Questions

1. Bank Mergers and the Dynamics of Deposit RatesBen R. Craig and Valeriya DingerConference on Mergers and Acquisitions of Financial Institutions

2. Questions • Changes in market structure → firm pricing behavior • Bank mergers → deposit rates

3. Why this topic • Political relevance • Growing literature • Seemingly contradicting results

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

5. 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

6. 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

7. Our approach • A new empirical framework including: • Deposit rate rigidity • Richer merger definition

8. % 1998 2000 2002 2004 2006 Checking account rate MMDA rate T-bill rate (3 months) Fedfunds rate Deposit rate rigidity • no change in 90% of the checking account rate observations

9. 2 1 0 Deposit rate Change in the deposit rate (ln(ratet/ratet-1)) trigger model Deposit rate rigidity: does it matter? • Censored dependent variable • Inconsistent and biased OLS

10. 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

11. Our model: Dependent variable: Standard controls

12. 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) -.5 Merger date .5 1 1.5 2 3 4 -.5 Merger date .5 1 1.5 2 3 4 t t

13. Our model: • Merger controls: • change of bank size • change of market share • change of number of markets

14. cu 0 cl Estimation technique • Assume costly deposit rate adjustment • Estimate a “trigger” model in the tradition of the Ss literature • If ΔP* is the desired and ΔP is the observed deposit rate change

15. 0 -1.50 Results: checking account rate dynamics Checking account rate dynamics 0.10 0.05 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 -0.05 -0.10 -0.15 Years after merger monthly change cummulative effect

16. 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

17. monthly change cummulative effect Results: money market deposit account rates MMDA rate dynamics 0.10 0.05 -0.5 0 0.5 1.0 1 1.5 2 2.5 3 3.5 4 -0.05 -0.10 -0.15 Years after merger

18. 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

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