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

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.