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er local banks is likely to emerge.  Although the number of

banks in the United States will continue to decline, small

banks will survive.  Consumers will enjoy greater conve-

nience and a greater array of options, and that will be true

in neighborhoods of all income categories.

To project how the U.S. banking system is likely to

evolve, it is useful to focus on California, which has had

unrestricted branching within the state for more than a cen-

tury.  Market forces, rather than branching and geographic

restrictions, have been the primary determinant of the stru-

cture of banking within California.  The large and diverse

economy of California thus can provide a good indication of

how the U.S. banking system as a whole will evolve now that

artificial barriers to branching across state lines have

been eliminated.23  Four hundred commercial banks and thrift

institutions operate in the state of California (as of June

1997).  These California banks and thrifts hold just under

one-seventh of all U.S. deposits.  If the whole of the

United States will ultimately have the structure we see in

California today, the number of banks that is likely to ex-

ist in the long run in the United States is roughly 2,800.

(In other words, multiply the number of institutions in Cal-

ifornia [400] by the inverse of their U.S. market share [7]

to determine the total number of banks.)

Survival of Small Institutions

Since there are approximately 9,000 banks and thrifts

in the United States today, that projection implies that the

number of banks in the United States will shrink by two-

thirds.  That large reduction in the number of banks, howev-

er, does not imply that the smaller banks are in danger of

disappearing or that there will be less competition.  First,

California provides an instructive example of the survival

of small banks.  Banking in California is not more concen-

trated than in other states even though there are relatively

fewer banks there.  Bank of America, the largest bank in

California and one of the largest banks in the world, has a

market share of 21 percent of deposits in California.  The

average market share of the largest bank in each state in

the United States is 20 percent, virtually the same as in

California.  If we sum the deposits held by the 5 or 10

largest banks and thrifts in each state, however, banking in

California is less concentrated than in the average state.

Small institutions have survived and will survive in the

same markets as the banking giants.