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

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  • Kwangwoo Park
  • George Pennacchi

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.

Suggested Citation

  • Kwangwoo Park & George Pennacchi, 2004. "Harming depositors and helping borrowers: the disparate impact of bank consolidation," Proceedings 939, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhpr:939
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    Citations

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    Cited by:

    1. Allen Berger, 2006. "Potential Competitive Effects of Basel II on Banks in SME Credit Markets in the United States," Journal of Financial Services Research, Springer;Western Finance Association, vol. 29(1), pages 5-36, February.
    2. Nathan H. Miller, 2008. "Competition When Consumers Value Firm Scope," EAG Discussions Papers 200807, Department of Justice, Antitrust Division.
    3. Pietro Alessandrini & Manuela Croci & Alberto Zazzaro, 2005. "The geography of banking power: role of function distance," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 58(235), pages 129-167.
    4. Allen N. Berger & Astrid A. Dick & Lawrence G. Goldberg & Lawrence J. White, 2005. "The effects of competition from large, multimarket firms on the performance of small, single-market firms: evidence from the banking industry," Finance and Economics Discussion Series 2005-15, Board of Governors of the Federal Reserve System (U.S.).
    5. Hirtle, Beverly, 2007. "The impact of network size on bank branch performance," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3782-3805, December.
    6. Hannan, Timothy H. & Prager, Robin A., 2006. "Multimarket bank pricing: An empirical investigation of deposit interest rates," Journal of Economics and Business, Elsevier, vol. 58(3), pages 256-272.
    7. Berger, Allen N. & Rosen, Richard J. & Udell, Gregory F., 2007. "Does market size structure affect competition? The case of small business lending," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 11-33, January.
    8. Degryse, Hans & Ongena, Steven, 2007. "The impact of competition on bank orientation," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 399-424, July.

    More about this item

    Keywords

    Bank loans ; Bank liquidity ; Bank mergers;

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