Many Markets Make Good Neighbors: Multimarket Contact and Deposit Banking

Format:Print
| Language:English

Abstract

We investigate the relationship between the interest rates offered to consumers in a deposit banking market and the contact that banks in that market have with each other in other markets. We show, in a simple theoretical model, that such overlapping relationships lead to less competitive behavior by banks. Furthermore, we empirically test this result across U.S. deposit banking markets and find that markets in which banks have many other points of contact with each other act significantly less competitive. Our results are particularly alarming as multimarket contact has increased significantly over the last two decades while the passthrough rate between the Federal Funds rate and deposit banking rates has fallen dramatically.