Timothy H. Hannan

The Price-Concentration Relationship in Banking

The commonly observed positive correlation between market concentration and profitability may be explained by noncompetitive pricing behavior, as argued by the structure-performance hypothesis, or by the greater efficiency of firms with dominant market shares, as argued by the efficient-structure hypothesis. By examining the price-concentration relationship instead of the profit-concentration relationship, this paper tests the structure-performance hypothesis in a manner that excludes the efficient-structure hypothesis as an alternative explanation of the results. The results strongly support the structure-performance hypothesis and are robust with respect to model specification, measurement of concentration, and econometric technique. Copyright 1989 by MIT Press.

The Efficiency Cost Of Market Power In The Banking Industry: A Test Of The "Quiet Life" And Related Hypotheses

Traditional concerns about concentration in product markets have centered on the social loss associated with the mispricing that occurs when market power is exercised. This paper focuses on a potentially greater loss from market powera reduction in cost efficiency brought about by the lack of market discipline in concentrated markets. We employ data from the commercial banking industry, which produces very homogeneous products in multiple markets with differing degrees of market concentration. We find the estimated efficiency cost of concentration to be several times larger than the social loss from mispricing as traditionally measured by the welfare triangle.

Bank insolvency risk and the market for large certificates of deposit

In this paper, the authors employ a new source of bank survey data to determine whe ther the market for large certificates of deposit exacts a price for bank risk taking. They find strong evidence that this is in fact the case. Proxy measures of the likelihood of bank insolvency, the variab ility of bank returns on assets, and bank capitalization are all foun d to influence jumbo CD rates in a manner consistent with this hypoth esis. Area-specific variables are also found to play an important rol e in explaining observed jumbo CD rates. Copyright 1988 by Ohio State University Press.

Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry

This study examines the price effects of recent U.S. bank mergers that substantially increased local market concentration. Using the deposit interest rates that banks offer their customers as their price measure, the authors find that, over the 1991-94 time period, deposit rates offered by participants in substantial horizontal mergers and their local market rivals declined by a greater percentage than did deposit rates offered by banks not operating in markets in which such mergers took place. The authors interpret their results as evidence that these mergers led to increased market power. Copyright 1998 by Blackwell Publishing Ltd

Bank commercial loan markets and the role of market structure: evidence from surveys of commercial lending

Abstract This paper seeks to test two tenets that underlie the current practice of antitrust analysis in banking. The first is the view that bank commercial loan markets are local in nature, and the second is the view that banks in more concentrated markets are more likely to engage in some form of noncompetitive behavior. Tests of both of these tenets are conducted using an extensive set of loan-specific survey information not previously employed to address these issues. Results consistent with the existence of local banking markets and the dominance of competitive differences as an explanation for observed differences in loan rates are found.

Foundations of the Structure-Conduct-Performance Paradigm in Banking

This paper employs an explicit model of the banking firm to derive formally, and thereby assess critically, the most commonly tested relationships implied by the structure-conduct-performance paradigm as it applies to the banking industry. These include the relationship between loan rates and market concentration, deposit rates and market concentration, and bank profitability and market concentration. The necessary assumptions and simplifications implicit in past empirical studies are outlined and suggestions for future empirical implementation of the underlying model are presented. Copyright 1991 by Ohio State University Press.

Market Share Inequality, the Number of Competitors, and the HHI: An Examination of Bank Pricing

This paper seeks to determine whether the Herfindahl--Hirschman index (HHI) adequately accounts for the roles of market share inequality and the number of competitors in explaining bank deposit and loan rates. This is been done by estimating deposit-rate and loan-rate equations in which the HHI is decomposed into components that reflect share inequality and number of competitors and, alternatively, by adding measures of share inequality and the number of competitors as additional explanatory variables. Results are inconclusive in the case of deposit rates but suggest that the HHI does not give sufficient weight to the number of competitors in explaining loan rates.

Sex Discrimination and Product Market Competition: The Case of the Banking Industry

This paper examines the relationship between product market competition and employment discrimination using an especially constructed data set that links microeconomic data on female employment with measures of market concentration in the banking industry. The use of firm-specific data drawn from this one industry allows estimation of this relationship in a manner that avoids the problems of interindustry differences that have troubled previous studies. The results provide strong support for a negative relationship between market concentration and the relative employment of women. Further, we find that individual market shares are unrelated to female employment, suggesting that the relationship is due primarily to differences across markets rather than individual firms.

Acquisition Targets and Motives: The Case of the Banking Industry

Findings do not indicate poorly-managed firms are more likely to be acquired than well-managed firms. The analysis uses a sample of 1,046Texas banks that existed in 1970, out of which 201 were acqui red during the period 1970-82. A multinomial logit procedure is used to estimate the relationship between the likelihood of acquisition and the characteristics of the target firm and its market. Additional results suggest that firms with la rge market shares, low capital/asset ratios, and operations in urban areas are r elatively likely to be acquired but not firms with low profits or low growth. Copyright 1987 by MIT Press.

Race, Redlining, and Residential Mortgage Loan Performance

Theories of discrimination in credit markets suggest that under certain circumstances systematic lender bias may result in creditors holding minority applicants or applicants from minority neighborhoods to higher standards of creditworthiness than other borrowers. This implies lower default rates or smaller dollar losses on loans to marginally qualified minority borrowers or borrowers from minority neighborhoods, compared to loans extended to other similarly qualified borrowers. This study seeks to test this prediction by examining the default-risk characteristics of FHA-insured single-family residential mortgages. All things equal, empirical findings fail to support the theoretical predictions that observed default rates are relatively lower among minority borrowers or neighborhoods.