U.S. Bank Market Structure: Evolving Nature and Implications

48 Pages Posted: 12 Nov 2015

Date Written: March 11, 2015


This paper documents the recent changing structure of the US bank market, as it has become more deregulated and specifically asks how this affects bank behaviour as it relates to profits and risk. Using a variety of approaches, such as the HHI and Lerner measures, we document a general increase in concentration and market power, at least until the recent crisis period. Importantly, we then consider whether these changes, or whether bank specific and general economic conditions have a greater impact on bank profit and risk. Results support the view that changes to market structure (especially market power) while positively impacting profit and persistence do not lead to increased risk. However, market share (or bank size) does, albeit not for the largest banks. Results also support the view that banks may increase some elements of risk as well as profit during an economic expansion. Notwithstanding, this an overriding feature of the results is differences in the conditioning factors across size strata and time. This leads to the conclusion that there is no simple relationship between market structure and competition and risk and that benign economic condition play a key role in reducing competition and possibly increasing risk. The key implication of the results is the need for more nuanced policy-making with regard to bank size, performance and economic conditions.

Keywords: Banks, Market Structure, Profit Persistence, Risk

JEL Classification: C23, G21

Suggested Citation

McMillan, David G. and McMillan, Fiona Jayne, U.S. Bank Market Structure: Evolving Nature and Implications (March 11, 2015). Available at SSRN: https://ssrn.com/abstract=2689723 or http://dx.doi.org/10.2139/ssrn.2689723

David G. McMillan (Contact Author)

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

Fiona Jayne McMillan

University of St. Andrews ( email )

North St
St Andrews, Fife KY16 9AJ
United Kingdom

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