Monetary Policy and Bank Concentration
47 Pages Posted: 23 Nov 2020
Date Written: May 8, 2020
This paper examines how monetary policy affects bank concentration. We show that when the policy rate rises, banks operating in more competitive markets are more likely to be acquired or fail outright. We find that the effect is more pronounced among smaller banks, causing the banking sector to be more dominated by a smaller number of large banks over time. Consistent with the market power channel, we show that the effect is driven by banks' inability to pass on rate hikes to the asset side and being forced to pass on rate hikes to the liability side in competitive markets. For banks with the lowest 25% market power, when the Fed funds rate rises by 100 bps, their net interest margin declines by 60% of its mean more than other banks. We also show that bank or branch exits lead to a significant decline in credit supply to small businesses and information-intensive loans of local borrowers.
Keywords: Monetary Policy, Bank Concentration, Market Power, Bank Failure, Bank Merger
JEL Classification: D72, G21, G28
Suggested Citation: Suggested Citation