Monday, January 24, 2005

More Banks, Less Crime? The Real and Social Effects of Bank Competition

Garmaise and Moskowitz report that bank mergers are bad for the community. Specifically, bank mergers (and the resulting reduced competition) lead to reduced lending in the community where the banks merged, a weaker local economy, and increased crime.

Longer version:

Who wins and loses in a merger? In class we analyze various stakeholder groups and try to come to a conclusion for each. It is not as simple of answer as one may think. For example: “the managers of the acquired firm lose because of the increased risk of dismissal”, but how do you measure what a merger does to a community. On one hand the community may suffer from lost jobs etc, but are the jobs lost less than would have occurred had the merger not occurred?

Garmaise and Moskowitz will definitely add to this discussion by providing evidence that bank mergers may be bad for the local community through both economically as well as socially.

In their words:
“We provide micro-level evidence that neighborhoods that experienced more bank mergers are subjected to future reduced loan provision, diminished local construction, lower prices and rents, an influx of poorer households, and higher crime in subsequent years.”
Of course, the immediate question (which the authors do answer somewhat convincingly) is whether the merger causes the problems, or forecasts the problems. Again in the words of Garmaise and Moskowitz:

“We show that these results are not likely due to reverse causation since, among other evidence, we find that while bank mergers precede future crime increases, crime does not precede bank mergers, nor are the two contemporaneously correlated.”

VERY INTERESTING! Definitely the fodder for many discussions, both in and out of class, and possibly even in the regulation of future mergers.

Garmaise, Mark J. and Moskowitz, Tobias J., "More Banks, Less Crime? The Real and Social Effects of Bank Competition" . AFA 2005 Philadelphia Meetings Paper.

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