Bank Mergers and the Dynamics of Deposit Rates Ben R. Craig and Valeriya Dinger Conference on Mergers and Acquisitions of Financial Institutions

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Bank Mergers and the Dynamics of Deposit
RatesBen R. Craig and Valeriya Dinger
Conference on Mergers and Acquisitions of
Financial Institutions
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Questions

• Changes in market structure ? firm pricing
  behavior
• Bank mergers ? deposit rates

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Why this topic

• Political relevance
• Growing literature
• Seemingly contradicting results

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This paper

• replicates earlier research approaches on a new
  dataset
• presents a new empirical approach for estimating
  bank mergers impact on deposit rate dynamics

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Data

• Monthly deposit rate series for 624 banks in 164
  local markets from 1997 to 2006
• Merger data merger date, acquiring and target
  bank
• Bank financial statements data
• Local market characteristics

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Alternative models
short-term
long-term
Hannan and Prager
-
-
no controls
ln(ratet/ratet-1)

-
ln(ratet/ratet-1)
controls


Focarelli and Panetta
ratet-3montht-bill
dependent
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Our approach

• A new empirical framework including
• Deposit rate rigidity
• Richer merger definition

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Deposit rate rigidity

• no change in 90 of the checking account rate
  observations

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Deposit rate rigidity does it matter?

• Censored dependent variable
• Inconsistent and biased OLS

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Set of mergers

• Distinction between in- and out-of-market mergers
  
• is not so clear in our data

Market B
Market A

• Include all bank mergers but control for what
  they change

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Our model
Dependent variable Standard controls
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Our model
Merger splines knots at ½ year prior to the
mergers, at the merger date, ½ year, 1, 1 ½, 2, 3
and 4 years after the merger (based on -1, 10
years data)
Merger date
-.5
.5
1
1.5
2
3
4
Merger date
-.5
.5
1
1.5
2
3
4
t
t
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Our model

• Merger controls
• change of bank size
• change of market share
• change of number of markets

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Estimation technique

• Assume costly deposit rate adjustment
• Estimate a trigger model in the tradition of
  the Ss literature
• If ? P is the desired and ?P is the observed
  deposit rate change

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Results checking account rate dynamics
Checking account rate dynamics
0.10
0.05
0
-0.5
0.5
1.5
2.5
3.5
4
2
3
1
-0.05
-0.10
-0.15
Years after merger
monthly change cummulative effect
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Results checking account rates
Merger controls
target size
-0.034
change of market share
-0.408
The local market matters
Change of number of markets
-0.021
Small impact of geographical expansion
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Results money market deposit account rates
MMDA rate dynamics
0.10
0.05
1
0
-0.5
0.5
1.5
2.5
3.5
4
2
3
1.0
-0.05
-0.10
-0.15
Years after merger
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Results money market deposit account rates
Merger controls
target size
0.007
change of market share
-0.100
Decoupled from local market competition
Change of number of markets
-0.011
Small negative impact of geographical expansion
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Conclusion

• Bank mergers have
• no substantial impact on MMDA rates
• persistent negative impact on checking account
  rates
• driven by local market power