Monetary Policy and Bank Concentration

47 Pages Posted: 23 Nov 2020

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

Tim Zhang

University of Wyoming, College of Business

Date Written: May 8, 2020

Abstract

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

Chu, Yongqiang and Zhang, Tim, Monetary Policy and Bank Concentration (May 8, 2020). Available at SSRN: https://ssrn.com/abstract=3704020 or http://dx.doi.org/10.2139/ssrn.3704020

Yongqiang Chu

Belk College of Business, UNC Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
7046877695 (Phone)

Tim Zhang (Contact Author)

University of Wyoming, College of Business

1000 E. University Avenue
Department 3275
Laramie, WY 82071
United States

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