2. A survey of the literature
In the USA the debate on bank interest rates is characterized by two points of view. According to
the first view, market concentration is an important factor influencing banks’ interest rates. According to the
second view, the link between traditional measures of competition and banking prices disappeared with the
deregulation of the banking system.
The first view developed from the Supreme Court decision, in the 1963 case Philadelphia National
Bank, to consider banking markets “local” rather than national, a decision which highly influenced
subsequent interpretations by the antitrust authorities. The idea that banking rates are influenced by market
concentration has been confirmed by the structure-conduct-performance paradigm - see Gilbert (1984)
and Weiss (1989) for surveys on the subject - and lastly in many papers by Berger and Hannan. They
focus their analysis on the retail deposit market. Berger and Hannan (1989a, 1989b and 1991) find a
negative relationship between concentration and deposit rates. The results are similar if the Herfindahl index
or concentration ratios are used to measure market power.3 Sharpe (1997) also finds that concentration
impacts negatively on deposit rates.
To evaluate the effect of recent bank mergers in the USA, Prager and Hannan (1998) compare the
prices charged by banks involved in mergers to those that are not. The result is that the deposit rates of
merged banks decline more than those of other banks because of their greater market power. Neumark
and Sharpe (1992) estimate a dynamic model to study the role of concentration in influencing changes in
deposit rates following money market rate variations; they find that banks in concentrated markets reduce
deposit rates faster and increase them slower because of their market power. In the USA particular
attention is given to the California banking market, where deposit rates are usually lower than in other states
(the so-called California rate mystery).4 Neuberger and Zimmerman (1990), checking for the effect of
other variables (growth rate of deposits, branch number, average wage of bank employees) find that higher
concentration is one of the factors leading to lower deposit rates in California.
2 See, inter alia, Angeloni, Buttiglione, Ferri and Gaiotti (1995), D’Auria and Foglia (1997), De Bonis and
Ferrando (1997).
3 Hannan (1997) discusses the pros and cons of the Herfindahl index.
4 See Freixas and Rochet (1998).