This paper examines the relation between the profit rates of 60 banks and concentration in the ‘home’ banking market of each. Other explanatory variables found to be significant are whether the bank is government owned, a proxy for profit rates throughout each country, and the rate of growth of individual banks' assets. The evidence supports the view that greater concentration leads to higher profit rates. However the relatively small coefficients of the concentration variable indicate that relatively large changes in concentration are necessary to reduce profit rates by one percentage point.

The relation between commercial bank profit rates and banking concentration in Canada, Western Europe, and Japan

Recent work on the theory of the firm under regulation suggests that managers of regulated firms may be utility maximizers rather than profit maximizers. There is, however, very little empirical evidence on managerial behavior in regulated industries. This article examines one kind of utility-maximizing behavior that seems particularly applicable to regulated firms: expense-preference behavior. Specifically, I develop a test capable of discriminating between expense-preference and profit-maximizing behavior and apply it to the banking industry, a highly regulated industry. My findings indicate that an expense-preference theoretical framework better explains the behavior of regulated firms than does a profit-maximization framework.

Managerial Objectives in Regulated Industries: Expense-Preference Behavior in Banking

We use a uniquely extensive branch-level dataset on deposit account interest rates, maintenance fees, and fee thresholds, and document substantial time-series and cross-sectional variation in these prices. We then examine whether variation in bank concentration helps explain the variation in prices. The standard measure of concentration, the HHI, is not correlated with any of the outcome variables. We then construct a generalized HHI (GHHI) that captures both common ownership (the degree to which banks are commonly owned by the same investors) and cross-ownership (the extent to which banks own shares in each other). The GHHI is strongly correlated with all prices. We use the growth of index funds as an arguably exogenous source of cross-sectional variation of county-level common ownership growth to suggest a causal link from the GHHI to higher prices for banking products.

Ultimate Ownership and Bank Competition

We model the impact of bank mergers on loan competition, banks' reserve holdings and aggregate liquidity. Banks compete in a differentiated loan market, hold reserves against liquidity shocks, and refinance in the interbank market. A merger creates an internal money market that induces financial cost advantages and may increase reserve holdings. We assess changes in liquidity risk and expected liquidity needs for each bank and for the banking system. Large mergers tend to increase expected aggregate liquidity needs, and thus the liquidity provision by the central bank. Comparative statics suggest that a more competitive environment moderates this effect.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID302879_code356495.pdf?abstractid=302879&rulid=9708983&mirid=1

Bank Mergers, Competition and Liquidity

We model the impact of bank mergers on loan competition, reserve holdings, and aggregate liquidity. A merger changes the distribution of liquidity shocks and creates an internal money market, leading to financial cost efficiencies and more precise estimates of liquidity needs. The merged banks may increase their reserve holdings through an internalization effect or decrease them because of a diversification effect. The merger also affects loan market competition, which in turn modifies the distribution of bank sizes and aggregate liquidity needs. Mergers among large banks tend to increase aggregate liquidity needs and thus the public provision of liquidity through monetary operations of the central bank.

/pdf/bank-mergers-competition-and-liquidity-1nac7fwiwx.pdf

Bank Mergers, Competition, and Liquidity

N recent years, we have seen a renewed interest in the problem of competition among banks. An increasing number of bank mergers has brought forth new legislation, such as the Bank Holding Company Act (1956) and the Bank Merger Act (1960), which directs regulatory agencies to preserve competition in banking. At the same time, it has become apparent that there is little or no empirical evidence on the relationship between bank performance and market structure. This paper aims chiefly at determining whether or not market structure or concentration has any effect on commercial bank performance. It is considered to be the groundwork from which it is hoped will spring more sophisticated techniques for handling the conceptual difficulties here encountered. It seems reasonable to begin an analysis of bank competition with what is undoubtedly the most delimited borrower market, the market for small business loans. There are fewer borrower alternatives for small business loans than for almost all other bank services. Business loans are also, of course, the most important component of commercial banks' loan portfolios. An investigation of this market provides an estimate of the upper bound of departures from competitive conditions. If no evidence of market power can be found in markets for business loans, other bank services for which there are more substitutes are not likely to display monopolistic practices. This paper attempts to test two hypotheses: (1) that, ceteris paribus, the level of business loan rates is higher in markets having relatively high concentration; and (2) that, ceteris paribus, business loan rates are less flexible in markets having relatively high concentration. In testing these hypotheses, an attempt is made to distinguish the effect of market structure from other regional differences, such as those of loan demand, bank costs, type of banking, etc. This paper seeks to probe the following questions: (1) What is a competitive market structure? (2) What is the quantitative effect of a given change in concentration, such as might result from a bank merger? (3) What determines the spatial market for bank loans? (4) Does branch banking have an effect on market performance different from that of unit banking? (5) How should market structure be measured? (6) Do banks which possess market power behave differently than competitive banks over the business cycle?

Franklin R. Edwards

Papers

Concentration in Banking and Its Effect on Business Loan Rates