The Banking Industry is Unconcentrated, and Will Remain So After the BB&T/SunTrust Merger

On February 7, BB&T and SunTrust announced a merger of equals that is expected to be completed at the end of 2019.  The combined entity will have a new name that will be announced at a future date and will become the 8th largest U.S. bank holding company with $442 billion in total assets. This blog post examines the potential impact of the merger from a concentration perspective.

As background, a firm is said to enjoy economies of scale when it can reduce its costs of providing products or services to its customers by increasing its size.  Not all industries are able to benefit from economies of scale, but those scale economies arise naturally in the banking sector because typically larger scale leads to more diversification and helps reduce risk.  In addition, recent changes in technology (e.g., real-time payments, artificial intelligence) have further increased the efficient scale in banking.  However, some argue that higher scale economies will lead to an increase in market concentration in banking over time.

The remainder of this blog post shows that the banking industry is unconcentrated, with a concentration index that is well-below the average of all publicly traded firms, and furthermore it shows the BBT/STI merger will have an insignificant impact on concentration of the banking industry.  The most commonly used measure of market concentration is the Herfindahl-Hirschman Index (HHI).  The HHI is calculated by summing the squares of the individual firms’ market shares, and thus gives proportionately greater weight to firms with larger market shares.  The value of the index approaches zero when an industry consists of many small firms, while it reaches a maximum value of 10,000 when the market is controlled by a single firm.  The Department of Justice (DOJ) considers a market unconcentrated if the HHI is below 1500, moderately concentrated if the HHI is between 1500 and 2500 and highly concentrated if the HHI is above 2500.  In evaluating the impact of a merger, the DOJ also looks at the increase in the HHI that results from the merger.

The chart above shows measures of banking industry concentration for total assets, deposits and loans between the first quarter of 1990 and the third quarter of 2018.   All three measures of concentration show that the HHI for the banking industry is well below the moderately concentrated level of 1500 and therefore is classified as unconcentrated.  Specifically, the HHI of assets, deposits and loans is 617, 580 and 523, respectively.  Moreover, the average concentration index across all industries was about 1200 in 2014;  thus, the concentration index of the banking industry is about 50 percent lower than the average of across all U.S. industries.  The change in the HHI of assets, loans and deposits for the banking industry that is obtained after combining BBT and STI is immaterial across the three major balance sheet items.  Specifically, the change in assets, deposits and loans is 3, 4 and 6 points, respectively.

In summary, the proposed BBT/STI merger will help the combined company expand their investment in technology and deliver more and better services to its customers.  As shown above, the proposed merger has a minimal impact on the degree of concentration of the banking industry.


Disclaimer: The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Bank Policy Institute or its membership, and are not intended to be, and should not be construed as, legal advice of any kind.