Finance and Economics Discussion Series (FEDS)
October 2001
The Competitive Implications of Multimarket Bank Branching
Timothy H. Hannan and Robin A. Prager
Abstract:
Regulators and research economists typically view retail banking markets as locally limited, spanning an area that can often be approximated by a metropolitan area or rural county. Banks are assumed to set retail prices based on the conditions of supply and demand prevailing within these local market areas. Over the years, a very large number of studies has found evidence consistent with this presumption. However, recent studies have found evidence that large multimarket banking organizations tend to offer uniform interest rates for retail deposit accounts of a particular type throughout the area that they serve, at least within a given state. This uniform pricing phenomenon raises questions about the continued relevance of the concept of local banking markets for both research and antitrust purposes.
We address this issue by developing a model to determine the effects of the presence of multimarket banks in a local geographic market on the deposit interest rates offered by singlemarket banks serving that same local market. Empirical analysis based on this model yields two key findings. First, deposit interest rates offered by single-market banks tend to be lower in local markets in which multimarket banks account for a greater share of market deposits. Second, even with multimarket banks present in the market, local market concentration influences the pricing behavior of single-market banks; however, the relationship between local concentration and the deposit interest rates offered by single-market banks weakens as the market share of multimarket banks grows.
Keywords: Bank, pricing, multimarket
PDF: Full Paper
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