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Bank market power and interest rate setting: why consolidated banking data matter

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  • Théo Nicolas

Abstract

The literature on the effects of bank market power on access to credit has produced many results that are sometimes contradictory. Yet, all of these studies are based on unconsolidated data that ignore the national market power of banking groups. This results in an underestimation bias that this paper proposes to correct. Using a panel of more than 55,000 French firms covering the period 2006–2017, I consider a set of structural and non-structural measures of bank market power both at the unconsolidated and consolidated levels. My results strongly support the market power hypothesis which emphasizes the virtues of competition on interest rate setting. I find that bank market power increases the interest rate charged, but only when using my consolidated measures. This effect is stronger for small and risky firms and is concentrated on long-term loans. My findings highlight the need to take into account the capital linkages of subsidiaries within the same banking group in order to fully assess the implications of bank market power.

Suggested Citation

  • Théo Nicolas, 2024. "Bank market power and interest rate setting: why consolidated banking data matter," The European Journal of Finance, Taylor & Francis Journals, vol. 30(9), pages 980-1007, June.
    • Handle: RePEc:taf:eurjfi:v:30:y:2024:i:9:p:980-1007
    DOI: 10.1080/1351847X.2023.2250379
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