Harming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation

Kwangwoo Park and George Pennacchi

The Review of Financial Studies, 2009, vol. 22, issue 1, 1-40

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. The Author 2008. Published by Oxford University Press on behalf of the Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Date: 2009
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Working Paper: Harming depositors and helping borrowers: the disparate impact of bank consolidation (2007)
Working Paper: Harming depositors and helping borrowers: the disparate impact of bank consolidation (2004)
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