We employ a procedure suggested by the Department of Justice's Merger Guidelines (but never before applied to banking) to determine whether nonbank financial institutions should be included as participants in defining the product market relevant to antitrust analyses of proposed bank mergers. We estimate bank “residual supply” relationships indicating the responsiveness of small-scale deposit funds supplied by consumers to the level of interest rates offered for such deposits. Estimated elasticities of residual deposit supply are quite small, implying that only commercial banks should be included as participants in the “antitrust market” relevant to proposed bank mergers.

The strategic groups hypothesis is tested using cluster analysis in -16 selected banking markets and based on portfolio composition in 1978, 1981, and 1984. The results indicate that approximately six strategic groups exist in banking and are stable over time. Strategy choices are similar across markets. Implications of the results are (1) intraindustry profit differences may be due to strategic groups rather than efficiency differences, (2) markets may generally be defined too broadly, (3) investigations for collusion need to focus on homogeneous groups in an industry rather than the whole industry, and (4) there is no simple strategy choice for banks between retail and wholesale banking.

In response to fundamental changes in regulation and technology, the financial industry is undergoing an unprecedented wave of consolidation. A growing body of empirical literature measures the efficiency gains from mergers and acquisitions; however there is little sense of how the results might depend on the country, industry and time period analyzed. In this paper we review critically works that cover the main sectors of the financial industry (commercial and investment banks, insurance and asset management companies) in the major industrialized countries over the last 20 years, searching for common patterns that transcend national and sectoral peculiarities. We find that consolidation in the financial sector is beneficial up to a relatively small size, but there is little evidence that mergers yield economies of scope or gains in managerial efficiency.

We study the effect of local market bank concentration on business loan originations and on the pass-through of the federal funds rate to business loan originations. Economic theory on the relationship between concentration and the pass-through of input prices to quantity (or price) is ambiguous. We find that more concentrated markets have lower business loan originations and experience smaller changes in business loan originations in response to changes in the federal funds rate. Our results support the idea that market concentration dampens quantity reactions to input price changes.