Harming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation

A model of multimarket spatial competition is developed wheresmall, single-market banks compete with large, multimarket banks(LMBs) for retail loans and deposits. Consistent with empiricalevidence, LMBs are assumed to set retail interest rates uniformlyacross markets, have different operating costs, and have accessto wholesale funding. If LMBs have significant funding advantagesthat offset potential loan operating cost disadvantages, thenmarket-extension mergers by LMBs promote loan competition, especiallyin concentrated markets. However, such mergers reduce retaildeposit competition, especially in less concentrated markets.Prior empirical research and our own analysis of retail depositrates support the model's predictions.