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The Influence of Consolidation and Concentration of the Banking Sector on the Price Level in the Banks. The Example of USA

Listed author(s):
  • Sylwester Kozak
Registered author(s):

    Consolidation leads to the higher concentration of the banking sector. Developments of ICT and electronic banking, on the one hand enable to create extended banking organizations, but on the other hand expand boundaries of the local banking market and the range of banking products. This research, which was conducted on the group of top 50 US banks for the period of 1994–2005, shows that there is a positive, although weak, correlation between the banking market concentration and the price level. Moreover, the research indicates the level of non-interest costs, as an important determinant of the increase of lending interest rates. Factors responsible for the reduction of lending rates are: the value of banking assets, the value of non-interest earnings, and the level of development of local real and financial sectors. The general outcome of the research suggests that the analysis of market effects of the bank merger should not be focused only on the relationship between the banking market concentration and the level of prices, but on the feasibility of improvements in the cost and revenue structures, resulted from expansion of the bank's network and the range of services. Consolidation may lead to reduction of overhead costs and banking prices. However, too broad expansion, may be a source of unexpected costs and force banks to raise lending rates and service charges, limit their competitiveness and put threat on the stability of the future operations.

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    File URL: http://ekonomia.wne.uw.edu.pl/ekonomia/getFile/672
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    Article provided by Faculty of Economic Sciences, University of Warsaw in its journal Ekonomia journal.

    Volume (Year): 21 (2008)
    Issue (Month): ()
    Pages:

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    Handle: RePEc:eko:ekoeko:21_120
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    1. Hannan, Timothy H., 1991. "Bank commercial loan markets and the role of market structure: evidence from surveys of commercial lending," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 133-149, February.
    2. S. Mishkin, Frederic, 1999. "Financial consolidation: Dangers and opportunities," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 675-691, February.
    3. Lawrence J. Radecki, 1998. "The expanding geographic reach of retail banking markets," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 15-34.
    4. Allen Berger & Iftekhar Hasan & Leora Klapper, 2004. "Further Evidence on the Link between Finance and Growth: An International Analysis of Community Banking and Economic Performance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 25(2), pages 169-202, April.
    5. Philipp Hartmann & Elena Carletti, 2002. "Competition and Stability: What's Special about Banking?," FMG Special Papers sp140, Financial Markets Group.
    6. Elijah Brewer & William E. Jackson, 2004. "The “risk-adjusted” price-concentration relationship in banking," FRB Atlanta Working Paper 2004-35, Federal Reserve Bank of Atlanta.
    7. Allen N. Berger & Asli Demirgüç-Kunt & Ross Levine & Joseph G. Haubrich, 2004. "Introduction: Bank concentration and competition: an evolution in the making," Proceedings, Federal Reserve Bank of Cleveland, pages 433-451.
    8. Berger, Allen N, et al, 2004. "Bank Concentration and Competition: An Evolution in the Making," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 433-451, June.
    9. Berger, Allen N & Hannan, Timothy H, 1989. "The Price-Concentration Relationship in Banking," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 291-299, May.
    10. Maudos, Joaquin & Fernandez de Guevara, Juan, 2004. "Factors explaining the interest margin in the banking sectors of the European Union," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2259-2281, September.
    11. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    12. Robert M. Adams & Kenneth P. Brevoort & Elizabeth K. Kiser, 2005. "Who competes with whom? the case of depository institutions," Finance and Economics Discussion Series 2005-03, Board of Governors of the Federal Reserve System (U.S.).
    13. Isil Erel, 2005. "The effect of bank mergers on loan prices: evidence from the U.S," Proceedings 994, Federal Reserve Bank of Chicago.
    14. 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 938-945, September.
    15. Prager, Robin A & Hannan, Timothy H, 1998. "Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 433-452, December.
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