US Bank Market Structure: Evolving Nature and Implications

Abstract

We study how the recent changes in the structure of the US banking market affect the banks’ behavior in relation to competition, risk, and profit. Using the Herfindhal-Hirschman (HHI) and Lerner indices, we find a general increase in the concentration and market power of banks since the recent crisis period. Thus, we also consider whether bank-specific or general economic conditions have a greater impact on the competition, risk, and profit. The results support the view that changes in the market’s structure while positively impacting profit and competition do not lead to increased risk. However, the banks’ market share does lead to increased risk, albeit not for the largest banks. The results also support the view that banks can increase some elements of risk as well as profit during an economic expansion. However, an overriding feature of the results is the difference in the conditioning factors across the size strata and time. This difference leads to the conclusion that there is no simple relation between the market’s structure and competition and risk.