Florida banking


Material Information

Florida banking present market structure and performance and an inquiry into the probable effects of alternative forms of bank organization
Bank organization, Alternative forms of
Physical Description:
xii, 262 leaves : ; 28 cm.
McCollough, W. Andrew ( William Andrew ), 1935-
Publication Date:


Subjects / Keywords:
Banks and banking -- Florida   ( lcsh )
bibliography   ( marcgt )
theses   ( marcgt )
non-fiction   ( marcgt )


Thesis--University of Florida.
Bibliography: leaves 249-261.
Statement of Responsibility:
by William A McCollough.
General Note:
Manuscript copy.
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University of Florida
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All applicable rights reserved by the source institution and holding location.
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Full Text

Florida Banking: Present Market Structure and Performance
and an Inquiry into the Probable Effects of
Alternative Forms of Bank Organization



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




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.


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LIST OF FIGURES . . .. viii

ABSTRACT . . .. ix


Methodology . . 5

The Nature of the System ....... .. 10
A Model of the Optimal Structure .... 15

History of Banking in Florida. .. . 26
Current Environment. . . 31
Manufacturing. .. . 39
Agriculture. . .42
Wholesale and Retail Trade . ... .42
Services. . .... .44,

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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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

Output Composition . ... 195
Bank Rates . .... .. 200
Bank Services . .... 20
Loan Limits . . 211
Bank Earnings . .... ... 217
Summary ; ..... ... .. .. 222







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


.... p:.

- 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


[ _________



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


William Andrew McCollough

December, 1971

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

n m

min T k ok i j

k=l j=l

Subject to:

Ok > 0

I > 0

n m

Ok Pok Ij E.
k=l j=l

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

uni-office constraint.

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-.


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--
withuni-variate analysis.

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.
Uni-office Multi-cffice

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




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

such as:

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



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.

~ '-';-"` -:`':---)-~


0* On.


The divergence Regulatory The resulting
between set, r -- set f otutt
0* and On in-ut, OnL
I ]


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
sustain losses.5

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
banking structure.

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
It- It
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
n m
PInt i z (OkPk jP ij)
k=l j=l

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

minimization goal.

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:

P>i E

".. ^ -^ .' ..* .--^., .* .* .' ..* ... .; 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.

n m

In) = (0kok IjPij
k=l j=l

Subject to:

Ok> 0

j > 0
n m
yii y (OkPok j.

k=l j=l

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.


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.
1828 (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.



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



Dominant Banking Regulative Structural
Dates Institutions Atmosphere Regulation

1413-1828 Forbes & Co. None Unspecified


Bank Agents

State Banks

Bank Agents

National and
Private Banks

State and
National Banks

State and
National Banks;
Group Banks

State and
National Banks;
Group Banks



Some Liberal-
ization; General
Banking Laws




More Stringent

Little Change




U specified


nit ('1913)



- -~ -- -









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.

Current Environment

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



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.



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.



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
Transportation, Communications
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




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.'
Finance, Insurance,and
Real Estate 5.7 .3
Transportation 5.3
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.



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).



Year Florida United States -_ rica as a
-f U.S.

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.


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
Payrolls ($1,000.0L'
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

Abstract, 1970.

- -


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

than $40,000.21
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

i; --1'--

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



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
(St. Augustine).

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,
D.C.: 1962).

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.



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.

Bank Markets

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

geographical markets.

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




Geographic range
of the Market

Large units
of highly
liquid funds

Medium size units
of highly liquid

Small units of
highly liquid

Large units of
time funds***

units of time

Small units
of time funds







Participants in the Market

Large organizations;* large
commercial banks..**

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
than zero.

TABLE 9 (Continued)

Product Geographical Range Participants in the Market
of the Market

Investment funds*

Large business

business loans

Small business





Consumer loans***


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 _-
business ar-Snizations.

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-

nated populace.

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

and/or dealers.

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
of commerce.9

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

such arises.

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).



Charters Per Organization

Single Multiple

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



Multiple Offices
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
Utah Wisconsin

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

per charter.

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

per charter.

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

different alternative.

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.

Bank Numbers

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 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

Indian River
St. Johns
Santa Rosa
Palm Beach


Banker, 1971).

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.


1950 AND 1969

Number of Banks Number of banking Offices

Percentage Percentage
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
Percentage Percentage
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

United States:
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.



percentage Ch-n~e
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

banking offices.

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



Total Resources

Wachovia Bank and Trust Co.
Winston Salem, N.C.

Citizens and Southern National Bank
Savannah, Ga.

North Carolina National Bank
Charlotte, N.C.

First Union National Bank of North Carolina
Charlotte, N.C.

Virginia National Bank
Norfolk, Va.

First National Bank of Atlanta
Atlanta, Ga.

Trust Company of Georgia
Atlanta, Ga.

First National Bank of Miami
Miami, Fla.

1, C"7, 17


-i7 2 .


l.TC 7.644



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-

office banking.

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-

ing authority.

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

multi-office alternative.




Population of Statewide Limited Unit-
Standard Metropolitan Branching Branching Banking
Statistical Area States States States

Banking Organizations
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

Banking ,fices
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
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.


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.

Concentration Ratios

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

objective function.


DECEMBER 31, 196- AND 1969,

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.
March 1970.

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.

Local Markets

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,