Banks merge for a variety of reasons, among them to realize increases in efficiency through exploitation of economies of scale or scope, to spread best-practice techniques and expertise to less profitable participants, and to reap the benefits of market share and decreases in competition. The fundamental policy question regarding mergers is whether the benefits are social or private in nature, and if social, whether they accrue to the banks alone or whether part of the benefits are enjoyed by the banks’ customers as well.

The recent merger wave has spawned research examining whether potentially vulnerable bank customers, such as small businesses and consumers, are hurt by consolidation in banking markets. These studies have tended to focus on the effects of mergers and concentration on small business loans and on consumer bank deposits. In contrast, there has been very little research analyzing how mergers influence banks’ consumer lending practices. A reason for the void in research on consumer credit is a lack of data on the quantities of specific consumer loans made by banks.

This paper sheds new light on the relationship between bank consolidation and consumer lending by examining data on interest rates charged for two types of consumer loans: new automobile loans and unsecured personal loans. This data was collected by Bank Rate Monitor, Inc., a company that conducts weekly surveys of consumer loan rates charged by large banks in various cities across the country. The data enable us to track the effects of changes in concentration and merger activity on bank pricing behavior at a very detailed level. To our knowledge this is the first study that examines the impact of bank consolidation on rates charged for consumer loans.

The paper considers several aspects of consumer loan pricing. First, it analyzes factors that might explain the average level of loan rates in different markets. Market concentration is found to have a positive and significant effect on the level of personal loans, but not automobile loans. Second, it examines the dynamics of bank pricing decisions during periods around large merger events when the concentration in a banking market can change significantly. We find evidence that mergers lead to greater market power in the pricing of personal loans. In contrast, banks participating in within market mergers significantly reduce automobile loan rates following a merger. This latter evidence is consistent with economies of scale in originating automobile loans, a hypothesis that is made more plausible given that a large proportion of automobile loans is securitized. Hence, mergers appear to have a disparate impact on different consumer loans.

er loan pricing. We find evidence of a leader- llower relationship in some markets, especially for the case of new automobile loans. Also, there is substantial rigidity in personal loan rates, and this stickiness is greater in more concentrated markets. In addition, banks appear to change both types of loans in an asymmetric manner: banks are quicker to raise loan rates in response to a rise in Treasury rates than they are to lower them following a decline in Treasury yields. Moreover, this asymmetric, “opportunistic” behavior is more prevalent in less concentrated loan markets.

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