by Katerina Simons and Joanna Stavins
March/April 1998

The U.S. banking industry has been rapidly consolidating for more than a decade, and the number of commercial banks has declined by almost 30 percent since 1988. At the same time, recent changes in banking law have relaxed constraints on allowable bank activities and geographic expansion, and technology improvements have brought about new secondary markets and payment systems. While banks entered new markets, other financial institutions entered the markets traditionally served by banks. Such far-reaching changes in the financial system make this an appropriate time to reassess antitrust policy in banking.

The authors analyze the effect of bank mergers on deposit interest rates, using data on banks responding to the Federal Reserve's Monthly Survey of Selected Deposits over an 11-year period. Their results suggest that banks exercise market power in pricing money market deposits and CDs in their local markets. Banks pay lower deposit interest rates in markets that are more concentrated, and deposit interest rates are lower in the year following a bank's participation in a merger, for any level of market concentration. Interestingly, rivals located in the same market as the merged banks are more successful in exercising market power by lowering deposit rates than the merged banks themselves. The effect is especially pronounced in large rival banks' pricing. The finding that mergers have an adverse effect on consumer deposit pricing raises a question about whether antitrust enforcement has been sufficiently vigorous.

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