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

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.

The impact of network size on bank branch performance

“…In support of this contention, Hannan and Prager (2004b) find that within the set of large, multi-market banking companies, those belonging to larger holding companies and those that operate in more states offer lower deposit rates. Pennacchi and Park (2004) further find that consumer loan rates also fall with increased multi-market bank share, suggesting a tradeoff between the welfare of borrowers and depositors as multi-market banks become more prevalent.…”

“…Prior research suggests that these customers face something of a trade-off in light of the growth of very large branch networks. On the one hand, larger banking organizations and organizations that operate in multiple markets tend to charge higher fees and offer lower deposit rates than smaller, single-market institutions (Hannan 2002(Hannan , 2004Prager 2004a, 2004b;Park and Pennacchi 2004), suggesting that branch-dependent customers could face additional costs as branches are increasingly consolidated into the large branch networks of multi-market banking organizations.…”

“…These papers examine the impact of large, multi-market banking organizations on the deposit rates offered by smaller, single-market banks in local banking markets. The general finding is that large, multi-market banks offer lower deposit rates than smaller, single-market banks and that the rates offered by single-market banks decline as the market share of large, multi-market banks increases Prager 2004a, 2004b;Park and Pennacchi 2004). The explanation is that large, multi-market banks have access to less expensive wholesale funding sources and thus are less likely to compete for retail deposits as a source of funds.…”

“…While a number of papers have examined the impact of the emergence of large, multi-market banks (Berger et al 2005;Hannan 2004;Prager 2004a, 2004b;Park and Pennacchi 2004), most of these papers have focused on asset or deposit size, rather than branch network size, as the key measure of institutional scale. But a direct focus on branches may be important in trying understand the evolution of retail banking activities.…”

Volatile Lending and Bank Wholesale Funding

“…To this end it contributes to the debate on the negative externalities of wholesale funding (Ratnovski and Huang 2011, Ivashina and Scharfstein 2010, Segura and Suarez 2012, Brunnermeier and Oehmke 2013 by providing richer evidence on the link between wholesale liabilities and lending. Also, our results add asset volatility to the battery of proposed liability structure determinants, which so far includes liquidity provision (Berger andBowman 2009, Diamond andRajan 2012); stable funding for information-opaque assets (Song and Thakor 2008); bank market power (Berlin and Mester 1998;Craig and Dinger, 2010) and market entry barriers (Park and Pennacchi 2009;Dinger and von Hagen 2009); taxes (Pennacchi et al 2010); a shift to a new originate-and-distribute business model (Gorton and Metrick 2011); as well as the fact that in periods of lending booms the growth rate of deposits is insufficient to cover loan demand needs as alternative determinants.…”