Review of Industrial Organization 16: 357–366, 2000.
© 2000 Kluwer Academic Publishers. Printed in the Netherlands.
Retail Commercial Banking: An Update on a
Period of Extraordinary Change
STEPHEN A. RHOADES
Federal Reserve Board, Financial Structure Section, Stop 149, Washington, DC, 20551, U.S.A.
Abstract. The 1990s has been an extraordinary period for the retail commercial banking industry.
This industry update discusses some of the important developments and issues they have raised from
the standpoint of competition and antitrust policy. A massive merger movement and removal of
restrictions on interstate banking have raised questions about barriers to entry, the inﬂuence of very
large banks on the behavior of other banks in local banking markets, the potential for multimarket
interdependence among large banks that meet one another in numerous markets, and the appropri-
ateness of local markets for analyzing competition. Finally, the emergence of electronic banking and
the unbundling of the pricing of services have highlighted the possible importance of switching costs
for customers in retail banking.
Key words: Banking, interstate banking, mergers, multimarket interdependence, switching costs.
The 1990s has been an extraordinary period for the commercial banking industry.
The industry has enjoyed record proﬁt rates, electronic technology has made in-
creasing inroads into retail banking, Congress passed legislation in 1994 removing
restrictions on interstate banking, there has been an unprecedented merger move-
ment, and securitization has emerged as a major source of funding. Of special
interest from the standpoint of competition analysis and antitrust policy is the retail
commercial banking industry, which serves households and small businesses.
is because retail banking is far more likely than wholesale banking to be subject to
market imperfections and market power due to information asymmetries between
sellers and buyers, switching costs, and the prevalence of local rather than national
or international markets. For the student of industrial organization, developments in
The views expressed herein are the author’s and do not necessarily reﬂect the views of the Board.
For helpful comments and suggestions, I extend thanks to Dean Amel, Beth Kiser, Steve Pilloff, and
Wholesale commercial banking is essentially a distinct industry wherein large banks provide
services to large corporate customers. This business requires not only large bank size but the provi-
sion of a wide range of relatively sophisticated ﬁnancial services, and, unlike retail banking, there is
little need for a network of branches to serve customers.