Three essays in bank mergers and market structure
Park, Yang Shin
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I analyze the effects of bank mergers and competitive market structure after the Riegle-Neal Interstate Banking and Branching Efficiency Act. The first chapter studies the incentives to decide mergers and the effects of market competition. Nationwide branching from deregulation and the resulting bank consolidation have brought more a competitive market environment. In particular, branch networks play an important role in bank merger analysis. Using commercial banks' branch-level location data in Texas from 1994 to 2005, I estimate a two-sided matching model of merging and target banks with transferable utility. To study post-match values, I apply the maximum score estimator developed by Fox (2010). I find the positive assortative matching of bank sizes and I confirm that a bank prefers matching with target banks that have geographically overlapping markets. Moreover, I extend the standard matching model to incorporate externalities of market competition and the merger activities of rivals. Competitive rivals lessen the effects of mergers but mergers that increase market power have positive externalities on unmatched banks. The second chapter develops a structural model of demand and supply for retail banking to predict post-merger price. Ownership consolidation can affect not only price but also product characteristics. Once demand parameters and price elasticities are estimated, the adjustments in banking characteristics following mergers are considered in order to estimate marginal costs. I apply Peters’ (2006) simulation methods to account for the discrepancy between simulated merger changes and actual changes. The third chapter builds on an entry model of Berry and Waldfogel (1999) to quantify market competition. Significant consolidation waves after the Riegle-Neal Act brought a decrease in the number of banking institutions, while the relaxation of branching regulations almost doubled the number of bank branches and fortified market competition. When a new branch with high quality enters, I analyze the effects of market deposit expansion, business stealing from rival incumbent banks and cannibalization from other branches operated by the same bank. I find evidence that business stealing effects dominate cannibalization effects as market size increases. However, the impact of competition is localized and cannibalization effects are rather reversed at remote distances.