Entry in Commercial Banking: 1962-78: Reply

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In our recent article in this journal (1984), we reported our finding that a bank entry relation that explains entry well for the years 1942-61, 1966-70, and 1976-78 years in which entry was rather tightly regulated badly underpredicts entry in the years 1971-75. We expressed the view that this underprediction represented a loosening of regulatory entry policy. Further, owing to the very rapid growth in the number of banks in multibank holding companies (MBHCs) in this period, we conjectured that the purpose of this loosening was to accommodate holding company growth. In his Table 1, Rose presents data which, he asserts, confirm our impression of the general importance of holding company expansion in explaining the underprediction of our entry equation. He then takes issue with our view that entry policy was relaxed in this period. We do not agree with Rose that his data confirm our earlier general impression of the importance of growth of MBHCs in explaining the underprediction of our entry equation in 1971-75. Rather, in this reply we show that when we use his data to eliminate from our sample banks in MBHCs, so that the sample is restricted to entry of banks established by independent organizers, we get much the same results as reported in our article. Thus, contrary to our earlier impression and to Rose's interpretation of his data, the rapid growth of MBHCs is not a major factor in explaining the higher than predicted entry rates of the first half of the 1970s. Since Rose's attempts to refute our view that entry policy was relaxed are all based on arguments about MBHC expansion, our view is unaffected by any of these arguments. Our reaction to the data Rose has furnished is quite different from his. We are immediately struck, if not astonished, by the relatively small number of banks established by MBHCs. As shown in Table 1 of our article, the number of banks in MBHCs increased from 895 in 1970 to 2,264 in 1975, an increase of 1,369 banks. In addition, in the years 1971-75, a total of 1,490 banks (insured and uninsured) was established. Rose's data show that of these totals, holding company de novo expansion accounts for only 264 banks. We would have thought this figure to be much higher. Thus, far from confirming our impression as to the crucial importance