Essays on Spatial Competition and Collusion in the Bank Deposit Market PDF Download

Author: Yoon Hae Oh
Publisher:
ISBN:
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Languages : en
Pages : 102

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Book Description
Abstract: The market structure in the U.S. banking industry has continuously changed with several events such as the removal of regulation, appearance of multi-state bank, entry of newly chartered banks, and various branching activities of banks. This dissertation examines how the changes in the market structure alter the spatial competition and collusion amongst banks in setting deposit interest rates. The first essay investigates the impact of the deregulation of branching activities on the degree of tacit collusion among the local banks. The empirical framework adapts a theoretical model of oligopolistic spatial competition in the bank deposit market proposed by Barros (1999). In this model, the degree of cooperation among local competing banks is represented by the spatial interdependency in deposit pricing. The essay proposes a general framework for identifying differences in collusive behavior between markets using a higher order spatial autoregressive model. With this approach, the regression results show that when states allow intrastate branching only by means of mergers, the collusive behavior of local banks rises significantly. Meanwhile, after the deregulation allowing full statewide branching and after the passage of the Riegle-Neal Interstate Banking and Branch Efficiency Act in 1994, the collusive behavior diminishes in the short run but returns to its previous level in the long-run. The second essay focuses on the two main events as a consequence of the Riegle-Neal Act: the appearance of large multi-state banks and the entry of newly chartered banks. The paper examines the response of small incumbent banks to these events. Specific samples from 1996 to 2004 were selected as such events occurred actively in this period. The empirical framework is similar to that used in the first essay. The appearance of large multi-state firms has negative effect on local bank's collusion behavior, both in the short-run and long-run. Similarly, the entry of newly chartered banks has competitive effect. The incumbent banks react competitively rather than cooperatively on the entry of a new bank. The third essay examines small banks' response in deposit interest rates and service fees on deposit accounts to the branching activities of other banks. The existing literature has faced difficulties in predicting how mergers and branching activity by large multi-market banks impact the deposit prices of competing banks. In this study, small banks' deposit interest rates and service fees in U.S. metropolitan areas from 2004 to 2006 are examined using an unbalanced panel regression analysis. Banks respond to competitors' branching activities differently according to the types of merger and the types of rival banks. The regression results show that a branch opening by an acquiring multi-market bank after a merger has negative impact on the deposit interest rates of neighboring single-market banks. Single-market banks set higher deposit rates after a merger between other single market banks.