Lots of people are talking about how big banks should be going forward. I don’t have any expert opinion on this, but I have read this paper, Bank Consolidation and Consumer Loan Interest Rates (Kahn, Pennacchi, Sopranzetti):
The recent wave of bank mergers has raised concern with its effect on competition. This
paper examines the influence of concentration and merger activity on consumer loan interest
rates. It uses Bank Rate Monitor, Inc. survey data on loan rates quoted weekly by large
commercial banks in ten major U.S. cities during the 1989 to 1997 period. The pricing behavior
of banks is analyzed for two types of loans: new automobile loans and unsecured personal loans.
Market concentration is found to have a positive and significant impact on the level of
personal loans, but not automobile loans. Consistent with the exercise of market power, we find
that personal loan rates rise in markets following a significant merger. However, there is a
significant decrease in automobile loan rates charged by banks participating in within-market
mergers, a finding consistent with economies of scale in the origination of automobile loans.
The paper also tests for the existence of leader-follower relationships in loan pricing and
finds that it is more widespread in markets for automobile loans. Interest rates on both types of
loans respond asymmetrically to a change in equivalent maturity Treasury security rates, being
more sensitive to a rise than a fall. In addition, personal loan rates are less responsive in more
That paper is the 2000 version; the published 2005 version has a similar abstract, but is firewalled by the various econ paper sites. I don’t keep up with the literature, but these guys are good and I’m pretty sure this analysis is current in the field. The “respond asymmetrically” means that if interest rates go up, it takes longer for the rates customers see to go up compared to the opposite direction (good for banks, bad for consumers).
There’s little reason to believe from the available research that having large banks with market concentration was passing along much to the customers of those banks – and good reason to believe they were using their market power to overprice them at the margins. From the summary data, those results appear with the coefficient of asset size as well as market concentration.