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Banking Competition: Responding to Social Changes

Paper Session

Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)

Manchester Grand Hyatt, Mission Beach B

Hosted By: Society of Government Economists

Chair: Alexander B. Ufier, Federal Deposit Insurance Corporation

Competition and Bank Fragility

W. Blake Marsh

Federal Reserve Bank of Kansas City

Rajdeep Sengupta

Federal Reserve Bank of Kansas City

Abstract

We present empirical evidence documenting how increased competition can affect the fragility of banks using U.S. banking data from 1990 to 2005. In particular, we find that local banks belonging to community (CBOs) and regional banking organizations (RBOs) increased their share of CRE loans as competition from large banking organizations (LBOs) increased. The paper traces the build-up in CRE concentrations in such local banks before the financial crisis to the expansions of LBOs into local banking markets. After instrumenting for LBO competition, we find a steady and continuous increase in CRE loan shares at local banks. CRE concentrations were a principal cause of post-crisis bank failures, and this paper presents evidence showing how competition has the potential to increase not just individual bank fragility, but the overall stability of the banking sector.

Market Competition, Production Technologies, and Regulatory Frictions: Evidence from the Banking Industry

Dasol Kim

U.S. Treasury Department

Allen Berger

University of South Carolina, University of Pennsylvania, and European Banking Center

View Abstract

Abstract

How 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

Justin Vitanza

Temple University

Sudipta Basu

Temple University

Wei Wang

Temple University

Abstract

Socially 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.