ESSAYS ON ISSUES THE FEDERAL RESERVE BANK APRIL 2004 OF CHICAGO NUMBER 201 Chicago Fed Letter Why Bank One left Chicago: One piece in a bigger puzzle by Robert DeYoung, senior economist and economic advisor, and Thomas Klier, senior economist When two large banks merge, where does the headquarters go? The recent Bank One–J. P. Morgan Chase merger is following well-established banking industry trends. If the recently announced acquisition of The economics of headquarters Bank One Corporation by J. P. Morgan location Chase & Co. feels like history is repeat- Whenever two companies headquartered ing itself in Chicago, the impression is an in different cities merge, the combined accurate one. This merger echoes acqui- companies must decide where to locate sitions of leading Chicago banks by large, their headquarters. History shows that out-of-state companies: Bank of America one of the most important factors in this purchased Continental Bank in 1994, the decision is city size. Larger cities tend Bank of Montreal purchased Harris Bank to have a greater range of inputs and in 1984, and Dutch banking giant ABN- services that corporations need, such as Amro purchased LaSalle Bank in 1979. skilled white-collar and technical work Indeed, Bank One’s short stay in forces, legal, financial, and advertising Chicago—it relocated here in 1998 from services, as well as proximity to corporate Bank One’s exit from Chicago its previous headquarters in Columbus, customers. As more companies locate in is part of a larger process of Ohio—began with its purchase of the a given city, these locational benefits— industry evolution, the seeds First Chicago–NBD Corporation. which economists refer to as agglomera- tion economies—tend to increase as the Although J. P. Morgan Chase plans to of which were planted long network of companies selling to and run its retail banking activities out of ago and the economics of buying from each other grows. Bank One’s existing offices in Chicago, which may be working in the corporate headquarters of the com- If agglomeration economies were all that favor of other cities. bined firms will remain in New York mattered, all company headquarters City. The J. P. Morgan–Bank One deal would gravitate toward the same city. will leave Chicago with one less major Companies often choose to locate their commercial banking company head- headquarters in smaller cities or even in quarters and possibly substantially fewer rural areas, for instance, because key in- banking sector jobs. puts are readily available (such as low- cost labor or raw materials) or for access Why is this happening? And what does to transportation networks. Maintaining it mean for Chicago’s future as a finan- a link to a company’s history can also cial center? This Chicago Fed Letter puts be an important reason for retaining Chicago’s loss of Bank One in perspec- headquarters in a smaller city, as can tive. We argue that Bank One’s exit from the personal preferences of company Chicago is part of a larger process of executives—even if these considerations industry evolution, the seeds of which do not seem to maximize shareholder were planted long ago and the econom- value. After two firms merge, the head- ics of which may be working in favor quarters of the combined company of- of other cities. ten stays in the city of the larger firm; 1. Distribution of large company headquarters, top 50 MSAs of much of Bank One’s headquarters activities from Chicago to New York A. Nonbanks B. Banks following its acquisition by J. P. Morgan cumulative frequency of headquarters cumulative frequency of headquarters Chase in 2004. 100 100 The J. P. Morgan Chase–Bank One 80 80 merger The merger of J. P. Morgan Chase with 60 60 Bank One is the culminating (at least for now) acquisition in a string of earlier mergers among major U.S. banking 40 2000 40 1990 companies between 1991 and 2000. This family tree has two branches (see 20 1990 20 2000 figure 2): the Bank One branch, in which a series of mergers moved bank head- 0 0 020406080100 0 20 40 60 80 100 quarters to progressively larger cities; cumulative frequency of MSAs cumulative frequency of MSAs and the J. P. Morgan Chase branch, in SOURCES: Compustat, Census Bureau, and authors' calculations. which a series of mergers retained bank headquarters in the largest U.S. city. The Bank One branch is geographically this tends to minimize post-merger or- MSAs between 1990 and 2000. The complex. Bank One (at the time, Banc ganizational disruptions, but can also Lorenz curves in figure 1 capture the One) was established in 1967 as a multi- be an indication of political clout with- divergent distributions of headquar- bank holding company headquartered in the new firm. ters locations for large banking and in Columbus, OH. It practiced a decen- nonbanking corporations during this In a recent study, Klier and Testa (2002) tralized business strategy, and by year-end decade. The Lorenz curve for large argue that in recent years phenomena 1994 the organization had 76 separately nonbanking companies (panel A) other than city size have become increas- chartered and locally focused affiliates moved closer to the 45-degree line ingly important for determining where spread across 11 primarily midwestern (which represents a hypothetical world corporate headquarters are located.1 states. By the late 1990s, however, Bank in which corporate headquarters are They found that the percentage of large, One had changed its strategic course distributed evenly across the top 50 public U.S. corporations headquartered and was rapidly centralizing its opera- MSAs), while the curve for large bank- in the very largest metropolitan areas tions into a single bank in each state, ing companies (panel B) moved fur- (MSAs) declined during the 1990s, while typically located in the largest city. ther away from the 45-degree line. the percentage in middle-tier MSAs In 1998, Bank One purchased First (population between one million and These data suggest six million) increased. They suggest that economies 2. Geography of the J. P. Morgan Chase–Bank One merger two explanations for these changes. of agglomeration First, technological advances and fall- may be especially ing costs of travel have likely improved important for the ability of top managers located in determining the smaller cities to gather information, pur- headquarters chase business services, and administer locations of large their company’s operations in national financial compa- and global marketplaces. In other words, nies. Moreover, Detroit 2 new technology may result in agglomer- these data are con- 1,3,5 6 New York ation economies being exhausted at a sistent with the Chicago smaller city size. Second, companies are examples at hand: 4 Columbus following their customers: The ongoing the relocation of shift in U.S. population toward the South Bank One’s head- and the West has gradually shifted these quarters from NOTES: Arrows indicate relocation of headquarters. Size of circle proportionate to population of MSA/CMSA. In the following transactions, holding company assets, in companies’ markets toward the mid- Columbus to parentheses, are measured at the beginning of the merger year: 1—in 1991, Chemical Banking Corporation ($73B) acquired Manufacturers Hanover Trust Company ($62B); tier cities located in those regions. Chicago following 2—in 1995, NBD Bancorp, Inc. ($47B) acquired The First Chicago Corporation ($66B); its acquisition of 3—in 1996, Chemical Banking Corporation ($183B) acquired The Chase Manhattan However, the authors found strikingly Corporation ($121B); 4—in 1998, Bank One Corporation ($216B) acquired First First Chicago–NBD Chicago–NBD Corporation ($114B); 5—in 2000, The Chase Manhattan Corporation different results for the headquarters ($406B) acquired J. P. Morgan & Co., Inc. ($261B); and 6—in 2004, J. P. Morgan Chase in 1998 and the & Co. ($793B) acquired Bank One Corporation ($290B). of large banking companies, which planned relocation SOURCES: FR Y-9C database and company websites. tended to move from smaller to larger 3. Mergers between large commercial banks, 1991–2004 than in Illinois, where unit banking laws limited banks to operating within City retained HQ City lost HQ a single county. During the 1980s and Year Bank City Bank City 1990s individual states gradually re- 1991 NCNB Charlotte C&S/Sovran Atlanta laxed their geographic restrictions on 1991 BankAmerica San Francisco Security Pacific Los Angeles banks, and the Riegle–Neal Act of 1994 1993 Society Corp. Cleveland KeyCorp Albany 1994 BankAmerica San Francisco Continental Bank Chicago brought an end to these restrictions in 1995 Shawmut National Boston/Hartford Fleet Financial Providence the remaining states. In states that de- 1995 First Union Charlotte First Fidelity Philadelphia/Newark regulated earliest, states that relaxed 1995 First Chicago Chicago NBD Bancorp Detroit 1996 Wells Fargo San Francisco First Interstate Los Angeles most broadly, and states that had few 1996 NationsBank Charlotte Boatmen’s Bank St. Louis geographic restrictions to begin with, 1997 First Bank System Minneapolis U.S. Bancorp Portland 1997 NationsBank Charlotte Barnett Banks Jacksonville banks have been able to grow faster 1997 First Union Charlotte CoreStates Philadelphia and attain the critical mass to make 1998 First Chicago NBD Chicago Bank One Columbus large out-of-state mergers. 1998 NationsBank Charlotte BankAmerica San Francisco 1998 Wells Fargo San Francisco Norwest Minneapolis Today the largest U.S. banks are located 1999 Firstar Milwaukee Mercantile Bancorp St. Louis 2000 U.S. Bancorp Minneapolis Firstar Milwaukee in international banking centers, such 2000 Wells Fargo San Francisco First Security Salt Lake City as New York or San Francisco, where 2000 FleetBoston Boston Summit Bancorp Princeton agglomeration economies are strong 2000 Fifth Third Bancorp Cincinnati Old Kent Financial Grand Rapids 2001 First Union Charlotte Wachovia Atlanta/Winston-Salem and high demand for financial services 2003 Bank of America Charlotte FleetBoston Boston has allowed even purely local banks to 2004 J.P.