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Merged Banks Grab Share

Economic Trends

Merged Banks Grab Share

A worrisome trend for regulators

A just released study by economists at the Federal Reserve Bank of New York gives new evidence of increased concentration in the banking industry in the 1990s. According to data compiled by Kevin J. Stiroh and Jennifer P. Poole, the nation's 10 largest bank holding companies dramatically expanded their share of bank loans and other industry assets, from 25.6% in 1990 to 44.8% in 1999 (chart). The share of assets for the top 50 holding companies rose from 55.3% to 68.1% over the same stretch.

This gain doesn't represent any internal growth spurt by large banks because of increased efficiencies. Rather, virtually all the jump in market share came from mergers and acquisitions, report Stiroh and Poole. While some banks expanded existing subsidiaries in addition to growing through combinations, such expansion as a whole "was an inconsequential factor."

In fact, Stiroh and Poole discovered that big banks lagged far behind smaller financial institutions in terms of adding new assets in the 1990s. They compared total assets of today's 50 largest bank holding companies to the assets of their component companies in 1990 and found a 25% hike. Yet smaller financial institutions grew by 41% over the same period.

So far, the growth of the smaller banks and the development of alternative nonbank lending sources has mostly muted regulatory concern about big banks' increased market share. But a continuing trend toward concentration could raise red flags for regulators.By Charles J. WhalenReturn to top

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How to Stop Kids' Smoking

Raising prices would be a big help

Raising cigarette taxes can reduce smoking among teenagers even more than previously thought, say economists Donna B. Gilleskie and Koleman S. Strumpf of the University of North Carolina in a new working paper published by the National Bureau of Economic Research. Using a new model and national data from a survey tracking upwards of 25,000 eighth-graders since 1988, the authors were able to estimate how much higher prices influence the decision to not start smoking.

According to their model, raising taxes by $1 per pack would reduce the likelihood of smoking by eighth graders by half, a substantially bigger drop than predicted by conventional models. Looking at the price effect on young people is essential, they add, because early-youth smoking decisions have a powerful long-term impact on future smoking behavior.

In fact, calculating the cumulative effects of early smoking decisions is where their model differs, say Gilleskie and Strumpf. That's because few researchers have used such models--and none has tracked the same youths. An updated look at the sample will be available next year, enabling them to extend their research to gauge the effect of cigarette taxes on young adults' smoking habits.By Charles J. WhalenReturn to top

What Asian Crisis?

The fallout in the U.S. was minimal

Despite dire predictions, the 1997 Asian economic crisis was nothing more than a minor blip for most U.S. industries. So concludes an article to be published later this year in the Federal Reserve Bank of New York's Economic Policy Review. The fear then was that Asia's devaluations would cause U.S. imports from these countries to soar--sending U.S. production and prices tumbling. Also, U.S. exports to Asia were expected to plummet. But that didn't happen in Korea, Thailand, Malaysia, and Indonesia, the four countries studied by the author, New York Fed economist James Harrigan.

In particular, while import prices fell, U.S. domestic prices changed little. This suggests that imports from these Asian countries don't actually compete directly with U.S. producers in most industries. The big exception was steel, where U.S. prices were hit hard. Overall, exports declined, but relatively little.

Harrigan says the Asian crisis was practically a "free lunch" for the U.S.--industry was mostly unaffected, while consumers benefited from cheaper imports. But with U.S. exposure to global markets continuing to increase, the next crisis may not be so benign.By Charles J. WhalenReturn to top

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