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Another place where small banks have survived the chal-

lenge from large banks is New York.24  Regulatory changes in

the early 1970s permitted the large banks in New York City

to expand upstate for the first time.  During the

1970s, most of the money-center banks did try to move up-

state by opening branches and purchasing local banks.  The

small upstate banks, however, proved to be tough competi-

tors.  During the 1980s, Bankers Trust and Bank of New York

divested much of the upstate networks built in the previous

decade; Citibank also sold many of its upstate branches.

The money-center banks generally have not been able to

achieve a dominant position upstate.  A study by the Federal

Reserve Bank of New York divided all of upstate New York

into 15 markets and showed that NYC-based banks had greater

market shares than the local banks and thrifts in only 2 of

those 15 upstate markets.25  After more than 20 years, small

local banks have survived and prospered in head-to-head

competition with the largest banks in the country.

Concentration and Competition: Local and National

Another issue raised by the consolidation in the bank-

ing industry is how the reduction in the number of banks

might affect market concentration and competition.  Given

the fragmentation of the U.S. banking system due to more

than a century of strict branching regulation, it is very

important to distinguish between bank concentration at the

local level and at the national level.  Reducing the number

of banks in the nation could increase competition and reduce

concentration in local retail markets.

To take an extreme example, assume that each state had

only one bank, and banks could not compete across state

lines.  While there would be monopoly at the state level,

measured concentration at the national level might not be

particularly high.  The number of banks nationally and the

national-level concentration, however, would be irrelevant

because the individual banks could not compete with each

other.  Now assume that banks are permitted to branch and

merge across state lines.  Banks will then begin to compete

directly by entering each other's markets through branching

and mergers.  At the national level, mergers will make it

appear that the industry is becoming more concentrated, but

the effect will be the opposite at the local level.  Even if

only, say, 10 banks survive after the mergers, each local

market may have lower concentration and more consumer choice

because multiple banks will operate in each state.