Bank Consolidation and the Dynamics of Consumer Loan Interest Rates

Abstract

The recent wave of bank mergers has raised concern over its effect on competition. This paper examines the influence of concentration and merger activity on consumer loan interest rates. It uses Bankrate, Inc. survey data on loan rates quoted weekly by large commercial banks in ten major U.S. cities during the period 1989 to 1997. The pricing behavior of banks is analyzed for two types of loans: new automobile loans and unsecured personal loans. Market concentration has a significant positive impact on the level of personal loan rates, but not on auto loan rates. Auto loan rates show little change around the time of significant bank mergers, suggesting that their relevant market is nationwide. However, consistent with mergers changing the market power and size structure of personal loan markets, the personal loan rates of banks involved in mergers show a significant decline relative to their market rivals during the period prior to the merger's completion. Merger participants' decision to lower personal loan rates could also reflect their desire to gain regulatory approval of the merger. The paper also tests for the existence of leader-follower relationships in loan pricing and finds that it is more widespread in markets for automobile loans. Interest rates on both types of loans respond asymmetrically to a change in equivalent maturity Treasury security rates, being more sensitive to a rise than a fall. In addition, personal loan rates are less responsive in more concentrated markets.

Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature

“…Kahn et al (2000) found that mergers resulted in higher market rates on unsecured personal loans, but lower interest rates on automobile loans which are secured by liens. They stressed the importance of soft versus hard information.…”

Bank Mergers and the Dynamics of Deposit Interest Rates

“…But using weekly deposit rate changes as a proxy for deposit rate setting after a merger introduces a lot of noise. Therefore, as in Kahn et al (2005), we base our tests on rate changes computed over 4-week intervals. Our sample encompasses a total of 461 weeks, which allows us to construct a time series of 115 4-week intervals, which we refer to as "months" although they do not correspond to calendar months.…”

Bank Mergers and the Dynamics of Deposit Interest Rates

“…We base the empirical estimation on a unique dataset that is drawn from the full list of bank Kahn et al (2005), we base our tests on rate changes computed over four-week intervals.…”