by Joanna Stavins
No. 2, September 2004 - December 2004

Motivation for the Research
The recent decline in the Federal Reserve’s check volumes has received a great deal of attention. Although switching to electronic payments methods and electronic check processing has been credited for much of that decline, some it may be attributable to changes following bank mergers involving Federal Reserve customer banks. The literature on the effects of bank mergers is vast, but most of it focuses on the impact of mergers on market competition.

This paper evaluates the effect of bank mergers on Federal Reserve check-processing volumes.

Research Approach
In this paper, the author uses inflow-outflow and regression analysis to examine two types of effects: changes in check volume following mergers of Reserve Bank customer banks with non-customer banks, and changes following mergers between Reserve Bank customer banks. Data on individual depository institutions in the United States were compiled from multiple sources.

Data on individual paper check and ACH volumes were obtained from the Federal Reserve Information System (FRIS). FRIS check-volume data were matched with individual bank records from the quarterly Consolidated Reports on Condition and Income (Call Reports) filed by commercial banks with the Federal Deposit Insurance Corporation (FDIC) or the Comptroller of the Currency. For credit unions, check data were matched with records from the quarterly or semiannual Statements of Financial Condition filed with the National Credit Union Administration (NCUA). Check data on thrifts were matched with the quarterly Thrift Financial Reports filed with the Office of Thrift Supervision (OTS).

Key Findings

• Mergers of Reserve Bank customer banks with non-customer banks resulted in volume gains early in the sample but generated volume losses during the last two years of the study.
  
  
• Mergers between two or more Reserve Bank customers have resulted in volume losses, especially in the first quarter after the merger.
  
  
• On average, the estimated cumulative loss of volume during the first five post-merger quarters was 2.6 million checks.
  
  
• While the overall number of checks in the United States has declined during the past few years, the Federal Reserve has lost additional check-processing volume because of bank mergers.

Implications
The Federal Reserve is most vulnerable to volume losses resulting from mergers between two institutions of different types, such as when a money center bank buys a regional bank, or a regional bank buys a community bank. This is because one of the merging banks, typically the larger institution, may have already been bypassing the Federal Reserve by presenting directly and receiving direct presentments and may be a clearinghouse member. Following the merger, this bank may continue to use its pre-merger check-processing method for all checks from both institutions. The smaller bank’s volume would be processed the same way as the larger partner’s volume had been processed previously.

The decline in the Federal Reserve’s check-processing volume has had other causes besides mergers, such as conversion of paper checks to ACH debits at the point of sale or at the lockbox.

Full text of Public Policy Discussion Paper 04-7