# Presentation: 751282

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

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

**Questions **

- Changes in market structure → firm pricing behavior
- Bank mergers → deposit rates

**Notes:**
Efficiency hypothesis – Demsetz
SCP Hypothesis – Weiss, Scherer

**Why this topic**

- Political relevance
- Growing literature
- Seemingly contradicting results

**This paper**

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

**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

**short-term**

**long-term**

**controls**

**no controls**

- ln(ratet/ratet-1)

- ln(ratet/ratet-1)

- ratet-3montht-bill

**Alternative models**

**-**

**+**

**+**

**+**

**-**

**-**

**Hannan and Prager**

**Focarelli and Panetta**

**dependent **

**Our approach**

- A new empirical framework including:
- Deposit rate rigidity
- Richer merger definition

**Deposit rate rigidity **

- no change in 90% of the checking account rate observations

**Deposit rate rigidity: does it matter?**

- Censored dependent variable
- Inconsistent and biased OLS

**Set of mergers**

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

**Market A**

**Market B**

- Include all bank mergers but control for what they change

**Our model:**

- Dependent variable:
- Standard controls* *

**Our model:**

- Merger splines: knots at 1⁄2 year prior to the mergers, at the merger date, 1⁄2 year, 1, 1 1⁄2, 2, 3 and 4 years after the merger (based on [-1, 10] years data)
* *

**Merger date**

**-.5**

**.5**

**1**

**1.5**

**2**

**3**

**4**

**t**

**Merger date**

**-.5**

**.5**

**1**

**1.5**

**2**

**3**

**4**

**t**

**Our model:**

- Merger controls:
- change of bank size
- change of market share
- change of number of markets

**Estimation technique**

- Assume costly deposit rate adjustment
- Estimate a “trigger” model in the tradition of the Ss literature
- If **Δ**** ****P*** is the desired and **Δ****P** is the observed deposit rate change

**Results: checking account rate dynamics**

- Checking account rate dynamics

- 0

- -0.5

- 0.5

- 1.5

- 2.5

- 3.5

- 4

- 2

- 3

**Years after merger**

- -0.05

- -0.10

- -0.15

- 0.10

- 0.05

- 1

- monthly change
- cummulative effect

**Results: checking account rates**

- The local market matters

- Merger controls

- target size

- change of market share

- Change of number of markets

-   -0.021*

-     -0.408**

- -0.034

- Small impact of geographical expansion

**Results: money market deposit account rates**

- MMDA rate dynamics

- 0

- -0.5

- 0.5

- 1.5

- 2.5

- 3.5

- 4

- 2

- 3

**Years after merger**

- -0.05

- -0.10

- -0.15

- 0.10

- 0.05

- 1.0

**Results: money market deposit account rates**

- Decoupled from local market competition

- target size

- change of market share

- Change of number of markets

-   -0.011*

- -0.100

- 0.007

- Merger controls

- Small negative impact of geographical expansion

**Conclusion **

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