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The recent bank megamergers are primarily of the net-

work-extension type.  The merging institutions generally

have been operating in distinct markets.  Bank of America

and NationsBank, for example, have almost no overlap.  First

Chicago and Banc One overlap in parts of Indiana and Illi-

nois, but a majority of their operations are distinct.  The

effect of these mergers is to create stronger competitors in

each of the markets in which the two banks initially operat-

ed rather than to eliminate a competitor.

Potential and Actual Entry

Even in cases in which there might be a significant

preexisting overlap of the merging partners, simply counting

the number of institutions and measuring concentration are

not sufficient for understanding what the effects on compe-

tition will be.  If barriers to new entry are high, then

high concentration and few banks in a local market may imply

a competitive problem.  If barriers to new entry are low,

however, it will be very difficult for the incumbents to

engage in anti-competitive behavior.  If banks in a particu-

lar market were enjoying monopoly profits, new banks would

then enter and compete away those profits.

Since one must obtain a charter from the state or fed-

eral government to operate a bank, the chartering process

could constitute a barrier to entry.  To maintain a competi-

tive and efficient banking environment, it is imperative to

keep such regulatory costs low.  Regulatory reform should

ensure that regulation does not pose unnecessary obstacles

to new entry.  As evidence that such costs have not been

prohibitive, more than 1,500 charters have been granted dur-

ing the past decade.  During the same period, nearly 4,900

banking organizations have disappeared through failure and

merger.  The number of new charters granted has risen stead-

ily over the last few years, and 188 were granted in 1997,

the most since 1989.  In an environment where barriers to

entry are not high, the mergers we are seeing are highly un-

likely to generate anti-competitive outcomes.

Most of the future big mergers will continue to be of

the network-extension type--expanding a banking franchise

into new markets to provide regionwide and, ultimately, tru-

ly nationwide service.  In the next 10 years, that process

will create the type of banking structure that the United

States would have developed 30 years ago if not for the

branching restrictions.  National banking giants such as

Citigroup and Bank of America-NationsBank will then be fac-

ing off in markets throughout the country.  The small local