Banking Market Concentration Research Articles

Bank Market Concentration and Interest Spreads: South Asian Evidence

This paper investigates whether any deviations in South Asian banks' interest margins can be attributed to market concentration after controlling for other bank-specific factors and exogenous environmental influences. To that end, an improved structural price-concentration model was estimated (using a sample of both state-owned and private-owned banks and a truncated sample of private-owned banks) with multiple definitions of market share covering loan and deposit markets. The findings suggest that no significant deviations in bank interest margins can be attributed to market concentration. Instead, only dominant South Asian banks with larger market shares were found to extract higher interest margins.

Bank Mergers and Lending Relationships

This paper analyzes the effects of bank mergers on bank-firm relationships. Using matched bank-firm level data, I find that mergers disrupt lending relationships, specially to small borrowers of target banks. However, I find significant positive effects of mergers for borrowers that continue the lending relationship with the consolidated bank. On average, consolidated banks reduce loan interest rates. The most beneficial mergers from the borrower point of view are those involving two large banks and commercial banks. While the reduction in interest rates is larger when the acquirer and the target have some market overlap, the decline is much smaller when there is a significant increase in local banking market concentration.

An Empirical Analysis of National Differences in the Retail Bank Interest Rates of the Euro Area

The availability of new harmonized data on bank interest rates allows a rigorous assessment to be made of cross-country price homogeneity/heterogeneity in euro area retail credit markets. Econometric analysis shows that the banking market is still highly segmented and that the degree of integration in a single country (Italy, taken as a benchmark for integration) is greater than in the euro area. However, national differences can be partially explained by variables reflecting the characteristics of domestic depositors and borrowers (demand side regressors, such as risk exposure, disposable income, alternative financing sources, average firm size) and the characteristics of the banking systems (supply side regressors, such as banking market concentration, asset and liability structure). The euro area prices appear different because national banking products appear different or because they are differentiated by national factors. Once these factors have been controlled for, many differences disappear.

What Determines Banks' Market Power? Akerlof or Herfindahl

We introduce a theoretical model predicting that banks' interest rate markups follow a lifecycle pattern. Due to endogenous bank monitoring by competing banks, borrowing firms initially face a low markup, thereafter an increasing markup until it falls for old firms. By applying a large sample of small firms and a new measure of asymmetric information, we find that firms with significant asymmetric information problems have a more pronounced life-cycle pattern of interest rate markups. We also examine effects of concentrated banking markets on interest markups. Results indicate that markups are mainly driven by asymmetric information problems (Akerlof). However,we find weak evidence that bank market concentration is important for old firms (Herfindahl).

Competition, Efficiency and Agency Costs: An Analysis of Franchise Values in European Banking

This paper investigates how stock market investors perceive the impact of market structure and efficiency on the long-run performance potential of European banks. To that end, a modified Tobin's Q ratio is introduced as a measure of bank franchise value. This measure is applied to discriminate between the market structure and efficient-structure hypotheses in a coherent forward-looking framework, in which differences in banks' horizontal and vertical differentiation strategies are controlled for. The results show that banks with better management or production technologies possess a long-run competitive advantage. In addition, bank market concentration does not affect all banks equally. Only the banks with a large market share in a concentrated market are able to generate non-competitive rents. The paper further documents that the forward-looking, long-run perspective and the noise-adjustment of the performance measure overcome most of the drawbacks associated with testing these hypotheses in a multi-country set-up. Finally, notwithstanding the international expansion of bank activities, the harmonization of regulation and the macroeconomic convergence in the European Union (EU15), we still find that country-specific macroeconomic variables have a significant impact on bank performance. The findings indicate that there is a trade-off between competition and stability that should be taken into account when assessing mergers or acquisitions. (Published as: Competition versus efficiency: What drives franchise values in European banking?,Journal of Banking & Finance Volume 32, Issue 9, September 2008, Pages 1820-1835)

Banking Market Concentration and Consumer Credit Constraints: Evidence from the 1983 Survey of Consumer Finances

Consumer borrowing is a large and growing part of the American financial landscape, amounting to over $1.5 trillion in 2000, or 15 percent of GDP. This credit helps households improve the timing of consumption expenditure, allowing consumers to purchase goods and services when they are needed. Still, many households report being credit constrained, with requests for credit rejected or discouraged by potential lenders. Stiglitz and Weiss (1981) formalize models where credit is rationed in equilibrium, and Petersen and Rajan (1995) extend this model to banking markets with varying degrees of local competition. Local banking market competition can be thought of as one element of the more general set of factors influencing the ‘captivity’ of a bank’s consumer borrowers. This paper uses data from the 1983 Survey of Consumer Finances to empirically test the relationship between banking market concentration and households’ self-reported measures of credit rationing and constraint. There is strong evidence that more concentrated markets have fewer constrained borrowers, a result consistent with the Petersen-Rajan model of credit markets. Interest rates on consumer borrowing appear to decrease more sharply with age in competitive markets than in concentrated markets. This result is consistent with the cross-subsidization between new and existing borrowers that is central to the Petersen-Rajan model.

The riegle-neal act and local banking market concentration

The riegle-neal act and local banking market concentration

The riegle-neal act and local banking market concentration

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 greatly transformed the American banking system by allowing the widespread establishment of interstate bank branching networks. This paper examines possible effects on local banking market concentration that resulted from the provision in the Riegle-Neal Act that allowed states to opt-in to the establishment of de novo interstate branches. Regression analysis using data from more than seven hundred cities does not provide any evidence that allowing the establishment of de novo interstate branches caused increases in local banking market concentration. These results may help alleviate some concerns that passage of the Financial Services Regulatory Relief Act currently pending in Congress will result in lessened competition in local banking markets.

The Geographic Scope of Retail Deposit Markets

In the United States, antitrust authorities rely heavily on numerical measures of local banking market concentration such as the Herfindahl Hirschmann Index to assess the likely competitive effects of proposed bank mergers and acquisitions. This approach to antitrust enforcement relies on two important assumptions: (1) that markets for at least some types of banking products are local in scope, and (2) that market concentration measures can serve as effective proxies for banks' abilities to extract monopoly rents. This paper uses balance sheet data from most banks operating in the United States in 1988, 1992, 1996, and 1999 to test these assumptions.

The Geographic Scope of Retail Deposit Markets

In the United States, antitrust authorities rely heavily on numerical measures of local banking market concentration such as the Herfindahl Hirschmann Index to assess the likely competitive effects of proposed bank mergers and acquisitions. This approach to antitrust enforcement relies on two important assumptions: (1) that markets for at least some types of banking products are local in scope, and (2) that market concentration measures can serve as effective proxies for banks' abilities to extract monopoly rents. This paper uses balance sheet data from most banks operating in the United States in 1988, 1992, 1996, and 1999 to test these assumptions.

Local Bank Office Ownership, Deposit Control, Market Structure, and Economic Growth

The restructuring of commercial banking has heightened interest in its economic consequences both for the economy as a whole and for those most likely to bear adverse consequences: small businesses, small banks, and rural areas. Most previous research on bank restructuring focuses on changes in bank behavior. In contrast, this paper focuses on the empirical association between local economic performance and changes in local bank market regulation and structure. Findings suggest that mergers or acquisitions of local banks by nonlocal banks need not impair local economic growth, and may even have beneficial effects in rural markets, with the possible exception of farm-dependent areas. These findings are derived from empirical models that relate both shortrun and longrun growth in real per capita personal income to geographic restrictions on bank activity, local bank (deposit) market concentration, local or nonlocal ownership of local bank offices, and local or nonlocal control of local bank deposits.

AUTHOR INDEX FOR VOLUME 36

This paper assesses Malaysia’s competition landscape and its risk implications subsequent to conventional banking consolidation and Islamic banking penetration in the aftermath of the 1997/1998 Asian financial crisis. Employing a panel sample of conventional and Islamic commercial banks, it arrives at the following conclusions. First, the consolidation exercise, which has led to a significant reduction in the number of domestic commercial banks, has not stifled banking competition. Second, the paper provides empirical support for the competition-stability relationship, particularly for the conventional banking sector. Islamic banking sector risk appears to be neutral to market competition or market power, although there is limited evidence that it increases with overall market concentration. Finally, the analysis uncovers the risk-increasing effect of the Islamic banking market structure on the conventional banking sector. By contrast, conventional banking market concentration tends to reduce the credit risk of Islamic banks.

Post‐Acquisition Performance of Rural Banks

The effects of bank consolidation on available credit for small rural businesses and farmers is a major concern. It is often argued that larger organizations, which usually have an urban base, neglect the credit needs of their rural constituents. The effect of on the banking and financial services industry was recently investigated by the U.S. House Subcommittee on Financial Institutions and Consumer Credit. Janet Yellen, a member of the Board of Governors of the Federal Reserve System, testified that mergers resulting in relatively high levels of local banking market concentration can adversely affect local bank customers. Similar concerns were also raised by the Texas House Committee on Small Business Access to Capital: Experience with interstate banking tells us that out-of-state banks tend to decrease their lending service to small businesses-which are the backbone of job creation. The effect of consolidation on rural financial markets is not a new issue. A set of studies by the Federal Reserve System in the early 1970s examined the effects of bank structure on the

Foreign banking presence and banking market concentration: The case of Indonesia

This study examines whether and how foreign banking presence has influenced market concentration in the host commercial banking industry. The evidence shows that foreign banking presence has contributed to the increased banking market competition in the case of the Indonesian banking industry. The study also finds that the size of market and relaxation of government policy on market expansion (for example, lowering of minimum liquidity ratio) have negative relationships with banking market concentration, consistent with previous findings in the manufacturing sector. On the other hand, market growth and number of banks have a positive influence on banking market concentration; economies of scale do not play their usual role as a market entry barrier in Indonesian banking.

Dynamics of market concentration in U.S. banking, 1966–1986

This paper estimates the speed at which local banking market concentration adjusts to its long-run equilibrium level. Long-run market concentration is estimated as a function of the attractiveness of entry and regulatory barriers to entry into the market. The speed of adjustment is allowed to vary across markets and depends on the deviation of market from normal profits. The empirical results from panels of data over 5, 10, 15 and 20 years show that concentration levels in local banking markets adjust slowly over time. Markets with unusually high or low profits show significantly more rapid adjustment than other markets over shorter time periods, but the differences are small in magnitude. Legal barriers to entry significantly impede market adjustment over longer time periods.