December 1995
Federal Reserve Bank of Dallas

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Does Geographic Liberalization Really Hurt Small Banks?
Robert R. Moore

Small bank market share has declined in almost every state since the early 1980s. In addition, many states have reduced their restrictions on intrastate branching and interstate holding company entry since that time. Using two different approaches, Bob Moore finds evidence that casts doubt on the view that the reduction in geographic banking restrictions has been the driving force behind the decline in small bank market share. These results suggest that the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 is not likely to have a major impact on the market share of small banks.

A CAMEL Rating's Shelf Life
Rebel A. Cole and Jeffery W. Gunther

How quickly can changing financial conditions reduce the applicable information content of CAMEL ratings assigned to banks during previous on-site examinations? One measure of the information content of CAMEL ratings is their ability to discriminate between banks that will fail and those that will survive. To assess the speed with which the information content of CAMEL ratings decays, Rebel Cole and Jeffery Gunther use as a benchmark an off-site monitoring system based on publicly available accounting data. Their findings indicate that a CAMEL rating's information content begins to deteriorate after two quarters, so that, by the third quarter, the off-site monitoring system tends to provide a more accurate indication of a bank's survivability than does its CAMEL rating. The accuracy of the off-site system in identifying bank failures derives from its timeliness-an updated off-site rating is available for every bank in every quarter. Cole and Gunther conclude that off-site monitoring systems should continue to play an important role in the supervisory process, as a complement to comprehensive, on-site examinations.