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FEDERAL RESERVE BANK OF DALLAS Issue 2 March /April 2001 Southwest Economy ..................... Texas Economy Cools in 2000 The Texas economy has known nothing but growth for more than a decade now. Steady employment gains and an increasingly diverse marketplace have been the hallmarks of this ex- pansion. After 13 years of positive job growth, Texas came through once again. The Lone Star State added over 338,000 jobs last year despite a sizable falloff of domestic activity in the closing months of 2000. However, Texas did not escape the economic softening in 2000 unscathed. Every sector except finance, insurance and real estate (FIRE) saw weakened employment growth during the second half. And statewide nonfarm employment growth waned from 5.1 percent in the first quarter to 2.8 percent in the fourth (Chart 1 ).1 Several factors curbed the rate of economic growth during the latter half of 2000. Higher inter- est rates and weakened U.S. and world economies negatively affected the Texas business environ- ment. Excess capacity and increased input costs hurt the chemical and refining sector, and high technology suffered as sales of computers, semi- conductors and telecommunications equipment ebbed from high levels.2 Consumer confidence took several hits toward (Continued on page 2) ................... Bank Competition in the New Economy Numerous economic forces, including technological innovations and pru- dent monetary and fiscal policy, account for the unprecedented growth and prosperity experienced over the past decade. However, an important, and often overlooked, factor is the relative stability and health of the banking system. A healthy, vibrant banking sector helps ensure that financial capital INSIDE: is directed to those businesses that would benefit most, thereby enhancing Why Free Trade the nation’s economic well-being. Although the banking system has not experienced major problems over in the Americas? the past decade, it has undergone substantial changes; in particular, its market structure has been evolving. This evolution is due primarily to two factors: (1) financial deregulation, in particular the repeal of restrictive laws; and (2) technological innovations related to computers and the Internet. Both fac- tors have the potential to produce long-lasting effects on market structure not (Continued on page 6) Chart 1 drilling rigs continued to rise, exceeding 400 by year-end. Texas Job Growth in 2000 Energy companies had a heyday in Percent change, annualized 2000. Many oil firms, including Irving- 9 based Exxon Mobil Corp., realized January–June July–December 8 record fourth-quarter profits. With an increase of 124 percent over 1999, the 7 firm’s 2000 net income gain was the 6 largest ever recorded by a U.S. corpora- 5 Q1 tion.3 Such improvements did not go unnoticed on Wall Street; energy sector 4 Q2 Q3 investments garnered 10.2 percent in 3 aggregated returns during 2000.4 Q4 2 Only 5.2 percent of Texas GSP comes from the oil and gas industry 1 (down from about 20 percent in the 0 early 1980s), but high prices improved Construction Mining TCPU Manufacturing Services Trade FIRE Total nonfarm the financial viability of many energy NOTE: TCPU is transportation, communications and public utilities; FIRE is finance, insurance and real estate. SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas. firms and helped buttress the economy against slowing in other sectors. There was a downside, however; elevated oil and gas prices boosted production costs for chemical-manufacturing firms, pun- the end of the year as households began employment rate remained in check at ishing earnings. to internalize the effects of weakened 3.7 percent. investment portfolios and diminished Exports and Mexico equity values. Spending on consumer Energy Texas trade conditions continued goods fluctuated as the so-called wealth Fervent world demand and OPEC very strong in 2000. Total exports during effect adjustment began to work its way production controls combined to send the first three quarters exceeded $78 through the Texas economy. energy prices through the roof in 2000. billion, a 24.7 percent increase over the Despite second-half weakening, Texas Oil prices tripled from 1998 levels, and same period in 1999 and the largest fared well overall. Annual employment natural gas prices quadrupled from 1999. percentage gain since 1987. Texas ex- growth registered a lofty 3.7 percent gain The industry woke up to the high prices: ports accounted for 13.4 percent of in 2000, easily surpassing the national Texas oil and gas employment grew 3.6 total U.S. exports in 2000 (second only figure of 1.6 percent. While high energy percent (4,900 jobs) on the year. Addi- to California’s 15.2 percent share). Put a prices are generally unfavorable to the tionally, the number of oil and gas different way, over $1 in every $8 of U.S. business climate, they continue to be a positive force for Texas by helping pump up cash flows and employment for oil and gas companies. Texas exports Chart 2 to Mexico, which make up about half the Texas Employment in Selected Sectors total, surged nearly 31 percent in the first Index, January 1998 = 100 three quarters over the same period in 125 1999. Texas exports to Asia improved dramatically over 1999, increasing more 120 Construction than 50 percent in the first three quarters of 2000. 115 The construction sector added Service-producing 110 30,000 jobs in 2000, and the value of res- Total idential building contracts increased 14.7 105 percent (Chart 2 ). Even manufacturing employment, which has been anemic 100 Manufacturing for three years, edged higher by 14,700 jobs (1.4 percent)—a good showing 95 for an industry that lost 178,000 jobs 90 nationwide. Gross state product (GSP) 1998 1999 2000 2001 increased 2.7 percent in the first three SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas. quarters of 2000, and the December un- 2 FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH /APRIL 2001 Chart 3 tributed to slowing in the Texas tech- nology sector. Texas Exports by Region Initially, stock values took the brunt Real seasonally adjusted index, 1997:1 = 100 of the blow, but by midyear the damage 205 Other had bled over into employment levels as 13% well. The stock market served the sector 185 Mexico a severe comeuppance in March and Asia Mexico 165 19% 46% April, and many firms saw their equity Asia values plummet. By year-end, aggregate Euroland 145 7% Latin Total returns for technology-based portfolios America Canada Euroland were all in the red. Nationwide, semi- 5% 10% Canada 125 conductors were down 19.8 percent, telecom 33.1 percent, and online retail 105 Latin America and information 47.3 percent and 54.1 Other 85 percent, respectively.8 Texas employment in durable manu- 65 facturing (which includes high tech) 1997 1998 1999 2000 started the year out strong, increasing NOTES: Euroland comprises Denmark, Switzerland, Greece, Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. Latin America comprises Argentina, Brazil, Colombia and Venezuela. Asia comprises China, Hong 4.9 percent in the first three months. But Kong, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. subsequent quarters exhibited steady de- SOURCE: Massachusetts Institute for Social and Economic Research. clines in the growth rate; by the fourth quarter, job growth had slowed to 1.1 percent. goods shipped from U.S. ports came jobs) from January through October. Metropolitan Areas from Texas. Trade with Mexican companies contin- Texas is a summation of its parts; Export trade makes up 14 percent of ued to revitalize Texas’ border cities. In five major metropolitan areas make up Texas’ total economic output. The state fact, 90 percent of El Paso’s exports went almost 70 percent of the state’s total ranks third in per capita exports, behind to the maquiladoras in 2000. The value employment. Job growth was positive Vermont and Washington. Three indus- of total trade activity was $35 billion in every major area in Texas in 2000 tries made up the lion’s share of Texas for Laredo, $16 billion for El Paso and (Charts 4 and 5 ). Here’s how each metro exports in 2000: electronics accounted $5.7 billion apiece for Brownsville and area fared for the year. for 26.8 percent of the total; industrial Hidalgo.6 Austin. Predictions that Austin’s super- equipment (including computers), 17.6 tight labor market would choke job percent; and chemicals, 14.8 percent. High Technology growth in 2000 seemed unfounded. Much of the state’s international out- High-tech manufacturing has made Nonfarm employment surged ahead put goes directly to Mexico (Chart 3 ). steady gains in Texas in the past decade.7 another 4.5 percent (29,500 jobs) despite Thus, the overall economic climate in The cumulative output of firms like an average unemployment rate of 2 per- Mexico is key to maintaining the good Texas Instruments, Dell Computer Corp. cent. The unemployment rate held times in Texas foreign trade. Texas’ and Compaq Computer Corp. now steady at 2 percent from July to Novem- southerly neighbor did not disappoint in makes up 4.9 percent of Texas GSP, a ber before dropping to an exceptional 2000, swallowing up $38.3 billion in marked increase from the 1.7 percent 1.7 percent in December. While job exports over the first three quarters. This share in 1990. Not only has high tech growth fell off in September and Octo- translated into a 31 percent jump over contributed more to GSP, but expansion ber, it recovered in November and De- 1999. Real Mexican GDP grew 5.3 per- of the industry has fueled much of the cember, increasing 5.1 percent and 4.3 cent in 2000.5 statewide economic growth over the past percent, respectively. Texas companies shipped $10.8 bil- decade as well. The high-tech sector A 10 percent jump in durable goods lion in electronic goods and $5.4 billion accounts for over 10 percent of Texas employment (7,200 jobs) and a 7.5 per- in transportation equipment to Mexico GSP growth in the past 10 years. cent increase in wholesale trade employ- in the first three quarters of 2000— The year 2000 turned out to be quite ment led job growth in 2000. Services increases of 38 percent and 20 percent, a speed bump for high tech in Texas, employment increased 6.4 percent, and respectively, over a year earlier. Mexico though. Telecommunication service pro- transportation, communications and pub- also bought $3.6 billion in industrial viders substantially underperformed the lic utilities (TCPU) employment grew 3.6 machinery and equipment and $2.5 bil- market, which led to widespread con- percent. lion in chemicals from Texas. solidation and company failures. Weaker High demand for software, semicon- Mexico’s maquiladoras realized strong than expected earnings among computer ductors and consumer electronics sus- growth in 2000. Total employment in the and semiconductor firms and a bubble tained the Austin business environment sector increased 15.9 percent (128,799 bursting in the Internet sector also con- in early 2000. Fallout from the 1997 FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH /APRIL 2001 3 Chart 4 air and ground freight business declined in the wake of a slowing national econ- Employment Level Increases omy. January– December 2000 (in thousands) Homebuilding in Dallas was particu- 100 92.9 larly strong in 2000. Single-family build- 2000 Employment Shares 90 ing permits increased 16.3 percent from El Paso 80 Rest of Texas 3% January to November.10 An oversupply in 13% Houston Oil Patch 22% 73.2 the multifamily market squelched apart- 70 1% ment building, however. Multifamily per- Dallas Farm Belt 60 22% 3% mits dropped 40.5 percent on the year. San Antonio 50 Central 7% While increased energy prices translated 3% 40 Austin Border 3% into statewide growth in mining em- Fort Worth– 7% Arlington Gulf Coast 27.4 29.5 ployment, these jobs did not show up in 30 8% North Texas 3% 5% Dallas. Mining employment declined 4.6 20 18.5 16.4 percent on the year because of industry 10 4.5 5 5.2 5.9 7.6 consolidation and firm relocations to 2 0 Houston. Though not as extreme as Oil Patch El Paso Gulf Coast North Texas Central Farm Belt San Antonio Border Fort Worth– Arlington Austin Houston Dallas Austin’s, the Dallas labor market was among the tightest in the state, register- NOTES: Border comprises Laredo, Brownsville and McAllen. Central comprises Waco, Bryan and Killeen. Farm Belt comprises Abilene, San Angelo, Amarillo and Lubbock. Gulf Coast comprises Brazoria, Beaumont, Galveston, Corpus Christi and Victoria. North Texas ing a 2.8 percent unemployment rate in comprises Texarkana, Longview, Tyler, Sherman and Wichita Falls. Oil Patch comprises Midland – Odessa. December. SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas. The Fort Worth economy plowed ahead in 2000 and continues to benefit from economic synergies with Dallas. Overall nonfarm employment grew a Asian financial crisis had a less-than- ment grew a whopping 4.8 percent solid 3.5 percent (27,400 jobs) for the expected effect on the economy, thanks (92,900 jobs) from January to December. year. Construction employment out- to pent-up demand for high-tech goods. TCPU employment led all sectors, paced all other sectors in Cowtown, Nevertheless, Austin was not immune with an 8.3 percent growth rate in 2000. increasing 11.8 percent. FIRE jobs rose to high-tech market difficulty. As the Employment in construction and services 7.4 percent; TCPU employment, 4.7 per- dot.com center of Texas, Austin saw followed, increasing 7.1 percent and 6 cent; and wholesale trade employment, three major Internet companies fold in percent, respectively. Dallas continued 3.7 percent. 2000. Eight more are expected to follow its role as a major distribution center and Recent investment in the Fort Worth in 2001. retail outlet. As a result, jobs in both Alliance Airport and the adjacent indus- Falling equity prices may have wholesale and retail trade increased trial park has catalyzed an increase in affected spending for some high-end more than 4 percent. But later in 2000, economic activity. High-tech prospects products late in the year. Sales of homes priced above $500,000 dropped off near the end of 2000, suggesting that New Economy employees were not “feeling” Chart 5 as rich. Texas Total and Major Area Employment The economic and high-tech situa- Index, January 1998 = 100 tion in Austin is still very good, how- 118 ever. There seemed to be no slowing Austin 116 in business investment; venture capital Dallas funding for the first three quarters of 114 Fort Worth–Arlington 2000 reached a record $1.3 billion on 112 Texas Houston 102 deals, up from $407 million on 75 110 San Antonio deals in the first three quarters of 1999.9 El Paso 108 Dallas/Fort Worth. Dallas’ favorable business environment and large airport 106 hub, combined with a growing national 104 economy, kept the city on a solid growth 102 path throughout 2000. The local econ- 100 omy profited from major construction 98 activity, early strength in the high-tech 1998 1999 2000 sector and robust international and SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas. domestic trade. Total nonfarm employ- 4 FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH /APRIL 2001 in Fort Worth are strong and continue to below the national rate of 4 percent. winds, however. Statewide growth is gain steam, as evidenced by a recent While higher oil prices stoked eco- expected to surpass that of the United American Electronics Association study nomic activity in Houston, employment States as a whole in 2001. that pinpointed the combined Dallas/ growth in the energy sector was some- Fort Worth area as the fastest-growing what muted in 2000. Mining employ- —John Thompson high-tech center in the country. How- ment (which includes oil and gas ex- ever, Fort Worth saw employment losses traction) grew a moderate 2.9 percent, Thompson is an assistant economist in the in mining and manufacturing in 2000. compared with 3.6 percent statewide. Research Department at the Federal Reserve The December unemployment rate regis- Construction employment grew 6.4 per- Bank of Dallas. tered 2.6 percent. cent. Single-family permits rose 6.2 El Paso. Spurred by steady growth in percent through November, as Houston Notes the maquiladoras, increases in the num- experienced rather strong demand for Thanks to Bill Gilmer, Keith Phillips and Lucinda Vargas for their input and to Mine Yücel and Steve Brown for helpful comments. ber of call centers and high construction new homes. However, multifamily per- 1 All percent changes in employment levels are annualized; seasonal activity, El Paso’s economy continued to mits dropped 25.6 percent over the and other adjustments by the Federal Reserve Bank of Dallas. chug along at a fairly strong pace. Over- same period. 2 Sigalla, Fiona, and Mine K. Yücel (2001), “Another Great Texas all nonfarm employment grew 1.8 per- San Antonio. Military downsizing and Boom,” Federal Reserve Bank of Dallas Southwest Economy, Issue 1, cent (4,500 jobs) in 2000. Much of this declines in mining and manufacturing January/February, 1–5. 3 Some of the record increase in net income emanated from the pro- growth was fueled by firms tied to the employment dampened San Antonio’s ceeds from asset sales related to the 1999 merger of Exxon Corp. and maquiladora industry, as jobs in trans- economic growth throughout most of Mobil Corp. portation, warehousing, finance, account- 2000. However, relative strength in the 4 These figures from Stock Performance by Industry, The Year in Review, ing and customs were rapidly added to service-producing sector kept the local 2000, Morningstar, Inc. 5 the economy. economy moving. The combined effect Seasonal adjustment by the Federal Reserve Bank of Dallas. 6 These figures, from Texas A&M International University’s College of TCPU employment rose 9.2 percent of these forces put total nonfarm em- Business Administration and Graduate School of International Trade, on the year, while services employment ployment growth at 2.3 percent (16,400 measure the U.S. dollar values of total trade activity through the bor- increased 3 percent. The apparel industry jobs) on the year. As in most Texas met- der cities, including transshipments. in El Paso continues to suffer in NAFTA’s ropolitan areas, San Antonio’s labor mar- 7 High-tech manufacturing is defined here by Standard Industrial Clas- wake, but emerging maquiladoras have ket was squeezed tight, with the unem- sifications 357, 366 and 367. 8 From Stock Performance by Industry, The Year in Review, 2000, Morn- absorbed many displaced workers. ployment rate measuring 3 percent in ingstar, Inc. El Paso is a growing hot spot for call December. 9 PricewaterhouseCoopers, MoneyTree U.S. Report, Third Quarter 2000. centers. Recent investments by insurance Kelly Air Force Base is set to shut 10 Building permit figures and construction contract values are measured and telemarketing firms pushed call down the last of its operations in 2001. in five-month moving averages. center employment to about 9,300 work- Employment at the facility has dropped ers. The new centers are increasing their from 20,000 in the early 1990s to about reliance on modern information tech- 2,400 employees, who will leave over nology and are demanding employees the next several months. Despite this with better skills. As a result, wages loss and declines in manufacturing in business services have been climb- employment, the San Antonio economy ing. Construction employment increased is in good shape. 5.5 percent, and retail trade grew 1.1 Wholesale trade employment grew percent, but manufacturing employ- 3.2 percent in 2000, and retail trade ment declined. The December unem- increased 2.7 percent. Services employ- ployment rate came in at a record low ment grew 2.9 percent. The peso’s cur- 7.3 percent. rent strength relative to the dollar, com- Houston. The Houston economy con- bined with the near completion of tinued to ride a wave triggered by the construction at the downtown conven- coincidence of a strong U.S. and global tion center, promises to stimulate retail economy and high energy prices. During sales. In addition to a solid trade sector, 2000, Houston nonfarm employment business services employment will con- grew 3.6 percent, adding 73,200 jobs to tinue to grow as call centers locate in the local economy. Employment gains San Antonio. were led mostly by the service-produc- ing sectors, with retail trade and TCPU Outlook both increasing 3.9 percent and FIRE Moderated economic growth is antici- growing 2.5 percent. Services employ- pated in 2001, with a slowing U.S. econ- ment rose 3.6 percent and manufactur- omy the primary threat to Texas. High ing employment 3 percent. Houston’s energy prices and sustained export trade unemployment rate fell to 3.5 percent with Mexico and Asia should buffer in December, a half percentage point the state against unfavorable economic FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH /APRIL 2001 5 Bank Competition in the New Economy Indonesia and Russia, were all related to unhealthy, fragile banking sectors. (Continued from front page) In particular, a comparison with Japan highlights the importance of banking to economic health. While the United States only in the banking sector, but also in term, whether increased competition will experienced many bank failures during the the financial sector, which includes follow; greater access to a market does savings and loan crisis of the late 1980s, it banking, insurance, securities underwrit- not guarantee new entrants success. established institutions, like the Resolution ing and similar businesses. Trust Corp., to quickly deal with the failed This article explores the likely impact An Engine of Economic banks. Once the banking system was of these recent events on both concen- Growth and Stability restored to health, economic growth tration and competition within the bank- Although banking has not generated ensued. In contrast, Japan did not swiftly ing and financial sectors. It is important the headlines garnered by the Internet reform its banking sector after suffering to distinguish between concentration and phenomenon, it has been crucial to sus- many large bank failures in the 1990s, and competition. Concentration refers to the taining the New Economy. Banks have the banking system’s ongoing ills have market share held by the largest produc- traditionally played the pivotal role in contributed to Japan’s 10-year malaise. ers in an industry; competition refers to a providing financial capital via loans. Given the importance of the banking company’s ability to dictate prices. Over the past few decades, however, sector to economic growth, it is vital to Although the two are linked, highly con- firms have gained access to a variety of understand how financial deregulation, centrated industries are not necessarily financing sources (Chart 1 ). As a result, with the resulting consolidation in the less competitive. For example, although banks have adapted, with larger banks banking sector, and technological evolu- there are fewer than 10 major banks in now also providing venture capital for tion, especially the rise of the Internet, Canada (high concentration), the bank- start-ups and securities underwriting for will affect the economy. In particular, how ing system is extremely competitive initial public offerings and with smaller does the degree of competition within the because all banks compete against each community banks still providing loans banking system affect economic growth other in every region of the country. for local businesses. and prosperity? And, will the specific The elimination of some legal re- Bank stability has also been critical events listed above affect the level of strictions on banks’ activities as a result of to our recent prosperity. During much of competition in the financial sector? financial deregulation has contributed to the 19th and early 20th centuries, every numerous mergers and fewer banks. The major recession was preceded by bank Financial Sector Structure impact has been to increase concentra- failures. Since the inception of the Fed- and Economic Growth tion in the banking industry without less- eral Reserve System in 1914, both the Although recent mergers and legisla- ening competition between banks. The banking system and the economy have tion are unlikely to lead to a monopoly effect of technological innovations is less been far less volatile. The importance of in financial services, it is, nevertheless, clear. While better technology generally a stable banking sector was also demon- important to understand the effects of helps lower costs, allowing easier entry strated recently when economic prob- reduced competition. There are both by new competitors, it is unclear, long lems in other countries, such as Japan, detrimental and beneficial aspects of reduced competition in the financial ser- vices industry.1 As economics textbooks teach, re- Chart 1 duced competition in any market harms Source of Funds in the United States the macroeconomy by raising prices and Percentage of assets held reducing output. In banking, this might translate into higher fees, higher loan Other 3.1% Other 7.4% interest rates, lower deposit interest rates Thrifts Thrifts Commercial 12.3% 4.4% banks and fewer new services. Higher loan 22.1% rates result in less productive and more Insurance risky projects obtaining funding and companies 14.8% increase the likelihood of bankruptcies 1948 Commercial banks 1999 and defaults. Lower interest rates on Insurance companies 55.9% deposits and higher fees for services 24.3% reduce the savings available to finance Investment Pension funds investment. These distortions on fees and Investment companies 29.6% companies 21.7% interest rates reduce productive invest- 1.3% Pension funds 3.1% ment, lessen growth and lower our stan- SOURCES: Anthony Saunders and Ingo Walter (1996), Universal Banking: Financial System Design Reconsidered (Chicago: Irwin Professional dard of living. Publishing); Federal Reserve Board of Governors. The benefits of a less competitive banking system are less well known. 6 FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH /APRIL 2001 Reduced competition helps overcome the Table 1 biggest problem facing borrowers and lenders: a lack of information. Usually, Dollar Value of Recent U.S. Bank Mergers the largest costs banks incur when mak- Asset value of ing loans come from obtaining informa- acquired/merged firm tion about prospective borrowers. With a Acquired or merged bank (in billions of dollars) competitive banking system, it is likely Total value for 1998 (Top 50 bank holding companies) 1,017 that more than one bank will seek infor- Largest mergers mation about a borrower, a cost duplica- Travelers Group Citibank 311 tion that wastes resources. Also, once a NationsBank BankAmerica and Barnett Banks 304 Bank One Corp. First Chicago NBD Corp. and 132 borrower secures a loan, it is possible First Commerce Corp. for the funds to be redirected to highly risky or inappropriate projects. Monop- Total Value for 1999 (Top 50 bank holding companies) 309 Largest mergers oly banks, in general, can exert greater Deutsche Bank Bankers Trust 156 influence over how funds are used, since Fleet Financial Group BankBoston Corp. and Matewan BancShares 76 the borrower has no other access to Firstar Corp. Mercantile Bancorporation 36 future funds. Total Value for 2000 (Top 50 bank holding companies) 494 Whether the costs of a less competi- Largest mergers tive banking system outweigh the bene- Chase Manhattan Corp. J.P. Morgan & Co. 282 fits depends on the severity of the infor- Citigroup Inc. Associates First Capital Corp. 93 mation problems. In the United States, Wells Fargo & Co. First Security Corp. 23 where information retrieval is relatively SOURCE: Federal Reserve Board of Governors. inexpensive, the costs from a reduction in competition would likely outweigh the benefits, thereby adversely affecting the nation’s macroeconomic well-being. 1997, banks have been allowed to own Numerous studies have analyzed the and operate branches in different states. effects of mergers on concentration in Will Deregulation Equally important, though, the recent banking.3 Mergers have had little impact Lessen Competition? wave of mergers is the result of banks on local market concentration. At the Given that less competition is detri- attempting to achieve larger, more cost- national level, mergers have increased mental to the overall economy, what are efficient organizations. For example, concentration somewhat—although not the likely net effects on the degree of mergers often eliminate duplicate serv- enough to dramatically alter the indus- competition as a result of recent deregu- ices such as branches, automated teller try’s competitive nature. In addition, the lation and technological innovation? machines and information technology- U.S. banking industry remains much less Financial deregulation, especially laws related services. concentrated than that in many coun- passed in 1994 and 1999, has spurred considerable merger activity within the banking sector and is also likely to lead Table 2 to consolidation throughout the financial sector. Summary of Federal Banking Legislation Banking Sector Consolidation. Like Legislation Impact many areas of the economy, the banking Federal Reserve Act of 1913 Established the Federal Reserve System sector has experienced numerous merg- McFadden Act of 1927 Placed national and state banks on equal footing ers of late, notably Citicorp with Travel- regarding branching; prohibited banks from branching ers Group, NationsBank with BankAmer- across state lines ica and, most recently, Chase Manhattan Banking Act of 1933 and 1935 Established the Federal Deposit Insurance Corp.; with J.P. Morgan. These mergers have (Glass – Steagall) separated commercial and investment banking involved not only the largest banks but Bank Holding Company Act of 1956 Gave the Federal Reserve regulatory oversight and also numerous other banks with consid- and Douglas Amendment of 1970 established rules governing bank holding companies erable asset values (Table 1 ). Financial Institutions Reform, Recovery, Established the Office of Thrift Supervision and Resolution Many recent mergers have been made and Enforcement Act of 1989 Trust Corp. to clean up savings and loan crisis; possible in part by the Riegle –Neal provided funding to resolve savings and loan failures Interstate Banking and Branching Effi- Riegle – Neal Interstate Banking and Allowed interstate banking and branching across ciency Act of 1994. This law repealed Branching Efficiency Act of 1994 state lines the McFadden Act of 1927 and Douglas Gramm – Leach – Bliley Financial Services Eliminated barriers separating commercial banking, Modernization Act of 1999 investment banking and insurance Amendment of 1970, which curtailed interstate banking.2 (Table 2 summarizes SOURCE: Mishkin, Frederic S. (1998), The Economics of Money, Banking, and Financial Markets, 5th ed. (New York: Addison –Wesley). some of this federal legislation.) Since FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH /APRIL 2001 7 tries. Finally, increased concentration also leads to greater banking stability. Mergers and New Bank Formation Having more regional and national Although mergers over the past decade have reduced the number of banking institutions in the banks and fewer local banks should United States, the increase in bank mergers in the second half of the 1990s also coincided with an reduce the incidence of bank failures increase in new bank charters. Economic research has yet to establish a conclusive connection (causality) because larger banks tend to have more between these two events. Seelig and Critchfield (1999) find that mergers do not lead to increased bank diversified portfolios, which can better formation. Consolidation within a local market results in fewer, more concentrated banks that can more absorb adverse economic shocks. easily act to bar potential entrants. As for competition, there are few However, Berger et al. (1999) find that mergers can increase new bank formation. Mergers often involve acquisition of smaller banks by larger banks or local banks by distant banks, leading to a reduction signs that banking is becoming less com- in personal, local services and dissatisfaction among the acquired bank’s customers. This provides a petitive. Recent studies find little evi- market for new, local banks to serve the dissatisfied constituents. Keeton (2000) also finds that mergers dence of a decrease in the number of are likely to lead to new bank formation.1 This relationship is strongest when mergers involve smaller small business loans, of higher prices for banks being acquired by larger banks or local banks by distant banks. services or of increased profits resulting Thus, merger activity appears to provide the stimulus for new bank formation. This is an additional from a more concentrated market —all reason why the banking sector will continue to be competitive in spite of (or as a result of) recent merger indicators of a less competitive market.4 activity. Even if the industry were to become 1 This article provides a good overview and explanation of the other two articles cited above. highly concentrated, it is doubtful that this would have a negative effect on bank competition. It is probable that our scale that motivate mergers solely petition is an open question, especially banking system, like Canada’s, would between banks. Recent studies conclude given the recent rash of business failures have fewer (potentially more efficient) that banks benefit from diversifying into in the high-tech sector. Thus, the overall banks, but still be highly competitive. certain types of insurance underwriting impact of technological change on com- (See box titled “Mergers and New Bank and that investments in insurance under- petition in the financial system is Formation.”) writing and securities brokerage can re- ambiguous. Financial Sector Consolidation. In duce the probability of insolvency.6 One-Stop Shopping. Technological addition to recent banking mergers, con- In the end, consolidation will likely advances, combined with recent legisla- solidation across the financial sector is help to create a single, unified financial tive reforms, make it easier and more likely as a result of the passage of the market where firms and individuals can efficient for firms to obtain financing Gramm–Leach–Bliley Financial Services address all their financial needs at a from a single entity capable of handling Modernization Act of 1999, which re- single integrated financial company. Eco- everything from loans to stock offerings pealed parts of the Glass–Steagall Act nomic research suggests that removal of to insurance. This one-stop shopping (officially known as the Banking Act of statutory barriers between banking, insur- should reduce the costs firms currently 1933). Glass–Steagall had separated bank- ance and securities will result in fewer incur finding various companies to meet ing, insurance and investment banking banks but a more competitive financial these different needs. It will also lessen into three distinct, nonoverlapping sec- system.7 As with mergers within the bank- the information-gathering costs finance tors (for example, banks could not offer ing sector, consolidation will likely occur companies incur by facilitating more insurance or underwrite securities and within the financial sector without an efficient exchanges of information. Both vice versa). Although the legal barriers appreciable loss of competition. of these benefits strengthen the com- between these three activities had eroded petitive environment. These cost-saving over time, they still prevented banks Technology, Banking benefits also apply to consumers, who, from completely entering the other two and the New Economy for example, can use the Internet to find businesses. For example, although Citi- In addition to the legal reforms, multiple rates for car loans and mort- corp (a bank) and Travelers Group (an another major force affecting the bank- gages. insurance company) merged in 1998, if ing industry is the rapid advancement in However, there are two other issues not for the repeal of Glass –Steagall, Citi- technology and the Internet. Consolida- to consider when examining competi- group, the resulting company, would have tion in financial markets, along with tion. First, the creation of integrated been required to divest its insurance technological advances, may bring about finance companies may result in a few underwriting business in a few years. one-stop financial shopping at a poten- extremely large, national financial com- The Financial Services Moderniza- tially limited number of large, national panies but eliminate small local firms tion Act of 1999 will likely foster a con- financial institutions. If this happens, it is from the industry because they lack solidation of the financial sector as not clear how concentration in the in- economies of scale. These few large firms banks, securities firms and insurance dustry will affect competition. In addi- may, or may not, compete fiercely across companies combine.5 Mergers involving tion, the Internet is creating considerable all local markets. Second, it is not clear banks, insurance companies and invest- competition to traditional banks from whether these integrated financial com- ment banks will be motivated by poten- firms both in and out of the financial sec- panies will actually emerge and domi- tial economies of scope and diversifi- tor. Whether these new firms can remain nate the market. With lower search costs, cation rather than by the economies of in business and provide sustained com- both businesses and consumers may find 8 FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH /APRIL 2001 it cost-efficient to continue using differ- began offering this service. Thus, in the 4 Although fees for some services (ATM, overdraft and so forth) have ent financial companies to handle their future, traditional banks could face been rising, these increases are not directly linked to greater concen- tration and less competition in the banking sector. various needs. This would eliminate the greater competition sparked by new tech- 5 As of March 2, 2001, the Federal Reserve Board had granted 509 firms anticipated savings derived from having nology and the Internet. However, the financial holding company status, a first step toward being allowed to integrated financial companies. Conse- long-term viability of these new com- combine banking, insurance and securities underwriting. quently, the impact on competition is petitors, as well as traditional banks’ for- 6 For recent work regarding the impact of banks’ expansion into insur- unclear. ays into the Internet, remains uncertain. ance and securities underwriting, see Laderman (2000) and the refer- ences therein. The Internet and Outside Competi- 7 See Boot and Thakor (2000). tion. The Internet and new technologies An Evolving, Competitive 8 Examples of Internet-only banks include Net.B@ank and First Internet may also increase competition by making Banking System Bank of Indiana; an example of a nonbank is Sony; examples of it harder to exclude new entrants. New An important, although often over- traditional banks include Citigroup’s Citi f/i and Bank One’s Wing- technology makes both workers and looked, source of our recent economic spanbank.com. North Fork Bancorporation is an example of a bank that decided against an Internet bank due to cost constraints. Finally, machines more efficient, thereby reduc- prosperity has been our healthy and Citigroup’s Citi f/i is an example of an Internet-only bank that has been ing fixed costs, start-up costs and operat- stable banking sector. While avoiding absorbed by its bricks-and-mortar parent company. ing costs. This makes it easier for poten- major problems, the banking and finan- tial new competitors to enter a market. cial sectors have been subject to numer- References With the advent of Internet banking, ous changes that have affected their Berger, Alan N., Seth D. Bonime, Lawrence G. Goldberg and new banks (both large and small) are underlying structure. Lawrence J. White (1999), “The Dynamics of Market Entry: The able to compete against the more tradi- The two major forces affecting com- Effects of Mergers and Acquisitions on De Novo Entry and tional bricks-and-mortar banks. In the petitiveness have been financial deregu- Small Business Lending in the Banking Industry,” Board of last two to three years, the banking sec- lation and technological innovation. As a Governors of the Federal Reserve System, Finance and Eco- tor has seen the formation of stand-alone result of deregulation, merger activity nomics Discussion Series no. 1999-41, July. Internet-only banks, nonbanking busi- within the banking sector will continue, nesses forming Internet banks and large, albeit at a slower pace, while the extent Boot, Arnoud W.A., and Anjan V. Thakor (2000), “Can Relation- traditional banks forming Internet-only of merger activity in the broader finan- ship Banking Survive Competition?” Journal of Finance 55 banks. Thus, it has already become cial sector is still unclear. Although these (April): 679–713. extremely hard to exclude new banks consolidations are likely to result in a DeYoung, Robert (1999), “Mergers and the Changing Land- from a market. However, merely having more concentrated banking sector, the scape of Commercial Banking (Part I),” Federal Reserve Bank of access to the market is not sufficient impact on financial market competition Chicago Chicago Fed Letter, No. 145, September. to guarantee competition. Some smaller will probably be negligible. Mergers will banks have decided not to form Internet- lead to fewer, larger banks that compete Guzman, Mark G. (2000), “The Economic Impact of Bank Struc- only banks because they do not have the fiercely across national markets and may ture: A Review of Recent Literature,” Federal Reserve Bank of resources to compete. Also, many Inter- spur new, smaller competitors at the Dallas Economic and Financial Review, Second Quarter, 11–25. net-only banks have either merged, local level. Keeton, William R. (2000), “Are Mergers Responsible for the exited the market or been swallowed up The effects of consolidation may Surge in New Bank Charters?” Federal Reserve Bank of Kansas by more traditional banks.8 also be more than offset by the increased City Economic Review, First Quarter, 21–41. In addition to competing with Inter- competition stemming from the Internet net start-ups, traditional banks are begin- and new technologies that make it easier Laderman, Elizabeth S. (2000), “The Potential Diversification ning to face competition from non- for both nontraditional banks and non- and Failure Reduction Benefits of Bank Expansion into Non- financial sources, including AOL Time bank firms to compete with more tradi- banking Activities,” Federal Reserve Bank of San Francisco Warner, Microsoft Corp., Yodlee and tional banks. Working Paper no. 2000-01 (San Francisco, January). CheckFree Corp. Two major areas of new —Mark G. Guzman Moore, Robert R., and Thomas F. Siems (1998), “Bank Mergers: competition are electronic bill payment Creating Value or Destroying Competition?” Federal Reserve and presentment (EBPP) and account Guzman is an economist in the Research Bank of Dallas Financial Industry Issues, Third Quarter, 1–6. aggregation (the ability to view all one’s Department at the Federal Reserve Bank financial accounts on a single web page). Osterberg, William P., and James B. Thomson (1999), “Banking of Dallas. Both EBPP and account aggregation Consolidation and Correspondent Banking,” Federal Reserve have recently become areas of intense Bank of Cleveland Economic Review, First Quarter, 9–20. competition between banks and non- Notes Seelig, Steven A., and Timothy Critchfield (1999), “Determi- Thanks to John Duca, Pia Orrenius, Alan Viard and Kay Champagne banks. Many companies in addition to nants of De Novo Entry in Banking,” Federal Deposit Insurance for helpful comments and suggestions. banks, including the U.S. Postal Service 1 Guzman (2000) provides a detailed overview of some of the recent Corp. Working Paper no. 99-1. and Microsoft, offer bill-payment ser- literature examining the theoretical impact of financial sector market vices, while most portals, such as structure on the economy. See the references therein for a more Stiroh, Kevin J., and Jennifer P. Poole (2000), “Explaining the Yahoo!, and financial web sites, such as detailed explanation of some of the ideas mentioned in this section. Rising Concentration of Banking Assets in the 1990s,” Federal 2 Not all interstate branching was eliminated, since various states Reserve Bank of New York Current Issues in Economics and Quicken.com, offer account aggregation. entered into regional pacts that allowed some interstate branching or Finance, August. In fact, account aggregation was pro- holding companies. vided by nonbank firms long before 3 For recent works, see Stiroh and Poole (2000), Osterberg and Thom- many larger banks, such as Citigroup, son (1999), DeYoung (1999) and Moore and Siems (1998). FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH /APRIL 2001 9 Beyond the Border Why Free Trade in the Americas? T his April Quebec City will host the third summit of the ongoing Free Trade Area of the Americas (FTAA) initiative. But even though Presi- dent Bush will attend and has made Coe, Helpman and Hoffmaister (1997) show that productivity growth in de- veloping countries increases with the openness of their trade with developed countries and with the research and imports but also exports. High tariff bar- riers, after all, make imports more costly. When these imports are used as inputs to products that are exported—or when they embody new technologies that trade liberalization in the Americas a development efforts of their industrial- make production of potential export high priority for his administration, many ized trading partners. products cheaper and more efficient— Americans’ attitude toward FTAA— if And yet most Western Hemisphere then high import barriers also mean low they are aware of it at all —is likely to be developing countries, the targets of the export-to-GDP ratios. Moreover, as pre- “So what?” Compared with the time and FTAA, are not very open to trade and viously noted, lower trade generally space the media devote to other topics, also do not generally trade very much.3 means lower GDP. the attention FTAA has received in recent For the average lower or middle-income years suggests that a free trade agree- country —a broad category that includes Why Liberalize Trade? ment spanning the Western Hemisphere all Western Hemisphere nations except To answer the question “So what?” carries far less news value than the aver- the United States and Canada—exports about trade agreements, politicians who age four-car pileup. as a percentage of GDP run about 21 advocate trade liberalization generally But FTAA is much more important to percent. Exports of Latin American and respond that it provides more jobs. Jobs the economies of the Americas than this Caribbean countries average about 14 are a red herring. While trade liberaliza- lack of interest would indicate. FTAA percent of GDP; South American coun- tion typically results in increased output would mean lower trade barriers in Latin tries separately average about 11 per- by each participating country, the real American countries, where average tariffs cent. Chart 1 compares Latin American benefit is increased efficiency in the form are two to three times those in industri- and Caribbean export-to-GDP percent- of higher output per worker even if no alized countries.1 Some Latin Americans ages with those of selected countries and more workers are employed. The reason oppose FTAA because they believe their regions of the world, and the differences is that protectionism not only discour- countries would bear the brunt of virtu- are striking. ages imports but also creates artificially ally all the agreement’s trade liberaliza- A partial explanation for these low high profits in protected industries, tion. Where is the benefit, they ask, trade ratios is the distance of the more diverting resources away from more pro- when the United States already has such remote Latin American nations from ductive and efficient but less protected low tariffs that an FTAA agreement will potential industrialized trading partners. industries. not lower them much more? What they Another is that the high tariff barriers of In addition to artificially high profits, fail to consider it that even though aver- Latin American countries compared with protectionism promotes inefficiency. Using age U.S. tariffs are markedly lower than developed countries affect not only data from a 1981 survey of more than those of Latin American countries, some 3,000 Brazilian firms, Braga and Will- types of U.S. protectionism are very high. more (1991) find that the firms’ likeli- Some of the products on which U.S. hood of purchasing foreign technology trade barriers are highest—and most Chart 1 or of developing their own technology damaging to U.S. consumers —are those Exports as a Percentage of through research and development was for which Latin America has a marked Gross Domestic Product negatively related to the degree to which cost advantage. their industries were protected from for- Low- and middle-income A second reason for FTAA is that East Asia and Pacific countries eign competition. If you don’t have to trade agreements typically induce partic- Low- and middle-income European and Central Asian countries compete, why mess with success? ipants to trade more.2 Rivera-Batiz and United Kingdom Opponents of trade liberalization Romer (1991), among others, demon- look at it another way. They remind us Germany strate that economic integration—and that that if these protected industries had to is what FTAA would be—accelerates eco- France compete on world markets, many would Latin America and nomic growth. As a corollary, Frankel and Caribbean countries close and their employees would lose Romer (1999) find a correlation between United States their jobs. A closer look shows that the the importance of trade in a country and 0 5 10 15 20 25 30 35 factors of production (labor and capital) the country’s income level. Moreover, Percent devoted to these industries would be the direction of causality runs from trade SOURCE: World Bank. reallocated to business endeavors that to income, not the other way around. could be profitable without charging the 10 FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH /APRIL 2001 consumer-gouging prices that govern- Chart 2 Notes ment protectionism allows. This does 1 Latin American tariffs are higher than those in industrialized countries mean, however, that during the transi- Average Ad Valorem Tariffs even though Latin American countries have generally lowered their tariffs significantly in recent decades. tion from protectionism to trade liberal- Percent 2 Some Americans do not want more trade in any event, on the grounds ization, some types of labor and capital 12 that it leads to environmental damage. For a related article, see Gruben would be out of work. 10 (2000). It is instructive, though, to consider 3 Mexico is an obvious exception. 8 4 Industrialized countries here are members of the Organization of the cost of preserving their employment Economic Cooperation and Development, which includes the United in protected industries. In a 1990 study 6 States, Canada, Japan, the European countries and, as a recent of 21 trade-protected U.S. economic inductee, Mexico. 4 sectors, Hufbauer and Elliott (1994) report that the average annual cost to 2 References Americans per job saved as a result of 0 Braga, Helson, and Larry Willmore (1991), “Technological United States Europe Japan Canada Latin America trade barriers was $54,348. In contrast, Imports and Technological Effort: An Analysis of Their Determi- SOURCE: World Bank. average earnings per year per worker nants in Brazilian Firms,” Journal of Industrial Economics 39 in these industries was $15,649. In one (June): 421–32. sector—sugar production —the cost per year per job saved was $256,966, even Coe, David T., Elhanan Helpman and Alexander W. Hoffmaister though the average worker earned only many products. Import quantities above (1997), “North–South R&D Spillovers,” Economic Journal $21,810 per year. In peanut production these quotas then incur so-called tariff 107 (January): 134–49. —another highly protected endeavor— peaks, one-fifth of which exceed 30 per- Frankel, Jeffrey A., and David Romer (1999), “Does Trade Cause the average cost per job saved was cent ad valorem. Such peak tariffs apply Growth?” American Economic Review 89 (June): 379–99. $55,416, but the average annual salary to cow’s milk (66 percent), yogurt (63 was just $17,104. Eleven years after this percent), butter (80 percent), cheese (42 Gruben, William C. (2000), “Trade, WTO and the Environment,” study, many of the same products are percent), raw cane sugar (90 percent), Federal Reserve Bank of Dallas Southwest Economy, Issue 1, still highly protected. peanuts and peanut butter (132 percent), January/February, 10. chilled/frozen beef (26 percent) and Hertel, Thomas W. (2000), “Potential Gains from Reducing The Price of Protectionism sports footwear with fabric uppers (58 Trade Barriers in Manufacturing, Services and Agriculture,” Indeed, while many Americans be- percent) (United Nations Conference on Federal Reserve Bank of St. Louis Review, July/August, 77–99. lieve that the United States and other Trade and Development 2000). Under developed countries have lowered trade the Generalized System of Preferences, Hufbauer, Gary C., and Kimberly Ann Elliott (1994), Measuring barriers across a broad front, the overall developing countries can export a lim- the Costs of Protection in the United States (Washington, D.C.: picture is more complicated. It is true ited number of the products at half these Institute for International Economics). that the average tariff on industrial goods rates before the peak tariffs go into Rivera-Batiz, Luis A., and Paul M. Romer (1991), “Economic imported into industrialized countries effect. But even at one-half off, these tar- Integration and Endogenous Growth,” Quarterly Journal of Eco- dropped from roughly 40 percent in 1947 iff rates hurt consumers. Also, as noted nomics 106 (May): 531–55. to 1.5 percent by the late 1990s (Hertel previously, only a small portion of the 2000).4 However, agricultural protection total income the protected companies Roberts, I., T. Podbury, N. Andreas and B.S. Fisher (1999), “The has risen from about 30 percent in the make as a result of protectionism goes to Dynamics of Multilateral Agricultural Policy Reform” (Paper late 1960s to 60 percent in 1998 (Roberts reimburse workers. presented at the 1999 Global Conference on Agriculture and et al. 1999). To put these rates in perspective, it the New Trade Agenda from a Development Perspective: Inter- There is a reason for the conven- should be noted that Japanese peak rates ests and Options in the WTO 2000 Negotiations, sponsored tional wisdom, though. On average, for many products are far higher than by the World Bank and World Trade Organizaton, Geneva, Octo- trade barriers in developed countries are those of the United States. In fact, based ber 1–2). lower than those of developing coun- on peak rates, Japan is far more protec- United Nations Conference on Trade and Development (2000), tries. Chart 2 shows that average tariffs in tionist than any other developed coun- “The Post-Uruguay Round Tariff Environment for Develop- Latin America are in the 11 percent try. Nevertheless, the fact remains that ing Country Exports: Tariff Peaks and Tariff Escalation” (Joint range, compared with 4.8 percent for the despite the ho-hum attitude of American study with World Trade Organization, no. TD/B/COM.1/14/ United States, 5.6 percent for the Euro- consumers, they—and their counterparts Rev.1, January). pean Union, 6.6 percent for Japan and in other Western Hemisphere countries 7.1 percent for Canada. But these are just —continue to feel the effects of punish- averages. In fact, U.S. tariffs exceed 12 ing trade barriers. percent for approximately one-tenth of the types of products imported, and the —William C. Gruben closer you look, the worse it gets. For example, under the putatively Gruben is vice president and director of the trade-liberalizing Uruguay Round, the Center for Latin American Economics at the United States imposes import quotas on Federal Reserve Bank of Dallas. FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH /APRIL 2001 11 FEDERAL RESERVE BANK OF DALLAS Southwest Economy Southwest Economy is Robert D. McTeer, Jr. published six times annually President and Chief Executive Officer by the Federal Reserve Bank of Helen E. Holcomb First Vice President and Dallas. The views expressed Chief Operating Officer are those of the authors and Harvey Rosenblum should not be attributed to the Senior Vice President and Federal Reserve Bank of Dallas Director of Research or the Federal Reserve System. Robert D. Hankins Senior Vice President, Articles may be reprinted Banking Supervision on the condition that the W. Michael Cox source is credited and a copy Senior Vice President and Chief Economist is provided to the Research Executive Editor Department of the Federal Harvey Rosenblum Reserve Bank of Dallas. Editors Southwest Economy is Stephen P. A. Brown William C. Gruben available free of charge by Alan D. Viard writing the Public Affairs Publications Director Department, Federal Reserve Kay Champagne Bank of Dallas, P.O. Box 655906, Associate Editors Dallas, TX 75265-5906, or by Jennifer Afflerbach Monica Reeves telephoning (214) 922-5254. Art Director This publication is available Gene Autry on the Internet at Design & Production www.dallasfed.org. Laura J. Bell .................................... Federal Reserve Bank of Dallas PRSRT STD P.O. Box 655906 U.S. POSTAGE Dallas, TX 75265-5906 PA I D DALLAS, TEXAS PERMIT NO. 151 ADDRESS SERVICE REQUESTED
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