¹ For a review of the recent literature, see: Guttentag, Jack M. and Herman, Edward S., “Banking Structure and Performance,” The Bulletin, No. 41/43. (New York: New York University, Graduate School of Business Administration, February 1967)Google Scholar. Also, Mote, Larry R., “Competition in Banking: What is Known? What is the Evidence?,” Business Conditions (Chicago: Federal Reserve Bank of Chicago, February 1967).Google Scholar

² Edwards, Franklin R., concentration and competition in banking: a statistical Study, Research Report No. 26. (Boston: Federal Reserve Bank of Boston, 1964)Google Scholar; Edwards, Franklin R., “Concentration in Banking and Its Effects on Business Loan Rates,” The Review of Economics and Statistics (August 1964)Google Scholar; and Edwards, Franklin R., “The Banking Competition Controversy,” The National Banking Review (September 1965)Google Scholar; Flechsig, Theodore G., Banking Market Structure and Performance in Metropolitan Areas (Washington, D.C.: Board of Governors of the Federal Reserve System, 1965)Google Scholar, and “The Effect of Concentration on Bank Loan Rates,” The Journal of Finance (May 1965); Kaufman, George, “Bank Market Structure and Performance: The Evidence from Iowa,” The Southern Economic Journal (April 1966)Google Scholar; Meyer, Paul A., “Price Discrimination, Regional Loan Rates, and the Structure of Banking Industry,” The Journal of Finance (March 1967)Google Scholar; Phillips, Almarin, “Evidence on Concentration in Banking Markets and Interest Rates,” Federal Reserve Bulletin (June 1967)Google Scholar; Schweiger, Irwin and McGee, John S., “Chicago Banking,” The Journal of Business (July 1961)Google Scholar; Taylor, Charles T., “Average Interest Charges, The Loan Mix, and Measures of Competition: Sixth Federal Reserve District Experience,” The Journal of Finance (December 1968).Google Scholar

³ Kaufman, “Bank Market Structure,” p. 429.

⁴ In this study, smaller refers to a city or SMSA of less than 250,000 population.

⁵ If such aggregation is included in a study of banking structure and performance and if appropriate variables are not included to account for the differences in these banks, an inherent bias may exist toward finding a relationship between banking structure and performance.

⁶ To evaluate the importance of bias introduced into the results by intercorrelation of the independent variables, a careful analysis of the correlation matrix was made. The amount of intercorrelation among the independent variables was, in general, quite small. The largest single correlation coefficient among any of the independent variables was between average bank size and the ratio of business to total loans (0.54 in 1966), while most single correlation coefficients were substantially lower.

⁷ Conceptually, an important determinant of loan rates would be some index of money market and capital market rates as a measure of the opportunity cost of loanable funds. However, these rates become parameters when attempting to explain variations in loan rates among banks in a single state.

⁸ Kaufman's equation explaining variations in loan rates among Iowa counties explained between 20.0 and 31.4 per cent of the total variation in bank rates for the 2 years, 1959 and 1960.

⁹ The failure of the loan composition variables to prove statistically significant is quite surprising, both for a priori reasons and since Taylor's study of banks in the Southeast finds them to be highly significant. (Taylor, “Average Interest Charges,” p. 795.) A comparison of the simple correlation coefficients between the composition variables for similar loan categories and the loan rate revealed only minor differences in the correlation coefficients determined by Taylor's study and ours. However, other than a bank-size variable, Taylor's regressions did not include arguments for either structural or demand factors. This suggests that his loan composition variables may have served to some extent as proxies for banking structure and/or demand for bank loans. It is particularly interesting to note that when the four loan mix variables in the present study are regressed by themselves against the effective loan rate, the ratio of consumer loans to total loans proves significant at the 0.05 level in both 1966 and 1967. The addition of average bank size to this reduced regression format does not change the result vis-a-vis the loan composition arguments, although average bank size becomes significant at the 0.05 level in 1966 and at the 0.01 level in 1967.

¹⁰ See, for example, Edwards, “The Banking Competition Controversy,” and Phillips, “Evidence on Concentration.”

¹¹ The relationship may be nonrecursive, however, reflecting the potential dependence of costs on the loan-deposit ratio.