Harming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation

48 Pages Posted: 16 Jan 2005 Last revised: 29 Aug 2008

See all articles by Kwangwoo Park

Kwangwoo Park

KAIST (Korea Advanced Institute of Science and Technology) - College of Business

George Pennacchi

University of Illinois

Multiple version iconThere are 2 versions of this paper

Date Written: October 12, 2007

Abstract

A model of multimarket spatial competition is developed where small, single-market banks compete with large, multimarket banks (LMBs) for retail loans and deposits. Consistent with empirical evidence, LMBs are assumed to set retail interest rates uniformly across markets, have different operating costs, and have access to wholesale funding. If LMBs have significant funding advantages that offset potential loan operating cost disadvantages, then market-extension mergers by LMBs promote loan competition, especially in concentrated markets. However, such mergers reduce retail deposit competition, especially in less concentrated markets. Prior empirical research and our own analysis of retail deposit rates support the model's predictions.

Suggested Citation

Park, Kwangwoo and Pennacchi, George G., Harming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation (October 12, 2007). AFA 2005 Philadelphia Meetings Paper; Review of Financial Studies, Forthcoming; KAIST Business School Working Paper Series No. 2005-004; FRB of Cleveland Working Paper No. 07-04. Available at SSRN: https://ssrn.com/abstract=649464 or http://dx.doi.org/10.2139/ssrn.649464

Kwangwoo Park (Contact Author)

KAIST (Korea Advanced Institute of Science and Technology) - College of Business ( email )

85 Hoegiro
Seoul 02455
Korea, Republic of (South Korea)
82-2-958-3540 (Phone)
82-2-958-3604 (Fax)

George G. Pennacchi

University of Illinois ( email )

4041 BIF, Box 25
515 East Gregory Drive
Champaign, IL 61820
United States
217-244-0952 (Phone)

HOME PAGE: http://www.business.illinois.edu/gpennacc/

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