Working Paper: NBER ID: w11351
Authors: Charles W. Calomiris; Thanavut Pornrojnangkool
Abstract: The merger of Fleet and BankBoston in September 1999 resulted in a regional New England lending market in which only one large, universal bank remained. We explore the extent to which that merger resulted in monopoly rents for the combined entity in some niches within the regional loan market. For small- and medium-sized middle-market borrowers, prior to the merger, Fleet and BankBoston charged unusually low loan interest rates, reflecting their ability to realize economies of scope and scale. After the merger, those cost savings were no longer passed on to medium-sized middle-market borrowers, which resulted in an increase in the average interest rate credit spreads to those borrowers of roughly one percent. Small-sized middle-market borrowers (which continued to enjoy the advantage of loan market competition from remaining small banks) maintained their low spreads. Our results suggest that it may be desirable for regulators to consider the concentration in lending markets in addition to deposit markets when evaluating mergers and structuring appropriate divestiture requirements.
Keywords: bank consolidation; market power; loan pricing; middle-market borrowers
JEL Codes: G21; L13; D43; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fleet and BankBoston merger (G21) | reduced competition (L19) |
| reduced competition (L19) | increased interest rates for medium-sized borrowers (G21) |
| Fleet and BankBoston merger (G21) | monopoly power in lending market for medium-sized borrowers (G21) |
| monopoly power in lending market for medium-sized borrowers (G21) | higher interest costs (G32) |
| Fleet and BankBoston merger (G21) | competitive rates for small-sized borrowers (G21) |
| Fleet and BankBoston merger (G21) | increased interest rates for medium-sized borrowers (G21) |