What drives deposit rates after bank mergers? Not just market power

Credit: Sebastien Thibault

Martin Daks | Mar 31, 2020

Antitrust authorities have the job of keeping markets healthy, which involves reviewing prospective mergers to make sure they foster, rather than harm, competition. Typically, authorities try to detect and nix deals that would give a company too much power in any one market. 

But they generally focus on how a merger would change local-market concentration, and this may not always be conducive to the best decisions, write Chicago Booth’s João Granja and the Bank of Canada’s Nuno Paixão. “It’s not so clear that increases in local concentration are necessarily going to give rise to increases in prices in those regions,” says Granja. 

The assumption underlying this regulatory approach is that when a company’s local market power increases significantly, consumers in that market will see a corresponding price increase. But Granja and Paixão saw a different pattern when they looked at US banking.

In the past two decades, this sector has experienced significant consolidation. After the 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act removed many restrictions on banks operating across state lines, big mergers and smaller consolidations reduced the number of financial institutions accepting deposits in the United States by half, to fewer than 5,000. In general, any bank merger or acquisition likely to result in a significant level of local market concentration triggers a regulatory review—the fear being that if an acquiring bank gains too much power in a market, it can lower the rates it offers depositors. 

But local concentration by itself was not the primary driver of rate changes, the researchers find. They analyzed branch-level data on deposit interest rates from RateWatch, an S&P Global company that surveys bank branches and collects weekly rates paid on deposits. They looked at data on 1,614 deals from 2006 to 2016, involving 7,500 branches that were acquired by 863 distinct banks. 

While the fear was that an acquiring bank would gain power and then lower rates, in fact, regardless of local concentration and an acquirer’s local market power, a branch’s postmerger rates tended to converge toward those of its acquirer. The banks in the study paid uniform or near-uniform interest rates on deposits across their branch networks. And because uniform pricing is so strong throughout the banking sector, even when a bank gained market power in an area, it seemed reluctant to lower rates there but not elsewhere. Acquisitions did lead to lower rates on deposits when the acquirer offered lower rates than the branches it acquired—but the opposite was also true, when the acquirer offered higher deposit rates than the acquired branches, those branches saw their rates increase.  

“This fact that banks adjust the deposit rates of the acquired branches toward their own [rates] is the most important factor in determining the evolution of local prices following a merger,” says Granja. In the year following a merger, the spread between the local bank’s rates and the acquirer’s rates narrowed by an average of 9.5 to 10.2 basis points, or about 18 percent. Moreover, these reductions in the absolute difference spilled over to competing institutions in local markets. 

By focusing on the local concentration effects rather than the convergence effect the researchers identify, regulators could make two errors, the research highlights. First, regulators could force some acquirers to divest themselves of branches where, because of postmerger convergence, rates would actually rise. Second, regulators could fail to stop a merger that might not result in a bank gaining significant local power but could nonetheless lead to lower rates. 

The findings could potentially inform more-general antitrust policy making, too, beyond the banking sector. “Antitrust is important, but the way we do it has inherent limitations,” says Granja. Regulators, he notes, need to take into account other factors that drive prices in particular industries, especially as technologies and these industries evolve.