Harming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation
AFA 2005 Philadelphia Meetings Paper
Review of Financial Studies, Forthcoming
48 Pages Posted: 16 Jan 2005 Last revised: 18 Mar 2021
There are 2 versions of this paper
Harming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation
Harming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation
Date Written: October 12, 2007
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 set retail interest rates uniformly across markets, have different operating costs, and have access to wholesale funding. If LMBs have significant funding advantages that offset potential 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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