Multimarket Bank Pricing: An Empirical Investigation of Deposit Interest Rates

Abstract

In recent years, the number of large, geographically diversified banking organizations operating in the U.S. has grown. Empirical studies have found that, at least in the case of deposit interest rates, many of these banks offer the same rate for a given type of account throughout a state, or, in some cases, a broader geographical area. This phenomenon of uniform pricing raises questions as to what competitive factors are relevant in explaining the deposit interest rates offered by large multimarket banks. In this paper, we provide empirical evidence regarding the determinants of the deposit interest rates offered by these banking organizations.

The impact of network size on bank branch performance

“…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. 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.…”

Bank Mergers and the Dynamics of Deposit Interest Rates

“…In other words, the marginal change at the knot is equal to exp(β) -1, where β is the estimated knot coefficient. Park and Pennacchi, forthcoming; Hannan and Prager, 2006) have argued that out-of-market mergers have a substantial negative effect on deposit rates. In this study, when we include all mergers and compare them within a uniform framework, we find that out-of-market mergers have only a negligible negative effect on deposit rates.…”

“…As a result, they argue, out-of-market mergers lead to lower deposit rates. Park and Pennacchi (forthcoming) 8 and Hannan and Prager (2006) present empirical tests of this hypothesis, and both find that multimarket banks offer lower deposit rates than their single-market rivals. Using a separate dataset and estimation approach, Rosen (2003), however, finds different results.…”

How Strategic Groups Act Competitively Within and Across Markets

“…The presence of large banks intensifies competition for retail loans, and these firmsbanks on the competition in the deposits market is the opposite (Park and Pennacchi, 2009): when large banks have a wholesale funding advantage, they do not compete aggressively for retail deposits, which represent a high cost funding source. As a result, large banks pay less interest on retail deposits (see Hannan and Prager, 2006). This situation would lead to the type of 'spoiling' conduct defined by Areeda and Turner (1979), where the response to an initial action of small firms in the loans market is expected to be strong retaliation by large firms mainly in the loans market, and not such strong in the deposits market, while the response to an initial action of large firms in the loans market is expected to be accommodation (retracting from the market) by the small firms in the loans market as well as in the deposits market.…”