FIGURE 2
Page from Annual Report of the Controller of the Currency , 1900 .
span of the country and the limits to communication technology until recently .
The public gradually took a more positive view of branching in the early 1900s . While states refused to consider cross-state branching , some began to allow branching within their borders . Most common was for states to allow banks to create branches in the city or county of its headquarters , but a few notable exceptions , such as California , allowed branching throughout the state . Even the McFadden Act of 1927 , which allowed nationally chartered banks to establish branches if their state allowed , limited branches to the location of their headquarters . The number of branches thus increased over time , but few banks could grow assets substantially . In 1929 , there were nearly 25,500 banks , yet only around 1,000 total branches located outside the headquarters ’ city — almost half of them in California .
The Great Depression broke the dam on widespread branching . Over the 1930s , many states relaxed branching laws and allowed wider geographical spread of branching . Further , many of the almost 8,000 banks that closed between 1929 and 1935 were acquired or merged into surviving banks . The number of branches outside the headquarters city thus roughly doubled to 2,000 as the number of banks fell to about 15,000 . The combination of these factors substantially increased concentration over the decade . The fivebank concentration ratio increased from 10 % in 1928 to 17.8 % in 1940 . Unlike previous increases , concentration remained relatively high going forward .
Even though branching laws had loosened during the 1930s , many constraints persisted , but with a major loophole : the bank holding company . These entities could acquire banks across state borders , and after WWII , banks exploiting the form to grow swiftly . The Bank Holding Company Act of 1956 , along with subsequent revisions , aimed to bridge some of the regulatory gaps and increase supervision . It imposed new regulatory hurdles on consolidation , such as prohibiting bank holding companies from acquiring banks in different states . This effectively limited many of the advantages of holding companies and pushed more banks to once again embrace traditional branching . The number of non-headquarter city branches grew from roughly 2,500 to 5,300 over the 1950s .
The late 1970s and 1980s saw a tide of liberalization in branching regulations across states , and some even forged bilateral partnerships , enabling banks to branch across borders . The liberalization culminated in the Riegle Neal Interstate Banking and Branching Efficiency Act of 1994 , which eliminated most restrictions on interstate bank acquisitions and provided a uniform set of rules across states . Consequently , it ushered in an era of consolidation , such that between 1993 and 2008 , the five-bank concentration measure rose from 17.2 % to 48.7 %, far outpacing the growth of concentration in previous periods .
The Role of the Business Cycle : Asset Booms and Banking Crises
The long-run concentration trends in the banking industry largely align with branching regulations , but short-run patterns often correspond to banking crises . Widespread bank failures directly reduce the number of banks and shrink the total asset pool , but economic turmoil also tends to send depositors fleeing for the safety of the largest banks , which also tend to be more likely to survive a panic .
In the early 1840s , a spike in concentration followed the fallout from the Panics of
32 FINANCIAL HISTORY | Summer 2023 | www . MoAF . org