Monetary Policy and Bank Concentration

58 Pages Posted: 23 Nov 2020 Last revised: 9 Sep 2021

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

Tim Zhang

University of Wyoming, College of Business

Date Written: Sep 8, 2021

Abstract

Examining how monetary policy affects bank concentration, we find that when the policy rate rises, banks operating in more competitive markets are more likely to be acquired or fail. The effect is more pronounced among banks with less market power, causing the banking sector to be dominated by fewer large banks over time. Consistent with the market power channel, the effect is driven by banks’ inability to pass the rate hikes to the asset side and being forced to pass to the liability side. We show that banks respond to rate hikes by seeking consolidation to gain market power.

Keywords: Monetary Policy, Bank Concentration, Market Power, Bank Failure, Bank Merger

JEL Classification: D72, G21, G28

Suggested Citation

Chu, Yongqiang and Zhang, Tim, Monetary Policy and Bank Concentration (Sep 8, 2021). Available at SSRN: https://ssrn.com/abstract=3704020 or http://dx.doi.org/10.2139/ssrn.3704020

Yongqiang Chu

Belk College of Business, UNC Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
7046877695 (Phone)

Tim Zhang (Contact Author)

University of Wyoming, College of Business

1000 E. University Avenue
Department 3275
Laramie, WY 82071
United States

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