Robert DeYoung

Thomas Klier

English

Research Papers in Economics

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.
ESSAYS ON ISSUES THE FEDERAL RESERVE BANK APRIL 2004
OF CHICAGO NUMBER 201
If the recently announced acquisition of
Bank One Corporation by J. P. Morgan
Chase & Co. feels like history is repeat-
ing itself in Chicago, the impression is an
accurate one. This merger echoes acqui-
sitions of leading Chicago banks by large,
out-of-state companies: Bank of America
purchased Continental Bank in 1994, the
Bank of Montreal purchased Harris Bank
in 1984, and Dutch banking giant ABN-
Amro purchased LaSalle Bank in 1979.
Indeed, Bank One’s short stay in
Chicago—it relocated here in 1998 from
its previous headquarters in Columbus,
Ohio—began with its purchase of the
First Chicago–NBD Corporation.
Although J. P. Morgan Chase plans to
run its retail banking activities out of
Bank One’s existing offices in Chicago,
the corporate headquarters of the com-
bined firms will remain in New York
City. The J. P. Morgan–Bank One deal
will leave Chicago with one less major
commercial banking company head-
quarters and possibly substantially fewer
banking sector jobs.
Why is this happening? And what does
it mean for Chicago’s future as a finan-
cial center? This Chicago Fed Letter puts
Chicago’s loss of Bank One in perspec-
tive. We argue that Bank One’s exit from
Chicago is part of a larger process of
industry evolution, the seeds of which
were planted long ago and the econom-
ics of which may be working in favor
of other cities.
The economics of headquarters
location
Whenever two companies headquartered
in different cities merge, the combined
companies must decide where to locate
their headquarters. History shows that
one of the most important factors in this
decision is city size. Larger cities tend
to have a greater range of inputs and
services that corporations need, such as
skilled white-collar and technical work
forces, legal, financial, and advertising
services, as well as proximity to corporate
customers. As more companies locate in
a given city, these locational benefits—
which economists refer to as agglomera-
tion economies—tend to increase as the
network of companies selling to and
buying from each other grows.
If agglomeration economies were all that
mattered, all company headquarters
would gravitate toward the same city.
Companies often choose to locate their
headquarters in smaller cities or even in
rural areas, for instance, because key in-
puts are readily available (such as low-
cost labor or raw materials) or for access
to transportation networks. Maintaining
a link to a company’s history can also
be an important reason for retaining
headquarters in a smaller city, as can
the personal preferences of company
executives—even if these considerations
do not seem to maximize shareholder
value. After two firms merge, the head-
quarters of the combined company of-
ten stays in the city of the larger firm;
Bank One’s exit from Chicago
is part of a larger process of
industry evolution, the seeds
of which were planted long
ago and the economics of
which may be working in
favor of other cities.1. Distribution of large company headquarters, top 50 MSAs
0 2 04 06 0 8 0 1 0 0
A. Nonbanks
cumulative frequency of headquarters
cumulative frequency of MSAs
B. Banks
0 20 40 60 80 100
cumulative frequency of MSAs
SOURCES: Compustat, Census Bureau, and authors' calculations.
this tends to minimize post-merger or-
ganizational disruptions, but can also
be an indication of political clout with-
in the new firm.
In a recent study, Klier and Testa (2002)
argue that in recent years phenomena
other than city size have become increas-
ingly important for determining where
corporate headquarters are located.1
They found that the percentage of large,
public U.S. corporations headquartered
in the very largest metropolitan areas
(MSAs) declined during the 1990s, while
the percentage in middle-tier MSAs
(population between one million and
six million) increased. They suggest
two explanations for these changes.
First, technological advances and fall-
ing costs of travel have likely improved
the ability of top managers located in
smaller cities to gather information, pur-
chase business services, and administer
their company’s operations in national
and global marketplaces. In other words,
new technology may result in agglomer-
ation economies being exhausted at a
smaller city size. Second, companies are
following their customers: The ongoing
shift in U.S. population toward the South
and the West has gradually shifted these
companies’ markets toward the mid-
tier cities located in those regions.
However, the authors found strikingly
different results for the headquarters
of large banking companies, which
tended to move from smaller to larger
MSAs between 1990 and 2000. The
Lorenz curves in figure 1 capture the
divergent distributions of headquar-
ters locations for large banking and
nonbanking corporations during this
decade. The Lorenz curve for large
nonbanking companies (panel A)
moved closer to the 45-degree line
(which represents a hypothetical world
in which corporate headquarters are
distributed evenly across the top 50
MSAs), while the curve for large bank-
ing companies (panel B) moved fur-
ther away from the 45-degree line.
These data suggest
that economies
of agglomeration
may be especially
important for
determining the
headquarters
locations of large
financial compa-
nies. Moreover,
these data are con-
sistent with the
examples at hand:
the relocation of
Bank One’s head-
quarters from
Columbus to
Chicago following
its acquisition of
First Chicago–NBD
in 1998 and the
planned relocation
of much of Bank One’s headquarters
activities from Chicago to New York
following its acquisition by J. P. Morgan
Chase in 2004.
The J. P. Morgan Chase–Bank One
merger
The merger of J. P. Morgan Chase with
Bank One is the culminating (at least
for now) acquisition in a string of earlier
mergers among major U.S. banking
companies between 1991 and 2000.
This family tree has two branches (see
figure 2): the Bank One branch, in which
a series of mergers moved bank head-
quarters to progressively larger cities;
and the J. P. Morgan Chase branch, in
which a series of mergers retained bank
headquarters in the largest U.S. city.
The Bank One branch is geographically
complex. Bank One (at the time, Banc
One) was established in 1967 as a multi-
bank holding company headquartered
in Columbus, OH. It practiced a decen-
tralized business strategy, and by year-end
1994 the organization had 76 separately
chartered and locally focused affiliates
spread across 11 primarily midwestern
states. By the late 1990s, however, Bank
One had changed its strategic course
and was rapidly centralizing its opera-
tions into a single bank in each state,
typically located in the largest city.
In 1998, Bank One purchased First
0
20
40
60
80
100
0
20
40
60
80
100
cumulative frequency of headquarters
2. Geography of the J. P. Morgan Chase–Bank One merger
NOTES: Arrows indicate relocation of headquarters. Size of circle proportionate to
population of MSA/CMSA. In the following transactions, holding company assets, in
parentheses, are measured at the beginning of the merger year: 1—in 1991, Chemical
Banking Corporation ($73B) acquired Manufacturers Hanover Trust Company ($62B);
2—in 1995, NBD Bancorp, Inc. ($47B) acquired The First Chicago Corporation ($66B);
3—in 1996, Chemical Banking Corporation ($183B) acquired The Chase Manhattan
Corporation ($121B); 4—in 1998, Bank One Corporation ($216B) acquired First
Chicago–NBD Corporation ($114B); 5—in 2000, The Chase Manhattan Corporation
($406B) acquired J. P. Morgan & Co., Inc. ($261B); and 6—in 2004, J. P. Morgan Chase
& Co. ($793B) acquired Bank One Corporation ($290B).
SOURCES: FR Y-9C database and company websites.
Detroit
Chicago
Columbus
New York
1,3,5
2
6
4
2000
1990
1990
20003. Mergers between large commercial banks, 1991–2004
Chicago–NBD, and moved its head-
quarters from Columbus to Chicago,
the larger of the two metropolitan areas.
First Chicago–NBD was itself a product
of a 1995 merger of two large Midwest
banks—NBD Bancorp, Inc. and First
Chicago Corporation—that resulted
in NBD’s headquarters moving from
Detroit to Chicago, again the larger
of the two metropolitan areas.
The J. P. Morgan Chase branch of figure
2 is a history of New York City banking
in a nutshell. In 1955, Chase–Manhattan
Bank was formed by a merger of the
Chase Bank (founded in 1877 and the
namesake of Salmon P. Chase) and the
Manhattan Company (founded by Aaron
Burr and Alexander Hamilton, among
others, in 1799). In 1961, the Manufac-
turers Hanover Trust Company was
formed by a merger of Hanover Bank
(founded in 1851) and the Manufactur-
ers Trust Co. (founded in 1853). During
the 1990s, both of these storied banking
companies were acquired by Chemical
Bank: Chemical acquired Manufacturers
Hanover in 1991 and Chase–Manhattan
in 1996, with the latter merger retain-
ing the Chase–Manhattan name and
creating for a short time the largest
banking company in the U.S. Finally,
in 2000, J. P. Morgan acquired Chase–
Manhattan, creating J. P. Morgan
Chase & Co.
Deregulation and the migration of
bank headquarters
Both the J. P. Morgan Chase–Bank One
case history and the more systematic
headquarters location data suggest that
the agglomeration economies available
in large cities are especially attractive
for large banking companies. But if a
large city headquarters location is so
important for banks, then why haven’t
large banks been located in the largest
cities all along? Why, for example, has
the management of Bank One’s assets
jumped, in turn, from small Midwest
towns, to state financial centers, to
Chicago, and finally to New York City
during the past ten years?
This question can best be answered by
revisiting the regulatory history of the
U.S. banking industry. The McFadden
Act of 1927 prohibited banks from
branching across state lines, and many
states restricted the ability of their banks
to expand within the state. Nowhere were
state-level restrictions more binding
than in Illinois, where unit banking
laws limited banks to operating within
a single county. During the 1980s and
1990s individual states gradually re-
laxed their geographic restrictions on
banks, and the Riegle–Neal Act of 1994
brought an end to these restrictions in
the remaining states. In states that de-
regulated earliest, states that relaxed
most broadly, and states that had few
geographic restrictions to begin with,
banks have been able to grow faster
and attain the critical mass to make
large out-of-state mergers.
Today the largest U.S. banks are located
in international banking centers, such
as New York or San Francisco, where
agglomeration economies are strong
and high demand for financial services
has allowed even purely local banks to
grow large, or in states like California
and North Carolina where geographic
regulations have historically been less
restrictive. For example, California
has never prevented its banks from
branching freely within its very expan-
sive borders, and North Carolina began
permitting (by interstate agreement)
its banks to operate affiliates virtually
anywhere in the southeastern U.S. over
a decade before Riegle–Neal. In con-
trast, Illinois’s strict unit banking laws
placed an effective upper bound on
Michael H. Moskow, President; Charles L. Evans,
Senior Vice President and Director of Research;  Douglas
Evanoff, Vice President, financial studies; David
Marshall, Vice President, macroeconomic policy research;
Daniel Sullivan, Vice President, microeconomic policy
research;  William Testa, Vice President, regional
programs and Economics Editor; Helen O’D. Koshy,
Editor; Kathryn Moran, Associate Editor.
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Research Department of the Federal Reserve
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authors’ and are not necessarily those of the
Federal Reserve Bank of Chicago or the Federal
Reserve System.
© 2004 Federal Reserve Bank of Chicago
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ISSN 0895-0164
City retained HQ City lost HQ
Year Bank City Bank City
1991 NCNB Charlotte C&S/Sovran Atlanta
1991 BankAmerica San Francisco Security Pacific Los Angeles
1993 Society Corp. Cleveland KeyCorp Albany
1994 BankAmerica San Francisco Continental Bank Chicago
1995 Shawmut National Boston/Hartford Fleet Financial Providence
1995 First Union Charlotte First Fidelity Philadelphia/Newark
1995 First Chicago Chicago NBD Bancorp Detroit
1996 Wells Fargo San Francisco First Interstate Los Angeles
1996 NationsBank Charlotte Boatmen’s Bank St. Louis
1997 First Bank System Minneapolis U.S. Bancorp Portland
1997 NationsBank Charlotte Barnett Banks Jacksonville
1997 First Union Charlotte CoreStates Philadelphia
1998 First Chicago NBD Chicago Bank One Columbus
1998 NationsBank Charlotte BankAmerica San Francisco
1998 Wells Fargo San Francisco Norwest Minneapolis
1999 Firstar Milwaukee Mercantile Bancorp St. Louis
2000 U.S. Bancorp Minneapolis Firstar Milwaukee
2000 Wells Fargo San Francisco First Security Salt Lake City
2000 FleetBoston Boston Summit Bancorp Princeton
2000 Fifth Third Bancorp Cincinnati Old Kent Financial Grand Rapids
2001 First Union Charlotte Wachovia Atlanta/Winston-Salem
2003 Bank of America Charlotte FleetBoston Boston
2004 J.P. Morgan Chase New York Bank One Chicago
NOTES: Mergers included if acquired bank had at least $20 billion of assets (2003 dollars). Bold type indicates which bank
or city was larger at the time of the merger. A slash (/) denotes dual headquarters.
SOURCES: Federal Reserve Bank of Chicago, bank merger database; Board of Governors of the Federal Reserve System,
consolidated financial statements FR Y-9C database; and Wall Street Journal.the size that Chicago banks could attain—
hence, when nationwide banking be-
came legal in the mid-1990s, Chicago
banks were at a disadvantage because
they lacked the critical mass and expe-
rience to participate fully in the wave
of acquisitions that followed.
Figure 3 lists in chronological order the
23 largest commercial bank mergers
since 1991 that combined banks head-
quartered in different cities. At first
glance it appears that bank size was the
strongest determinant of headquarters
location—the post-merger headquarters
stayed in the city of the larger bank (in
bold) in 19 of the 23 mergers. A closer
look, however, reveals the importance
of city size, agglomeration economies,
and the lasting effects of restrictive geo-
graphic regulations. In 12 of the 23
mergers, the larger of the two cities (in
bold) retained the post-merger head-
quarters, while in 10 of the remaining
11 mergers the city that retained its
headquarters was either Charlotte, NC,
or San Francisco, CA—as discussed above,
banking center cities in which banks
were relatively less handicapped by geo-
graphic regulation. The lone exception
is the Firstar–Mercantile merger in
which the headquarters was moved from
St. Louis to Milwaukee (the smaller of
the two cities)—but this was undone just
a year later when U.S. Bancorp purchased
Firstar and moved it to Minneapolis
(the largest of the three cities).
Implications for the Chicago economy
The ongoing consolidation of the finan-
cial sector has reduced the number of
large U.S. banks and increased the con-
centration of large bank headquarters
in the largest cities of the country. More-
over, because the unwinding of the old
(regulated) industry structure is not
complete, we are likely to witness more
bank mergers and further movement of
large bank headquarters to large cities.
The economic impact on a city that los-
es a major banking headquarters depends
primarily on how the post-merger com-
pany allocates banking functions across
its new geographic space. Early indica-
tions are that the retail banking functions
of J. P. Morgan Chase will be managed
from the (former) Bank One offices in
Chicago, which will exploit Bank One’s
relative expertise in retail banking. Al-
though Chicago will lose a considerable
number of capital markets and other
bank-related jobs, it would be prema-
ture to conclude that this merger marks
the decline of Chicago as a financial
center. Indeed, Eurex’s decision to lo-
cate its new all-electronic derivatives
exchange, Eurex US, in Chicago indi-
cates otherwise.
Finally, what about attracting and retain-
ing nonfinancial headquarters? Does
the loss of Bank One make Chicago a
less attractive headquarters city in gen-
eral? The evidence suggests otherwise.
While large banking companies have
been relocating to large “banking cen-
ter cities,” large nonfinancial firms have
been spreading out across medium-sized
cities. Although the agglomeration ben-
efits of a large city location continue to
be important for banking companies,
the improved ability to communicate,
pass information, and travel across long
distances means that for large nonfinan-
cial companies being located near their
financial services providers has become
less important—perhaps signaling a
reduction in the importance of city size
for delivering agglomeration economies.
Other city characteristics matter more
for headquarters retention. For example,
Diacon and Klier (2003) find that cities
with well-educated work forces, good
access to international transportation,
and reputations as global business cen-
ters are more likely to retain large non-
financial company headquarters.2 These
and other characteristics will play im-
portant roles in determining Chicago’s
future as a headquarters city.
1 Thomas Klier and William Testa, 2002,
“Location trends of large company head-
quarters during the 1990s,” Economic Per-
spectives, Federal Reserve Bank of Chicago,
Second Quarter, pp. 12–26.
2 Tyler Diacon and Thomas Klier, 2003,
“Where the headquarters are—Evidence
from large public companies 1990–2000,”
Federal Reserve Bank of Chicago, working
paper, No. 35.

Why Bank One left Chicago: One piece in a bigger puzzle

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