 reveals that some
60 percent of total wage earners employed in manufacturing worked
in lumber and timber (28.3%), tobacco and cigars (16.51), and
turpentine-rosin (15.8%). These industries plus s-hi-c.uCing-
steel accounted for almost 70 percent of value adc~ .
Today, the three groups of manufacturers fior.t in Florida
as measured by value added by manufacture are fop -.d kindred prod-
cts, chemicals and allied products, and paper and 'alied Iroducts
(see Table 8). Although not among the above, eiecTicl .achinery
has been the most rapidly growing category, experiercirng a 482.2
percent increase in value added and 506.9 percent increase in pay-
rolls since 1958. Over the same period of time, lumber and wood
products and tobacco manufacturers have experienced declines in
payroll of 17.9 and 27.8 percent, respectively.
Another significant change in the characteristics of the manu-
facturing sector over the last 50 years has been the average size
of the firm. The average firm in 1914 employed less than 15
employees and produced products valued at $32,000. The average
Florida manufacturer in the 1960's employed more than 30 people and
added values of over $350,000 to the final products.
GENERAL STATISTICS ON MANUFACTURING, BY
MAJOR INDUSTRY GROUP, IN FLORIDA:
1958 AND 1966
Number of Establishments
Industry Group 1958 1966 %incr.
All Industries Total 6304 7406 17.5
Food and Kindred Products 904 895 (-)l.0
Chemical and Allied Products 291 390 34.0
Paper and Allied Products 86 112 30.2
Printing and Publishing 761 1016 33.5
Electrical Machinery 122 243 99.1
Stone, Clay, and Glass Products 590 610 3.4
Fabricated Metal Products 540 687 27.2
Transportation Equipment 292 394 3-.9
Machinery Except Electrical 353 516 16.2
Others 2365 2543 7.5
Industry Group 1958 1966 Tincr.
All Industries Total 656 1444 109.9
Food and Kindred Products 130 191 6.6
Chemical and Allied Products 65 121 8.
Paper and Allied Products 64 104 c3.2
Printing and Publishing 58 99 68.9
Electrical Machinery 22 137 506.9
Stone, Clay, and Glass Products 46 68 46.6
Fabricated Metal Products 58 106 82.1
Transportation Equipment 41 146 252.2
Machinery Except Electrical 16 58 253.5
Others 151 408 170.1
Values Added by Manufacturers ($1,000,00)
Industry Group 1958 1966 %incr.
All Industires Total 1410 2938 108.3
Food and Kindred Products 321 521 61.9
Chemical and Allied Products 233 403 72.9
Paper and Allied Products 151 291 92.2
Printing and Publishing 103 197 90.2
Electrical Machinery 37 218 482.4
Stone, Clay, and Glass Products 105 163 54.4
Fabricated Metal Products 104 213 103.4
Transportation Equipment 56 209 270.4
Machinery Except Electrical 27 92 234.7
Others 267 627 134.3
Source: Census of Manufacturers. 1958 and 1963: Florida Statistical
Personal income directly attributable to agriculture has
diminished in importance since the early 1900s and now constitutes
less than 5 percent of the state's total. However, it should be
noted that the manufacturing process involving food and kindred
products is the major manufacturing category.
Citrus is the state's most valuable crop. The 650,000 acres
of bearing groves comprise about 71 percent of the nation's citrus
acreage and provide some 75 percent of the total prediction. In
terms of value or cash receipts, citrus was by far i:e predominant
commodity in 1970, returning $259 million or abc-- ,5 percent of
total agriculture receipts. Other important com-odi:es include
tomatoes, sugarcane and livestock.
The scale of Florida farming is typically large and has been
getting larger over time. The average farm of 1910 1hd 105 acres
and produced products valued at $1,000. The average farm of the 196S-
contained more than 590 acres and realized products valued at more
The average size of a Class 1 commercial farm, which accounted
for more than 70 percent of total product value, was 2,294 acres.
The relative size of Florida farms is further demonstrated by the
fact that Florida has the fewest number of farms in the Southeast,
but its estimated average net income per farm is the highest in the
Wholesale and Retail Trade
In comparison to other major industry groups, employment in
Florida is heavily oriented to trade. Employing 508,300 workers in
. / !,. ..-.. .. L
1962, wholesale and retail trade constituted the largest employ-
ing industry group in the state (25 percent of total employed workers).
The increasing importance of this sector can be seen by comparing
the 1910 figures which show less than 10 percent of the total
employed workers in this industry.
The $10.3 billion of sales reported for the 9650 wholesale
establishments in the 1967 Census of Business was an increase of
39 percent over 1958. The average firm was substantially Iarger
than the wholesaler of the early 1900's with saleC of over 1,000
per establishment as compared to some $200,000 per fin in the
1920's. Groceries and related products ranked fIrs* bCoh in
number of establishments (1945) and total sales (gl- billion).
Motor vehicles and automotive equipment ranked second while macwhirC--,
equipment, and supplies were third. It should be n-ed rhat there
is no necessary relationship between wholesale and retail sales;
many wholesale sales are to other than retailers and conversely
many large retailers by-pass the wholesaler.
In 1968 Florida's retail sales amounted to over $12.3 billion.
an increase of some 60 percent over the 1963 figure. The average
firm was substantially larger than the retailer of the early 1900's
with sales of over $175,000 per establishment as compared to $22,000
per firm in the 1920's. In addition, the one-store retailer accounted
for 85 percent of the total firms in 1929 and 70 percent of total
sales. However, the dominance of the one-store retailer has declined
and in 1967 he accounted for 80 percent of all firms but only 54
percent of total sales. Of increasing importance, particularly,
in food and department stores, was the large interstate chain,
claiming some 36 percent of total retail sales.2
In 1968 the two kinds of businesses leading in sales volume
were food stores with sales of over $2.6 billion and automotive
dealers with sales of $2.5 billion. If the sales of eating and
drinking places are added to those of food stores, and if the gaso-
line service station figures are included with thcse of the auto-
motive group, the resulting figures together account for well over
half of all retail sales ($6.9 billion in 1968).
The large concentration of workers in the rro'de area appears
to be due, at least in part, to the magnitude of te state's
tourist industry. With 21 million tourists coming Florida
annually, the demand for trade establishments ccntnes :o be
high. However, while employment in this area ccntrn 1s to grow,
its proportion of total employment has experienced a slight decline
since 1958. The cause of this shift appears to lie in the fact
that although tourism continues to increase, other elements of
Florida's economy have been growing even more rapidly.
The service industry group, which employed some 348,400
workers during 1968, continues to be of growing importance to Florida's
economy; second to trade, only, in numbers employed. This industry
experienced an increase in employment of 83.9 percent since 1958
and is one of Florida's most rapidly expanding industry groups.
Included in this group are doctors, lawyers, accountants, and others
furnishing professional services as well as those employed in
establishments engaged in personal and repair services such as
hotel and restaurant workers, radio and television repairmen, and
persons working in amusement and recreational activities. The
increasing levels of employment in this industry group have not
substantially altered the position of this sector in terms of
percentage of total workers employed. The 1910 figure of 17.3
percent (1968 16.9 percent) suggests that,while the number in the
industry has grown in response to population changes and an increasing
tourist trade, its relative importance has been fairly static.
However, the relative size of the firms grouped in .-is classifi-
cation has increased over the years so that the average firm,
which produced services valued at $9,000 in the ISK r, now
generates some $50,000 in services during the year
In the "selected services" group27 surveyed i-n he 1967
Census of Business, we find that hotels, motels, an-i tourist courts
generated some 25 percent of the total receipts attributable
to the industry group, followed by miscellaneous business services,
and personal services. Again we see the influence of tourist
expenditures which have pushed the "room rental" business to the
predominant position in selected services.
One of the difficulties in trying to establish a precise
definition of Florida's economic environment is the presence of a
large and significant tourist industry. While this industry is no
longer as absolutely dominant as it once was, it still plays a
major part in Florida's economic health. However, tourist expenditures
are not easily segregated and the survey methods presently used
~'j,~si~~~'-~7-',-""itXin. ~-- L_ (I- .(-
are gross estimates of the impact of this spending sector. Of
the estimated $5.5 billion spent by tourists in Florida in 1968,
$3.2 billion or 60 percent was spent on services (lodging, food
and drink, amusements, etc.) and $1.7 billion or 32 percent was
spent at various wholesale and/or retail establishments. The
pervasive nature of the tourist industry, especially in trade and
services, and the presence of some 21 million visitors in the state
annually suggests that changes in this industry could have a
substantial impact on Florida's economic environment
In summary, the regulative set which now de =rmines banking
structure in Florida was drawn up in 1913. Its c1' iiracing
task was defined by an economy which was largely ':raditi'nal".
Population was relatively small and widely disperse w:ith less
than 29 percent in urban areas. Population growth .as slow and
immigration accounted for less than 50 percent of -is. Aaricultur
was by far the principal industry (43 percent of -e work force)
and what little manufacturing was present was concentrated in
lumber and timber.
The same regulative set is attempting the equilibraring
task in today's economy. These regulations, developed to meet the
demands of the 1913 environment, now attempt to enlarge the popula-
tion of the intersection set in a totally different environment.
Population is among the largest in the nation (ninth) and is
growing rapidly. Population density has increased with 76 percent
located in urban areas and more than 50 percent of the increasing
population represents immigration. The economy has matured and
the structural base has broadened considerably. The seasonal
nature of the traditional economy has been tempered as Florida's
increasing urban market has brought her economic structure closer
to that typical of the nation. Today's employment and income
figures indicate the emergence of the service and trade sectors as
major contributors as agriculture has receded in importance. Further,
the size of the average business unit has increased in all sectors
of the economy. After adjustment for price changes, the firm
of the 1960's ranges from four (wholesale) to twen : (agriculture)
times as large as its 1910 counterpart.
Despite lagging per capital income, the dynamris- generated
principally by the population expansion presents a csfinite challenr-
to Florida banking. Postwar economic expansion in rhe state has
seen nonfarm employment expand at a rate of 6 percent annually whilI
personal income has increased at an annual rate of percent.
These figures, among the highest in the nation, are indicative of
the demands that must be met. Is the given regulative set, con-
ceived in a distinctly different environment, the mcst efficient
NOTES TO CHAPTER III
1. J.E. Dovell, History of Banking in Florida (Orlando, Fla:
Florida Bankers Association, 1955), p. 5.
2. In 1825, the time of the first state census, the population
stood at 13,554 and by 1830 had more than doubled to a total of
3. The term "commercial banks" and the word "banks" shall be usec
interchangeably to refer to those institutions which accept demand
deposits and whose liabilities circulate as money.
4. They were the Bank of Pensacola, the Union Bank cf Flcrida
(Tallahassee), and the Southern Life Insurance and Trust Company
5. See Dovell, p. 37, for a complete list.
6. Thirteen of these were national banks, two we-r operating g under
legislative charter, one was organized under the 'icS banking law.
and the remainder were private banks.
7. H.B. Dolbeare, "A Record of Fifty Years of SF:c Eaarking in
Florida," Annual Report of the Comptroller of the ca:e of Florida.
1940 (Tallahassee, 1941), p. 10.
8. In 1925, the first addition to the Atlantic ':sricnal Group was
made and by 1931 it included nine banks. The Barnet: Group made i
first acquisition in 1929 and by 1931 included for banks. Also in
1929, the Florida National Group made its first addition and by rhe
latter date included seven banks.
9. Among the ten largest states, the 1960 census shrws Flcrida,
with 73.9 percent, had a higher urban population than Pennsylvania,
71.6 percent, Ohio, 73.4 percent, or Michigan, 73.4 percent.
10. These cities and their populations are: Jacksonville, 528,865;
Miami, 334,859; Tampa, 277,767; St. Petersburg, 216,232; Fort Lauder-
dale City, 139,590; Hollywood, 106,873; Hialeah, 102,297. See U.S.
Census of Population: 1970, Washington, D.C., 1970.
11. Although the city of Jacksonville has a greater total popula-
tion than Miami (528,865 vs. 334,859), the Miami SMSA population
exceeds that of the Jacksonville SMSA (1,267,792 vs. 528,865). This
is due to the fact that the Miami SMSA includes all of Dade County
and several communities not included in the city total such as
Hialeah and Miami Beach. However, the Jacksonville city figure
encompasses all the population in its SMSA area (Duval County).
12. W.W. Rostow, The Stages of Economic Growth, A Non-Communist
Manifesto (London: Cambridge University Press, 1966). Rostow defines
a traditional society as one in which "a ceiling exists on the level
of attainable output per head." According to Professor Rostow,"This ceil-
ing resulted from the fact that the potentialities which flow from
modern science and technology were either not available or not regularly
and systematically applied."
13. Ibid., p. 6.
14. For an interesting discussion of the intervening period and
causes of the change in economic structure see John N. Webb,
"Florida's Expanding Economy," Economic Leaflets (Gainesville, Florida:
University of Florida, Bureau of Economic and Business Research, March,
15. Rostow, p. 10.
16. W.M. Nelson, The Economic Development of FloriL, 1S70-1930,
master's thesis, University of Florida, Gainesville.
Florida, June, 1962, p. 79.
17. It has been contended from time to time that -Iriaa income
levels are lowered by the large number of retired residents. That
this element is not the dominant influence is shown -- the fact: that
median earnings in 1960 of men in the experienced 1.:r force were
$3,811 in Florida compared with $4,595 for the naticr. See U.S.
Bureau of the Census, U.S. Census of the Population: 1960 (Washingi-c,
18. See Tables 3 and 4.
19. Abstract of the Census of Manufacturers, 191-, U.S. Bureau of
the Census, 1971; Florida Statistical Abstract, 1970, Bureau of
Economic and Busniess Research, University of Florida, 1970.
20. Florida Statistical Abstract, 1970, p. 263.
21. U.S. Bureau of the Census, Abstract of the Thirteenth Census of the
United States (Washington, D.C.: 1913); Florida Statistical Abstract. 1970.
22. A Class 1 commercial farm is defined by the Census of Agricul-
ture to be one whose value of product sold amounts to $40,000 or more.
23. "Non Agriculture Employment in Florida: Growth and Development,
1958-1968," Florida Comments, an undated publication of the Florida
Development Commission, Tallahassee, Florida, p. 2.
24. U.S. Bureau of the Census, Abstract of the Fifteenth Census of the
United States (Washington, D.C.: 1933). It was not unit this census (15th)
that wholesale and/or retail data were collected and reported. Also
see Florida Statistical Abstract, 1970.
1_l!ni-tig.....~ aaaaS.T_.^-.-f.-jl.:*.'"-----.'*. -*- '*.fyJ"_- '*- *' __.___. ___ *" '_
25. Census of Business, 1967, Retail Trade, Single Units and Multi-
units, Vol. 1, Part 1; Fifteenth Census of the United States, Retail
Distribution, Vol.1, Part 1.
26. Census of Business, 1948, Vol. VII, Service Trade-Area
Statistics, Bureau of Census, 1951; Florida Statistical Abstract,
27. Selected services as surveyed by the Census of Business exclude
professional services as well as private household services.
28. The regulative statement requiring unit banking is found in
Florida Statutes, 1965, Chapter 659.06, and reads as follows:
Any bank or trust company shall have only one -lace of
doing business, which shall be located in the community
specified in its original articles of incorp~c- tion,
and the business of the bank or trust company shnall be
transacted at its banking house so located i-n sid
community specified, and not elsewhere.
29. For sake of comparison,the recent sales or va be added figures
were deflated by use of the appropriate price inexe i.e., hole-
sale Price Index, Consumer Price Index, Retail PricL: indec etc.
See Statistical Abstract of the United States: 197-. p. 33.-349.
FLORIDA BANKING: I-RKET STRUCTURE
An audit of the Florida banking regulatory set rust be ir. tears of how
well this set accomplishes its equilibrating task. The characteristics
to be associated with the set of optimal output and./or input have
been previously suggested. In addition, the peculiarities of the
local (Florida) environment have been explored. The next task
must be an identification of the characteristics cf -_rrent Florida
banking and how these relate to the optimal set.
Market structure will be viewed as a separai= -nd identifiabi;
subset of the universe of characteristics asscciar:e qwith Florida
banking. Special interest is given to this partictlar subset
for two reasons. First, many aspects of banking regulation are
focused on some desired market characteristics, i.e., increased
competition or a low level of market power, rather than on the
characteristics of the set of output and/or input. Secondly,
economic theory holds that the market structure of an industry
influences the performance of firms within the industry. While the
model being used is non-prescriptive as to the optimal market
structure, the latter may be viewed as a surrogate variable for
such desideratum as allocative neutrality.
However, an investigation of the market structure of Florida
banking requires a preliminary discussion of bank markets in general.
The unique nature of banking has given rise to several different
definitions of bank markets and an examination of these alternatives
should lead to a better understanding of Florida bank markets and the
related regulatory set.
Explanations and definitions of bank markets cover a wide
spectrum of possibilities. The literature suggests interpretations
which range from multi-area, multi-product possibilities in both
the input and output market to the uni-product, zun-area fccus of
the courts in the Philadelphia-Girard Case. WhiLe a complete
survey would include an investigation of the interrdiate points
of view it appears reasonable,for purposes of rthis r.hsis to
concentrate on the polar positions.
Multi-Product, Multi-Area Approach
In this analysis banking is viewed as a mul: -roduct, multi-
area activity in both the input and output market. Banning, in its
intermediation role, is seen as seeking and acquiring various kind:
of fund inputs from a variety of geographical areas. These inputs
are then put through a "productive process" and are thereby transformed
into an assortment of final products with a number of different
The market-type or structure prevalent in any given market is
a function of the nature of the product, the geographic range of
the product, and the resulting institutional range of competition.
Thus any discussion of bank markets under this interpretation requires
a specification of the product and geographical area.
Reference to Table suggests the several product-area market
combinations in which the bank may find itself involved. Within
the input market, the liquidity characteristics of the funds demanded
are a major determinant of the range of institutional competition.
Commercial banks have an advantage in the demand for funds requiring
high liquidity and the unique nature of the compensation offered
by commercial banks assures the deposit of such furds in the
banking system. However, the total amount of funds requiring
immediate liquidity tends to vary with the intensir ctf the bidding
of all financial institutions for such funds. The ce facto demand
nature of alternative such as savings accounts and g-ernnent
securities, has given the offerees additional flexW._ity. When
bidding for such funds increases the rates offered, holders ha'-
been able to engage in a successful liquidity-profi abilityy trade-
off while meeting their continuing transaction neec 7;ith increase
The other major fund input demanded by banks are those which
are less volatile and could be characterized as "store of value"
funds by the offerees. In competing for this input, commercial
banks have no form of compensation superior to other financial
intermediaries. Further, as the liquidity requisite placed on the
funds is relaxed, more and more deficit units are drawn into direct
negotiations with the fundholders or surplus units, so that the
institutional participation in this market is more extensive than
is found in the highly liquid market.
"**.*: -'* -^ ;1';.- ** .* *.*- ** ', .*.*. *** *- .. -. -. fd
BANK MARKETS: PRODUCTS, GEOGRAPHIC
RANGE AND PARTICIPANTS
of the Market
Medium size units
of highly liquid
Small units of
Large units of
units of time
of time funds
Participants in the Market
Large organizations;* large
Medium-siZed crganizaticns and
wealthy individuals; lar and
medium-sized coc=errcial bnr;s.
Small or.:-izations and :
individual .; 3;= 2 redi-,. and
large cct-rcial banks.
All sur-lus units large a ugh
to prcdu; such r produce
large fi n:cial interedi r_es
as well a- the deficit .r
found in e pen money L-zet.
Medium-sized su'r 2lus unitr:
large and mdium:-sized firanrial
intermediaries as :;ell as Large
and meciua-sized deficit uCits.
Small surplus units; local
financial intermediaries cf all
sizes as well as all deficit
*Those participants listed first are on the supply side of the market.
**Those participants following the semicolon are on the demand side
of the market.
***Time funds are those funds whose liquidity time dimension is greater
TABLE 9 (Continued)
Product Geographical Range Participants in the Market
of the Market
All forms amd sizes of financial
intermediaries and surplus units;
large deficit units such as local,
state, and national government,
and large corpcrations.
Large financial intermediaries
and surplus units; large business
Large ar- redium-sized fincnial
intermedri:-ies, some sur-:s units;
medium-s-_'ra business org--i.ations.
Local cc-~-rcial banks and :m ner-
cial fi:a-ce companies; se _-
Local cc-rze ia banks, sarl and
consumer i:nance companies
savings, a-c loan associarions;
individual for purchase rf real
or personal rrcoerty.
*Investment funds include those funds placedin the credit instrumen-s of
enterprises, both public and private. Investments differ from loans in
several respects. In the first place, a loan is generally a relatively
short term fund placement whereas an investment has a longer time horizon.
Secondly, in bank lending, the borrower usually initiates the transaction,
but in investing the bank takes the initiative by entering the market
to make purchases or sales. Thirdly, in lending, the bank is normally
the major creditor and one of only a few creditors, while in investing the
bank is one of many creditors. Finally, in the lending transaction there
exists a personal relationship between the bank and the borrower, while
investing is an impersonal matter.
Investments also include the placement of secondary reserves in the
money market. However, the primary difference between these investments
and those previously mentioned is in maturities. Otherwise, they are
differentiated from loans in the same way. For a further discussion of
the characteristics of this output see Reed, E.W., Commercial Bank
Management (New York: Harper & Row, 1963), pp. 419-468.
TABLE 9 (Continued)
** Such loans include both short-and long-term loans as well as mortgages.
These may be handled as three separate products. However, for brevity's
sake, they have been grouped into a single product-type.
***Loans to consumers are those loans made to borrowers, the proceeds of
which are used for consumption. This is in contrast to business leans
whose proceeds are used for productive purposes. Consumer loans rmke
possible the consumption of goods and services before the consumer has
the wherewithal. These loans may be made for a multitude of purposes to
include the purchase of automobiles, appliances, furniture, homes, etc.
There are at least three geographical markets associated with
each of the input groups suggested. The market areas identified are
a function of the fundholder's ability or willingness to restict his
search for alternatives and the banks' ability to meet the demands
of the fundholder. The national market for the highly liquid funds
is supplied by large surplus units such as corporate fundholders
whose fund output is sufficient to justify national "shopping" for
the best offering. The demanders are those banks whcse position,
resources, and/or output potential are most attractiv- to the fund
On the regional level, the suppliers of these -ds are smaller
surplus units such as medium-size firms and wealthy i .-iduals. Suc
units do not have sufficient fund output to justif-" -:r=icipation in
the national market and yet they are large enough nrt rbo be found
locally by convenience. The demanders are all the -;-ns in the large-
market plus those somewhat smaller banks whose pcsitirn, resources,
and/or output are sufficient to meet the demands of che fund suppliers
On the local level, the suppliers of these funds are business
firms and individuals whose balances do not warrant regional
"shopping". Moreover, the decision as to fund placement in this
market appears to be more heavily weighted by the factors of con-
venience and ease of access than in the larger markets.
This decreased emphasis on size-related services in the local
market allows for universal bank participation, regardless of size.
On the other hand, the number of participants in any specified
market is limited by the demand for convenience. The locale emphasis
effectively erects a spatial barrier so that the demanders in the
local market are limited to those readily accessible to the desig-
The national market for the less volatile, store of value
funds, finds on the supply side all who would furnish funds in the
money or capital markets. This market is generally non-discriminating
and would encourage fund input, regardless of size. On the demand
side, the relevant institutions are thosefinancial in:irn.ediaries ar.
deficit units which are large enough to meet the ri return demands
of the offerees.
The regional and local markets tend to ove-ra.p s the fund-
holders include the entire range of surplus unit' -i; the c.. nders
include a wide range of financial intermediaries as -ei as some
deficit groups. Demanders at the regional level ar I u function of
their ability to meet the risk/return requirements zf the larger
fundholders. At the local and regional level, fin--cial institu-
tions are joined on the demand side by other national financial
intermediaries as well as deficit units in both the money and
capital markets and are active demanders of "store of value"
This multi-area, multi-product approach to bank markets
identifies the same sort of proliferation in the output market. In
fact, Chandler suggested that the number of different products
in the bank's output mix was a function of the number of different
bank loans, each one of which was a unique product of bargaining.
Certainly, bank output can be separated into at least three general
lines investments, consumer loans, and business loans.
The market for bank investment purchases is simplified by
the various legal restrictions placed on bank investments. The
conservative nature of existing regulations virtually assures the
analyst that bank output made available to security issuers or
holders will be restricted to markets that are national in scope and/or
highly liquid. The 13,000 commercial banks are only one of many
sources of funds for U.S. securities, high grade s~are and local
obligations, and premirum corporate. The geographical compartmentOrl-
ization noted in the input market is virtually non-e iscent and the
participants are numerous.
On the other hand, the customized nature of Ian loans reaffir-
the multi-area, multi-product possibility. The furs made avail-
able for "wholesale" or business loans are not usea f-r consumption
directly but enter into the productive process. C?- considerations
tend to override the demand for convenience and the geographical
boundaries of any given market are normally delinea:i by the size ci
the borrower and the set of banks which can supply the output with
the characteristics demanded.
The large business loan is found in a national market where
product specification is such that only large participants are found
on both sides of the transaction. Loans of such size reduce search
costs per dollar which encourages mobility. All of the larger fina-cial
intermediaries participate in such a market as well as individual
surplus units through the money and capital market.
The regional market for such output is generally identified
with the medium-sized business loan. The reduced loan size increases
the search cost per dollar and brings smaller demanders with less
than national reputations into the market. The financial inter-
mediaries of the larger market are joined by smaller institutions
whose output is now acceptable. However, the amount of direct
negotiations are reduced and therefore the intermediary is a more
important factor in this market.
The small business loan is generally restricted to a local
market. The small borrower is constrained by reputatLon, "shopping'
costs, and/or inclination to the sources of funds a--ilabil in the
local area. The local financial intermediary, part:-clarly che
commercial bank, is the predominant supplier in this market as The
possibility of dealing directly with surplus units i_ remote and
commercial finance companies or trade credit are po-r sbslitutes.
The "retail" loans, which are part of bank outrt, are general.
extended to individuals who seek such a "product" icr consumption
purposes and would include such loans as consumer installment loans,
residential mortgage loans, term loans to individuals and others of
the same nature. With few exceptions, the geographic range of these
loans tends to be local. Convenience and present bank relationships
weigh heavily in consumer choice. A variety of local financial
intermediaries participate in this market including: commercial
banks, consumer finance companies, savings and loan associations,
savings banks life insurance companies and the selling retailer or
dealer. While this range of participants suggests a number of
possible alternative sources of funds in the local market, evidence
r -.,... ;.li ---r._ .-.l:L:~-i. -xS1 ~-"YPI~I
indicates that in many instances the alternatives are limited to
the local bank and the credit supplied by the local retailers
Uni-Product, Uni-Area ADDroach
In this approach it is generally recognized that banking is a
multi-faceted operation dealing in a number of markers. However,
the advocates of this approach view the total services of a commercial
bank as a single, unique "product" package whose mcsr important
market is local.
The most explicit statement of this point of -e-7 has developed
in the course of bank merger litigation in recent years. A determinr-
tion of the competitive effect of a merger must be .-= under Secticr
7 of the Clayton Act. Such a determination calls c-r a testing of
the competitive impact of a merger "in any line cf c7rnerce in any
section of the country." The "line of commerce" and Lhe "section of
the country" yield the relevant market.
The Supreme Court, in the Philadelphia National Bank case (19~6~,
suggested the uni-product nature of banking when it stated:
We have no difficulty in determining the "line of commerce"
in which to appraise the probable competitive effects of
appellees' proposed merger. We agree with the District
Court that the cluster of products and services denoted
by the term "commercial banking" composes a distinct line
In the same case, the Court found "no difficulty in determinii.g
the .relevant geographic market in which to appraise the
probable competitive effects" of the merger.
Individuals and corporations typically confer the bulk
of their patronage on banks in their local community;
they find it impractical to conduct their banking business
at a distance. The factor of inconvenience localizes
banking competition as effectively as high transportation
costs in other industries.10
Growing out of this and other court decisions has been the
idea that bank markets and bank market structure can be examined
in terms of a single composite product in the most important market.
It is evident that any study of bank structure must start
with a set of assumptions concerning the nature of bank markets.
This study assumes that bank markets are of a multi-product,
multi-area nature.1 However, the defense of such an assumption is
outside the scope of this paper and, therefore, the analysiss will
examine structure/market relationships which might -rise under eirthe
the multi-product or uni-product approach. In r.os c!aes the analyst
will be coincident. However, divergence will be u:__rscored when
The Regulatory Set
As previously mentioned, the focus of this pa_-r is on the
relevancy of that part of the regulative set which directly affects
or controls bank structure. Such regulations specify the number of
charters that can be controlled by a single organization or the
number of separate offices that can be maintained by a single
charter. Because these restrictions are not mutually exclusive
there are several charter/office combinations possible (see Table 10).
THE POSSIBLE COMBINATIONS OF
CHARTER AID OFFICE REGULATIONS
Charters Per Organization
Single RSS RS
Per Multiple (limited) RLS RL
Multiple RMS R.I.I
The number of bankcharters that can be controllc by a single
corporate entity is regulated, primarily, at the nat:rna level.
With the vast expansion of holding company banking ir :he 1920's
and the subsequent failure of several leading grous L:. the early
1930's, Congress enacted laws to establish some degr- of control
over the multi-charter organization. The Banking Acz of 1933 and
the Bank Holding Company Act of 1956 and its 1966 amendmsents were
a result of such enactments. While the multi-charter organization
is not prohibited, a rather stringent national regulatory environment
has been established.
Many years before the appearance of the federal statutes,
several states had enacted legislation to control multi-charter
organizations.12 However, in most states, including Florida, there
are no legal provisions regarding the ownership of bank stock and
so the relevant regulatory set is national.
The number of bank offices which can be controlled by a
single charter is regulated, primarily, at the state level. The
Glass Bill of 1933 formalized state predominance in this regulatory
area by a provision which required national banks to conform to the
regulations of the resident state in regards to the number of offices
or locations controlled by a single charter. The national law
remains essentially the same today with some minor additions provided
by the Banking Act of 1935 and the 1962 amendment :e the Glass Ac
The state laws which have been enacted in t 'i_ area are
varied. Essentially, the enactments have been of lr-e types. Sc=:
states have restricted each charter to a single ce-fce (ain
banking). Others have permitted an unlimited numb_: c f offices per
charter (branch banking).3 And there are still _--!rs .,o have
placed certain geographic restrictions on the offi;:: each charter
can maintain(limited branching). It is, however, Li^licult to
classify states categorically as to how they treat .r regulate the
question. Many of the statutes are vague and their eerminology is
ambiguous, so a division of states into multi-office, limited multi-
office, and uni-office categories is somewhat arbitrary (see Table 11).
Casual observation would suggest that the regulatory bodies
which see banking as a uni-product, uni-area business tend to advocate
one office per charter. Whereas those who subscribe to the multi-
product, multi-area approach would generally accept multiple-office
charters. Differing concepts of bank markets have led to differing
structural answers to the quest for the "optimal" structure. However,
it appears that an appropriate definition of the "optimal bank
structure" will suggest a structure whose optimality is not contingent
CLASSIFICATION OF STATES BY THE REGULATIONS
LIMITING THE NUMBER OF OFFICES PER
BANK CHARTER, MARCH, 1970
Multiple Offices with Geographic Single Offices
(19) Limitations (16) (15)
Alaska Alabama Arkansas
Arizona Georgia Colorado
California Indiana Florida
Connecticut Kentucky Illinois
Delaware Louisiana Iowa
Hawaii Massachusetts Kansas
Idaho Michigan Minnesota
Maine Mississippi Missouri
Maryland New Hampshire Montana
Nevada New Jersey Nebraska
North Carolina New Mexico North Dak:ta
Oregon New York Oklahcma
Rhode Island Ohio Texas
South Carolina Pennsylvania West Vir:znia
South Dakota Tennessee Wyoming
Source: "Recent Changes in the Structure of Commercial Banking,"
Federal Reserve Bulletin, March, 1970, p. 210.
upon a certain bank market concept. This possibility is developed
further throughout the paper.
In Florida, the intra-state regulatory variable of interest
is the number of offices per charter. The state has not interposed
any significant regulations on the number of charters per organiza-
tion and so the national regulatory set is dominant. However, Florida
has been very definite in its approach to the office/charter question
and since the early 1900's the regulatory answer has been re office
Any bank or trust company shall have only one lace
of doing business, which shall be located in t.i
community specified in its original articles in-
corporation, and the business of the bank or r
company shall be transacted at its banking hLc-
so located in said community specified, and r-.
In terms of Table 10, Florida's regulatory set ccul-i e .characterize
as RSM, single office, multiple charter. Given the -ltiple charter
provision, the intra-state alternatives for Florida arF R'.- and ..-.
which both allow for some form of branching or more :.an one office
This analysis will be cast in terms of examining the alternative
regulative sets, RSM, RLM, and RcM, and determining which might,
through its effect on structure, bring Florida banking closest to
its optimal position. Emphasis will be placed on the existing
regulative set, RSM, and the polar alternative, RMM. The limited
office alternative, RIU, will be considered, but primarily as a
variation on the multi-office set rather than as a third distinctly
It should be noted than in considering these alternative
regulative sets for Florida, the question might properly be cast
as regulation or no regulation. The single office per charter
appears as a result of regulative restriction. Without restriction
or regulation the multi-office alternative tends to emerge. As the
regulative set moves from the uni-office to the multi-office, the
members of the regulative set are not only changed but also reduced'
The multi-office alternative permits charters which nave any number
of associated offices whereas the uni-office permit: crly the one
for one correspondence.
One of the major determinants of the nature an economic
market is the number of participants in the market. r rket
conditions are described or characterized, at leasr i: part, in
terms of the number of buyers and sellers.
The first requirement for the existence of pur
competition is that there must be a large number
of buyers and sellers. .
In price theory, conditions of monopoly in a
given market refer to a situation in which the
supply of an economic good. is controlled
by a single seller. 16
When there are only a few sellers of an economic
good under imperfect competition. the
situation is given the special name of oligopoly.
While the number of participants is not a sufficient condition
for a given market situation, it is apparently a necessary one.
It is therefore desirable for this analysis to investigate Florida
bank numbers as they have developed under the current regulative
~. ( t r
set. This development can then be contrasted with the number
situation which arises under the alternative regulative set.
The 510 commercial banking offices in operation in Florida
on February 1, 1971, were distributed rather unevenly over the
state's sixty-seven counties (see Table 12). Three of the nost
sparsely populated counties, Wakulla, Liberty, and Glades had no
banking facilities and in each of thirteen other lI;u-population
counties there was only one banking office. Thus, 4.5 percent of
the counties in the state, with less than 1 perce-r of the
population, had no banking facilities whereas natic: -_iy less than
2.5 percent of all counties were in this category. addition,
23 percent of the total counties, with 2 percent of c3-o;lation.
had less than two banking offices, while on the nt- :a ie-vl,
less than 14 percent of all counties were so situscI
On the other hand, the state's banking offlics ind population
are concentrated in the eleven largest counties D.-a, Lroward,
and Palm Beach on the lower East coast; Orange, Pol;, Brevard, and
Volusia in Central Florida; Pinellas and Hillsborough on the West
coast; Duval in Northeast Florida; and Escambia in vest Florida.
Within these counties resides 73 percent of Florida's population
with some 65 percent of the banking facilities.
The number of banking facilities can further be described
in terms of the number of banks and banking offices in Florida as
compared with other states and the changes in these figures over
NUMBER OF COMMERCIAL BANKING OFFICES,
POPULATION, AND POPULATION RANK OF FLORIDA COUNTIES,
Number of Banking Offices Population Population
County 1950 February, 1971 Rank
Wakulla 0 0 61 6,309
Glades 0 0 64 3,669
Liberty 0 0 66 3,379
Nassau 1 1 38 20,525
DeSoto 1 1 48 13,6
Washington 1 1 51 113.33
Holmes 1 1 53 10,720
Jefferson 1 1 56 8,778
Okeechobee 1 1 52 11,233
Baker 1 1 55 9,242
Hamilton 1 1 58 7,787
Calhoun 1 1 59 7.62
Union 1 1 57 8112
Dixie 1 1 62 5. 80
Gilchrist 1 1 65 3,551
Lafayette 1 1 67 2,892
Franklin 1 2 60 7.065
Flagler 1 2 63 7,454
Hernando 1 2 40 17,004
Charlotte 1 2 35 27,559
Walton 2 2 41 16,087
Madison 2 2 47 13,481
Sumter 2 2 44 14,839
Taylor 1 2 46 13,641
Hardee 1 2 43 14,889
Bradford 1 2 45 14,625
Hendry 1 2 50 11,859
Gulf 2 2 54 10,096
St. Lucie 2 3 24 50,836
Putman 2 3 28 36,290
Columbia 3 3 37 25,250
Osceola 2 3 36 25,267
Clay 1 3 31 32,059
Suwanee 3 3 42 15,539
Levy 3 3 49 12,756
TABLE 12 (Continued)
Number of Banking Offices Population Population
County 1950 February,1971 Rank
Source: Florida Bank Directory, 1971. (Norcross, Ga.: The Southern
It can be seen from the data that from 1950 to 1969 the number
of banking offices in the nation has increased by some 80 percent,
while, during the same period, Florida experienced a growth from
205 to 504 or 146 percent (see Table 13). This increase was the
sixth largest, percentage-wise, in the nation and was the highest
among the unit banking states.
The picture is significantly different when the figures
for banks or bank charters rather than banking offices are exmined.
While the figures for unit banking states correspcr- cCher
regulatory sets have been associated with a slower even negative
growth of bank entities over this period. In face, :-.e nation as
a whole experienced a 3 percent decrease in bankirng ;-rers. ;hil
Florida enjoyed a nation-leading increase of 139 r
The number of banking offices and/or banking nr'.:e-r are
rather empty measures unless related to some other :a abl -. such
as population, which may define the markets served. A- co-or,
measure used in this area is population per banking office. This
highly simplified ratio reflects a number of factors economic
structure, population makeup and density, growth trends, etc.
Variance from a given aggregate figure must be understood in the
light of the multi-determinants.
Florida has been typified by a high ratio of population per
banking office since the 1930's and, throughout most of the post-
war period, has experienced the highest ratio in the United States.
While banking offices have increased 160 percent since 1940, popula-
tion has increased more than proportionately or by some 240 percent.
NUMBER OF BANKS AND BANKING OFFICES
IN THE UNITED STATES BY STATES,
1950 AND 1969
Number of Banks Number of banking Offices
State 1950 1969 Change 1950 1969 Change
Alabama 225 268 09 251 515 105
Arizona 11 13 09 67 211 364
Arkansas 232 248 07 251 61
California 212 162 (-)27 1,181 3.fi5 138
Colorado 154 257 73 158 2 77
Connecticut 112 66 (-)54 162 138
Delaware 38 19 (-)50 58 69
D. C. 19 14 (-)26 64 78
Florida 199 461 139 205 1 6
Georgia 397 428 09 439 3 60
Idaho 43 26 (-)30 98 175 78
Illinois 891 1,074 30 893 1 .K 22
Indiana 486 415 (-)16 595 1.11 70
Iowa 663 673 01 827 17
Kansas 612 601 (-)02 612 (1 08
Kentucky 385 346 (-)10 429 6 53
Louisiana 165 228 40 242 5 144
Maine 63 40 (-)30 134 253 89
Maryland 164 121 (-)26 283 613 117
Massachusetts 182 153 (-)12 359 76 1-3
Michigan 442 336 (-)25 681 1,185 118
Minnesota 680 720 06 686 734 07
Mississippi 201 185 (-)10 269 502 87
Missouri 600 667 11 601 753 25
Montana 110 135 23 110 141 27
Nebraska 418 441 06 420 481 15
Nevada 8 9 0 27 89 230
New Hampshire 58 77 22 77 128 66
New Jersey 324 229 (-)19 489 1,119 129
New Mexico 51 63 16 66 185 180
New York 629 319 (-)49 1,415 2,618 85
North Carolina 225 121 (-)52 443 1,125 154
North Dakota 150 169 13 172 237 38
Ohio 659 525 (-)20 885 1,738 96
Oklahoma 386 424 10 387 484 24
Oregon 70 50 (-)29 172 370 115
Pennsylvania 971 509 (-)49 1,164 2,108 81
Rhode Island 16 13 (-)19 76 174 126
TABLE 13 (Continued)
Number of Banks Number of Banking Offices
State 1950 1969 Change 1950 1969 Change
South Carolina 148 118 (-)29 197 485 146
South Dakota 169 165 (-)04 218 257 17
Tennessee 297 305 03 395 754 91
Texas 908 1,166 28 920 1,233 34
Utah 55 51 (-)04 79 177 124
Vermont 70 44 (-)36 81 122 51
Virginia 313 233 (-)26 427 9F 134
Washington 118 92 (-)22 262 15 135
West Virginia 180 195 08 180 21 11
Wisconsin 552 604 09 704 856 22
Wyoming 53 70 32 53 -2 34
14,121 13,681 (-)03 18,966 34,0- 0S
Source: Annual Report, 1950, Federal Deposit Insuran-c Corporation;
Federal Deposit Insurance Corporation.
Changes Amone Operating Banks and Branches, -'
By the end of 1970, after two decades of substantial expansion in
banking facilities, Florida continued to show the highest ratio
in the nation with over 13,000 persons per banking office, or
better than twice the national average of 5,921 (see Table 14).
An examination of the population per banking office data
for the country shows that multi-office states consistently have
a population per bank office figure 12 to 15 percent less than the
uni-office states. It seems probable that a regulative set permittir-
multi-office banking in Florida would lead to a de:-rese in the
population per banking office.
POPULATION PER BANKING OFFICE AND PERCENTAGE CILGE.
FLORIDA AND UNITED STATES, 1950-1970
1950 1960 1970 1930-1970
Florida 13,519 15,471 13,313 03
United States 7,946 7,216 5,921- 25
* The U.S. figure is for 1969 due to the unavailability of 1970
banking offices figures.
Source: Statistical Abstract of the United States, 1970; Florida
Bank Directory, 1971.
The extremely aggregative nature of this ratio denies its use
as a general framework for relating structure and number. However,
Motter and Carson have suggested there are "structural dimensions
of performance" such that "any additional banking office will bring
added convenience to some group of bank customers."19
Within the framework of a structural objective of minimizing
the costs of intermediation, the pcpulation/bank ratio has two
possible implications. If cost minimization is more likely to appear
under pure competition, then a low population per banking office is
desirable for this is indicative of a relatively large number of
participants.20 Secondly, the costs of intermediation are affected
by distance and the increased convenience of a relatively large number
of banking offices per capital may decrease the distance of inter-
mediation and thereby decrease cost. Thus, Florida's current uni-
office regulation is less than optimal in regards Lc tze nur:ber of
Bank Numbers in National and Regional Markets
One characteristic of multi-office banking -hzc is rather
universally accepted as fact is that it tends to pr.ouce larger
banks in terms of total resources than is possible urnc-r the uni-
office arrangement. With very few exceptions the largest banks in
the country have more than one office per charter. One of the
limiting features of participation in the national input or output
market is firm size. Because multi-office banking tends to lead to
larger banks, it tends to increase the number of participants in
the wider geographical markets.
The problems of entry into the larger markets under the uni-
office constraint is well typified in Florida. There were 76 banks
in the United States with $1,000,000,000 or more in resources as
of December 31, 1970. None of these banks are domiciled in Florida.
In fact, Florida's largest bank, the First National Bank of Miami,
is exceeded in size by 78 other banks located in 24 different states
and Florida's next largest bank, the Atlantic National of Jackson-
ville, is one hundred and ninety-seventh in total resources. It
would appear that Florida, the ninth largest state in the union, has
no participants in the national market.
In terms of the cost of intermediation, the possible effects
of this situation are two. In the input market, the large depositor
must seek an out-of-state intermediary or deficit unit. This, of
course, leads to an outward flow of funds reducing tih vclume of
funds available in Florida's output market23 and possibly increasing
the cost of intermediation. The lack of sufficient fr-ds in the
output market for large in-state demanders means h-L-: :hir costs
are increased by the necessity of dealing with distra:-- lenders.
The financial requirements of such projects a-- isney world
have been met to a large extent by large out-of-st:e banks. In
fact, W.E. Allen, vice-president of Barnett Banks cf Florida suggests:
"Florida banks, in many cases,are not being asked
to provide capital needs for large out-of-state
firms doing business in Florida. They feel our
banks just aren't big, e; ugh to handle the dollar
volume they need. .
The story at the regional level is much the same. Florida has
the largest population of any state in the region and yet there are
some eight banks in the Southeast larger than Florida's largest bank
(see Table 15). Further, there are some 28 banks in the region larger
than Florida's second largest bank. From a number point-of-view, it
appears that Florida has minimal participation in the regional
markets due to the limited bank size which appears to be consistent
LARGEST BANKS IN THE SOUTHEAST
BY TOTAL DEPOSITS, DECEMBER 31, 1970
Wachovia Bank and Trust Co.
Winston Salem, N.C.
Citizens and Southern National Bank
North Carolina National Bank
First Union National Bank of North Carolina
Virginia National Bank
First National Bank of Atlanta
Trust Company of Georgia
First National Bank of Miami
1, C"7, 17
-i7 2 .
and Co.), 1971.
Source: Rand McNally's Bank Directory, 1971 (Chicago: Rand McNally
uni-office regulations. The possible effects on the cost of
intermediation are as suggested for the national market, and, of
course, the multi-office alternative should lead to a rapid increase
in the number of Florida participants.
Bank Numbers in a Local, Non-Metropolitan Area
In considering the number question at the local level, it is
convenient to look at metropolitan and non-metropolitan areas
separately. Extensive studies of regulations and bank numbers in
the non-metropolitan areas have led most authorities 7o agree with
Shull and Horvitz who investigated the average number cf banking
institutions per non-metropolitan community in states :ith differi-n
regulative sets. Their conclusion was:
that states with unlimited branching s ,
clear number superiority in host of these co-ri-
sons. 2 his is true even in the very small cc.--
Such results should not be too surprising. Th c requirements
for an economic base sufficient to support a bank charter are much
more extensive than those necessary to support a banning office.
The single office constraint requires a location where the supply and
cost of inputs and the demand and price for outputs are balanced in
such a way that the resulting earnings are sufficient to satisfy all
of the factors of production. However, the multi-office organization
finds it possible and even desirable to place a facility wherever
there is need for some part of the intermediation process. There
is no requirement for any type of input-output balance at any one
location. Thus, in non-metropolitan areas, where there is often a
chronic in-balance in the flow of funds, the number of banking offices
under multi-office banking is invariably greater than appears under uni-
Florida's non-metropolitan areas appear to suffer the common
fate of uni-office states. As noted before there are three rural
counties in the state which have no banking offices at all. There
are some thirteen other counties which have only one banking office.
Both of these figures are above the national average and when
compared with the numbers developed in the previously mentioned
studies would indicate the number of banking offices in Florida's
non-metropolitan areas wculd be increased under the rlti-office
The absence or fer.ess of banks in such a marke vculd have
the same type of effect cn the cost of intermediatic.- s was true
in the national and/or regional market and so the rir7nmization
objective will be more closely served by increased numbers.
Sometimes the spector of funds being "gobbled up" by the
rural branches of large -etropolitan banks for intra-city, regional
or national use is served up as a reason for avoiding the multi-
office regulatory environments. The implication of this argument
is, of course, that the branch location will result in a net
outflow and local demands for funds will go unmet.
While this argument will be considered empirically later, the
reasoning can be faulted from the point-of-view of the minimization
objective on two counts. First, the macro-aspects of minimizing
the costs of intermediation imply the best possible flow of funds
through the intermediation process in response to the market forces
present. If market forces are such that the demand for funds
exceeds the supply of funds in some locale, then the costs of inter-
mediation are best served by that structure which facilitates the
fund flow in this situation rather than impeding it by a non-
market factor such as the absence of a banking facility in some
excess supply area because of the unitary constraint.
The second point, and one that is more micro in sccpe, is
that the lack of a local office does not prevent an outflow in case
of a local excess of supply over demand. In fact :se funds will
find a depository, outside the local area, and theC- : e possibiliz-:
of an inflow to meet the local demands that may arts= is less
likely than if there was a local facility through --hi h lca
inflows and outflows could be channeled.
Bank Numbers in a Local, Metropolitan Area
The evidence as to the effect of the regulatii set on bank
numbers in metropolitan areas is not as clear. The difficulty lies
in the question of the definition of the local market in such an
area. Some would take the entire area as a "local market" while
others see the area as constituting a number of local markets. If
the important aspect of banking numbers is banking offices, as has
been suggested, then the latter approach may be the more valid
Using such an approach, Schweiger and McGee, among others,
In a small area (local market) such as a neighborhood or
suburban city, a branch bank system provides a larger
number of firms. There are relatively more one-bank towns
and towns with no banks in metropolitan areas with unit
This point is well demonstrated in Table 16. From the data,
it can be seen that while the number of banking organizations in the
metropolitan area is greater under uni-office banking, the number of
banking offices is far greater under the multi-office situation. If
a metropolitan area is divisible into a number of local markets, then
the probability of bank representation in such markets is higher
where multi-office banking is allowed. The reasons for such a
situation and the effects on the costs of intermediation are the
same as those suggested in the non-metropolitan area.
Florida's situation in its metropolitan areas is exacerbated
by the rapidly growing population. Although the greatest growth
in banking offices in the state during the post-war er: has occurred
in the larger counties, population increases have ma~tiined the
ratios at a particularly high level (see Tables 17 an=d 1). In fact,
evident from Table 17 that the overall figures which- s:.w Florida
having the fewest banking offices in relation to popularion in the
nation can be largely accounted for in these metropolitan areas
where burgeoning population continues to stay ahead of the charter-
In summary,it appears that the number of banking offices
within a state or the number located in any one of the geographical
markets is a function of regulation. The fewest number of banking
offices appears under the uni-office constraint and the greatest
number of banking offices at all levels is consistent with the
AVERAGE NUMBER OF BANKING ORGANIZATIONS
AND BANKING OFFICES IN METROPOLITAN AREAS, 1970
Population of Statewide Limited Unit-
Standard Metropolitan Branching Branching Banking
Statistical Area States States States
50,000-100,000 6 5 7
100,000-500,000 8 11 18
500,000-1,000,000 15 18 3S
1,000,000 and over 35 46 120
All SMSA's 13 16
50,000-100,000 19 10
100,000-500,000 40 35 23
500,000-1,000,000 112 89 i8
1,000,000 and over 353 368 12
All SMSA's 93 86 36
Source: Federal Reserve Bulletin, March, 1970, p. -C
AVERAGE POPULATION PER BANKING
OFFICE AND PER COUNTY IN FLORIDA BY
NUMBER OF BANKING OFFICES IN COUNTY, 1970
Number of Banking Number of Per Banking Per
Offices in County Counties Office County
None 3 4,452
1 14 9,273 9,273
2 12 6,899 13,799
3 7 9,426 28,280
4 9 8,539 34,155
5 3 13,134 65,671
6-10 9 11,760 900,618
11-20 4 10,828 186,782
21-38 6 15,265 475,770
Over 39 1 18,373 1,267,792
Source: Derived from Table 12.
POPULATION PER BANKING OFFICE,
FIVE HIGHEST COUNTY RATIOS IN FLORIDA,
1950 AND 1970
Population Per Banking Office
County 1950 10..
Escambia 18,784 20
Hillsborough 22,717 -10!
Dade 27,500 IS.7
Duval 30,402 17.
Broward 13,126 16 7S
Source: Table 12 and Census of Pooulation, Bureau cf :he Census,
1950. This excludes Nassau County which has one bank and
a population estimated at 20,626.
The costs of intermediation tend to be decreased as the
number of banking offices increase. The decrease stems from the
increased participants in the market. This causes the resulting
market structure to more closely resemble pure competition where
the cost of intermediation, at least in part, may be minimized.
In addition, increased numbers means decreased distance between the
intermediary and its markets. The "structural dimensions" of
banking are strengthened by the increased convenience and the costs
of intermediation are decreased by the decreased distance.
Florida's bank number situation is a result of its urni-office
constraint. In every measure of bank numbers, Florida is less
optimal than multi-office states and in many measures FIerida's
banking situation is among the worst in the United ES.=s. There
seems to be little doubt that if Florida moved to so- forr. of
multi-office regulation the number of banking office would in-
crease and to the extent such a change would affect the cost of
intermediation, these would decrease.
Price theory identifies market structure not only by the
number of participants in the market, but also by their relative
sizes. While the former can be measured directly, the measurement
of relative size is more difficult. Normally, such a measure is
couched in terms of concentration ratios. These ratios are
generally computed to show the degree of ownership or control of
a large proportion of some aggregate of economic resources or
activity by a small absolute number of economic units.
Theory holds that "the atomistic industry, in which seller
concentration is very low, meets one of the necessary conditions
of pure competition.'27 On the other hand, it is suggested that the
oligopolistic industry in which seller concentration is high, is
more closely akin to imperfect competition and the more concentrated
the industry the further the resulting market structure diverges
from pure competition.
While the minimization of the costs of interrmeiation does
not require any specific market structure, it is generally predicted
that the probability of such minimization varies dirsacl with the
degree of competition. There is little doubt thai ai:lcative
neutrality is maximized under pure competition. Hc-cver, quesLi.;
of productive efficiency and/or technical innovation are -c; as
clearly related to a specific market structure and arc therefore
discussed more directly in a later chapter. The curr-nt concern
with a concentration ratio is based on the idea that such a ratio
gives information about the existing market structure uhich may
have an effect on the cost of intermediation to the e::tent that
allocative neutrality affects such costs.
Concentration or relative size is an important determinant
of competition within the specified market area. However, the
question as to what constitutes a banking market is, as suggested
earlier, an unsettled one. Those who see banking as a multi-product,
multi-area business make little use of the concentration ratio
because of the multitude of products, geographical areas and institu-
tions involved. However, the uni-product, uni-area advocates place
great emphasis on such ratios as an indicator of the degree of
competition. In fact, the Anti-trust Division of the Justice
Department built its case in the Philadelphia-Girard Case largely
on changes in the concentration ratios.28
While these ratios have some definitional and analytical
difficulties, some notice must be given to these comcutations.
Their apparent computational simplicity has led to their extensive
use by students of banking in making judgments as to the relation-
ship between bank regulation and market structure.
Concentration ratios are often noted at the stc=e level as
an approximate indicator of market power in the regi-ol market.
It is evident in Table 19 that concentration as measured by the
percent of total deposits held by the five largest hrks in the stare
is highest in the multi-cffice regulatory envirorne-' and the lowest
in the uni-office situation. If the multi-charter (:-.nization is
allowed into the picture, the degree of concentration in the multi-
office state increases very little (+.004), whereas -:e ratio for
unit banking states increases above that of the limited branching
states to a 40.1 percent figure. The final figure for Florida's
five largest banking groups and/or banks is 34.9 percent of total
deposits held by such organizations.
To the extent that concentration ratios affect the cost of
intermediation it would appear that at the regional level, the uni-
office constraint has contributed to the minimization of such costs
in Florida. The relatively low concentration increases the prob-
ability of allocative neutrality and thus may contribute to the
CONCENTRATION RATIOS IN STATES,
DECEMBER 31, 196- AND 1969,
BY TYPE OF OFFICE REGULATION
Type of Office Percent of Total Deposits
Regulation Held by the Largest Five Banks
Statewide Branch Banking 76.7 7i.
Limited Branching 40.0 3B.
Unit Banks 28.6 3
Source: Annual Report of the Federal Deposit Insurancr
Corporation, 1964; Federal Reserve Bulletin.
However, this conclusion must be tempered by certain reserva-
tions about the state-wide concentration ratio as an indicator of
regional market power. Aggregate deposit figures as used here may
give little specific information about a market. In order to
ascertain a bank's market power in the regional market, the con-
centration ratio would reflect only those deposits which are regional
in nature. Using the aggregate measure, New York, for example,
with limited branching, has 58 percent of all deposits in the large:
five banks. However, it is likely that a large par: cf these
deposits can be assigned to the national market.
On the other hand, low concentration in unit bL -ing states
may not indicate an absence of market power, rather ; .ay be
indicative of the fact that no banks, or a very f~i. rhae been
able to attain the size necessary to participate in tZ regional
market. As noted before, there are a number of ban i in the South-
east larger than Florida's largest bank. The low state-wide
ratio in Florida appears to indicate a lack of participation at the
regional level rather than a lack of concentration of market power
at this level.
At the local market level the concentration ratios show mixed
results under the different regulatory sets. Data on the propor-
tion of deposits held by the largest, three largest, and five
largest banks in some 60 metropolitan areas are presented in Table
20. Perhaps the most significant point to be noticed about these
figures is that they are consistently high. The largest bank holds,