Product level market power spillovers among U.S. banks

Abstract

Bank market power has far-reaching effects as, among other things, it affects the price of credit. Even though it is well-known that banks are spatially interdependent due to rival banks having branches in the same geographical areas, the literature on bank market power overlooks this. To measure market power spillovers, we set out an approach to calculate spill-in and spill-out Lerner indices for firms and their products. To account for the marked consolidation over the sample, we use unbalanced panel data comprising over 45,000 observations for large commercial U.S. banks. From spatial stochastic frontier models, we obtain estimates of these indices (with and without adjustment for inefficiency spill-ins and spill-outs). We observe high spill-in Lerner indices for some banks, which is consistent with consolidation in the industry leading to concerns about bank market power. In line with larger agglomeration effects being conducive to higher spillovers, banks with high spillover Lerner indices tend to have branches in major cities.