Banking Competition: Responding to Social Changes
Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Alexander B. Ufier, Federal Deposit Insurance Corporation
Market Competition, Production Technologies, and Regulatory Frictions: Evidence from the Banking Industry
AbstractHow do firms respond to shocks to product market competition, such as mergers? We exploit a regulatory friction in the banking industry in which antitrust analysis primarily focus on deposit market conditions for bank merger approvals, and consider loan market conditions in only limited circumstances. We find evidence that rival bank commercial lending reactions to mergers that affect loan market concentration depend on their lending technologies. Transactional banks curtail lending while relationship banks expand lending when increases in loan market concentration are not scrutinized in bank merger applications. However, the responses of relationship lenders are insufficient to offset overall losses in credit availability, as increases in loan market concentration is associated with reduced overall credit availability. Consistent with this, local firms report higher borrowing costs and increased financial constraints for such cases. Finally, we document spillovers in lending by rival transactional banks through cross-market linkages, suggesting that some merger events affect competitive conditions beyond markets that are directly affected.
Walking the Walk: CSR Disclosures and Bank Practices
AbstractSocially responsible banks portray themselves as community pillars, particularly for low-to-middle income neighborhoods. We examine the truthfulness of this portrayal by studying the implications of banks’ corporate social responsibility (CSR) disclosures for their product pricing and lending behavior. Using an instrumental variable approach that addresses selection bias, we find that high-CSR banks offer lower deposit rates, charge higher loan rates, and limit capital supply in poorer neighborhoods relative to their low-CSR peers. We also find high CSR banks attract more mortgage loan applications from females and minority groups. Collectively, our findings suggest that banks capitalize on CSR disclosures, obtaining product differentiation and pricing power.
Small Banks and Big Boxes: Real Sector Industrial Organization and Financial Consolidation
AbstractThe industrial and banking sectors have each seen consolidation over the past twenty years, with small institutions taking an ever-shrinking share. Existing literature argues that small banks' comparative advantages lie in small business finance. Consequently, in this paper, we argue that some of the consolidation in the banking sector is a consequence of changes to the industrial organization of the real economy. We use a Bartik-type instrument and variation in exposure to industries with different patterns of small business growth to show that the real-side demand for small bank products is partially responsible for the relative decline in small bank deposits and branches. We do not find that small business growth impacts large banks nor do we find that large business growth affects small bank growth. We find that the result is driven in large part by the propensity of small banks to be acquired, consistent with the view that small banks comparative advantage lies in small business finance.
- E0 - General
- G0 - General