Bank Mergers and the Dynamics of Deposit Interest Rates

by

Ben R. Craig and Valeriya Dinger

Discussant Robert R. Bliss

Wake Forest University Calloway School

Conference on Mergers and Acquisitions of Financial Institutions

1 December 2007

No disclaimer.

Methodological Innovations

• Correct for econometric problem posed by sticky deposit rates

• Add more complete set of controls

• Use linear spline rather than step function for time since merger

Puzzle

• Hannan and Prager (1998) find lower rates following mergers in the first year

• Focareli and Panetta (2003) find higher rates over longer period

First Step

• Authors confirm previous results using their data set.

Second Step

• Introduce controls and linear spline– Find some evidence of

• Short run increases in rates• Long run decreases• Opposite of both Hannan-Prager and

Focarelli-Panetta– Evidence consistent across specifications

• Suggests choice of controls is critical.

Third Step

• Introduce three-step procedure correction

• Checking deposit results – Negative changes (mostly significant) at all

horizons out to 4 years– Except at 3 years (significant positive)

• Money market deposit rates– Alternating, strongly significant positive and

negative changes

Issues

• Robustness

• Inconsistencies in results

• Is spline helping?

• Are rates the relevant variable?

Robustness

• Three-step probit-GLS-probit procedure is very complex– Assumptions piled on assumptions

• Preliminary steps results would help

• Suggestions– Examine data for outliers (visual or statistical)– Bootstrap to check variability of results.

What is Special About Year 3?Money Market Deposits (Table 6)

Is Flip/Flop Plausible?Money Market Deposits (Table 7)

Is Spline Helping?

• Spline may be “overshooting”– Effects of other variables on spline goodness

of fit?

• Also show results with step function

• Generate residuals w/out spline and plot against time since merger– Do they show same pattern?

Are Rates the Relevant Measure?

• Efficiency argument assumes benefits will be passed to depositors– Might be passed to stockholders– cf GSE subsidy debate

• Market power argument assumes deposits are separate good– Merged firms may bundle in more services– Need all-in cost of deposits