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

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Author Info
Kwangwoo Park
George Pennacchi
Abstract

A model of multimarket spatial competition is developed where small, single-market banks compete with large, multimarket banks (LMBs) for retail loans and deposits. Consistent with empirical evidence, LMBs are assumed to have different operating costs, set retail interest rates that are uniform across markets, and have access to wholesale funding. If LMBs have significant funding advantages that offset any loan operating cost disadvantages, then market-extension mergers by LMBs promote loan competition, especially in concentrated markets. However, such mergers reduce retail deposit competition, especially in less concentrated markets. Prior empirical research and our own analysis of retail deposit rates support the model’s predictions.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0704.

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Date of creation: 2007
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Handle: RePEc:fip:fedcwp:0704

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Keywords: Bank mergers

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