Conference Paper

Harming depositors and helping borrowers: the disparate impact of bank consolidation

Abstract: There is growing evidence showing that large and small banks differ in how they service retail customers. Large, multi-market banks (LMBs) have more standardized operations and set interest rates that are uniform across local markets, while small banks have greater autonomy to set rates according to local market conditions. LMBs also differ from smaller banks by having relatively greater access to wholesale funding. This paper presents a model of spatial competition where small, single-market banks compete with LMBs. It shows that market-extension mergers by LMBs promote competition in relatively concentrated retail loan markets, and this effect is magnified the greater is LMBs? funding advantage and the greater is the multi-market contact among LMBs. In contrast, when LMBs have significant funding advantages, market extension mergers reduce competition in retail deposit markets. Our model?s predictions are examined in light of previous empirical studies and also by our own statistical analysis of retail deposit interest rates quoted by individual banks.

Keywords: Bank loans; Bank liquidity; Bank mergers;

Status: Published in Conference on Bank Structure and Competition (2004 : 40th) ; How do banks compete? strategy, regulation, and technology

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Proceedings

Publication Date: 2004

Number: 939

Pages: 227-242