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Bank concentration and retail interest rates

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  • Corvoisier, Sandrine
  • Gropp, Reint

Abstract

The recent wave of mergers in the euro area raises the question, whether the increase in concentration has at least in part offset the increase in competition in European banking through deregulation. We test this question by estimating a simple Cournot model of bank pricing. We construct country and product specific measures of bank concentration and find that for loans and demand deposits, increasing concentration may have resulted in less competitive pricing by banks, whereas for savings and time deposits, the model is rejected, suggesting increases in contestability and/ or efficiency in these markets. These findings are robust across a wide variety of econometric specifications. Finally, the paper discusses some implications for tests of the effect of concentration on monetary policy transmission JEL Classification: L13, G21, B43

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 26 (2002)
Issue (Month): 11 (November)
Pages: 2155-2189

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Handle: RePEc:eee:jbfina:v:26:y:2002:i:11:p:2155-2189
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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Find related papers by JEL classification:
  • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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  1. Angeliki Kourelis & Carlo Cottarelli, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Working Papers 94/39, International Monetary Fund.
  2. Rhoades, Stephen A., 1993. "Efficiency effects of horizontal (in-market) bank mergers," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 411-422, April.
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  10. Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May.
  11. D'Auria, Claudio & Foglia, Antonella & Reedtz, Paolo Marullo, 1999. "Bank interest rates and credit relationships in Italy," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1067-1093, July.
  12. Allen N. Berger & Timothy H. Hannan, 1988. "The price-concentration relationship in banking," Finance and Economics Discussion Series 23, Board of Governors of the Federal Reserve System (U.S.).
  13. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September.
  14. Harhoff, Dietmar & Korting, Timm, 1998. "Lending relationships in Germany - Empirical evidence from survey data," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1317-1353, October.
  15. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, August.
  16. Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series 0040, European Central Bank.
  17. Panzar, John C & Rosse, James N, 1987. "Testing for "Monopoly" Equilibrium," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 443-56, June.
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  19. Amel, Dean F. & Hannan, Timothy H., 1999. "Establishing banking market definitions through estimation of residual deposit supply equations," Journal of Banking & Finance, Elsevier, vol. 23(11), pages 1667-1690, November.
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