RFS Advance Access published online on May 21, 2008
Review of Financial Studies, doi:10.1093/rfs/hhn051
Harming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation
Graduate School of Finance, Korea Advanced Institute of Science and Technology
Department of Finance, College of Business, University of Illinois
Address correspondence to George Pennacchi, Department of Finance, College of Business, University of Illinois, 1206 South Sixth Street, Champaign, IL 61820; telephone: (217)-244-0952; e-mail: gpennacc{at}uiuc.edu.
JEL Classification: G21, G28, G34, L11
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Abstract |
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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.
We are grateful to the Office for Banking Research at the University of Illinois and the Federal Reserve Bank of Cleveland for research support. Dong Keun Choi and Jaehoon Lee provided excellent research assistance. Valuable comments were provided by Allen Berger, Mark Carey, Nicola Cetorelli, Astrid Dick, Joong Ho Han, Timothy Hannan, Robert Hauswald, Myron Kwast, Sangwoo Lee, Toby Moskowitz (the editor), Robin Prager, Bent Vale, two anonymous referees, and participants of the 2003 Competition in Banking Markets Conference at the Katholieke Universiteit Leuven, the 2004 International Industrial Organization Conference, the 2004 Chicago Fed Bank Structure and Competition Conference, and the 2005 American Finance Association Meetings. We also thank participants of seminars at the University of Alberta, the Bank of Korea, Hitotsubashi University, KAIST, the Korea Institute of Finance, Korea University, the Korea Deposit Insurance Corporation, Seoul National University, and Waseda University.