Bank mergers and deposit interest rate rigidity

Posted by D. Daniel Sokol

Valeriya Dinger (University of Osnabrueck) explores Bank mergers and deposit interest rate rigidity.

ABSTRACT: In this paper I revisit the debate on the impact of bank and market characteristics on the rigidity of retail bank interest rates. Whereas existing research in this area has been exclusively concerned with static measures of bank and market structure, I adopt a dynamic approach which explores the rigidity effects of the changes of bank and market structure generated by bank mergers. I find that bank mergers significantly affect the frequency of changes to deposit rates. In particular, the probability of adjusting deposit rates in response to shocks in money market rates significantly drops after mergers that involve large target banks and after mergers that generate a substantial geographical expansion of bank operations. These effects, however, materialize only after a "transition" period characterized by very frequent changes of the deposit rates.