Does the presence of big banks influence competition in local markets?

This paper examines whether the biggest organizations in the banking indust ry influence competition differently than their smaller rivals. Big bank fi nancial strength, multimarket links, diversified operations, status as "too big to fail," economies of scale and scope, and in some cases, weak incent ives to be aggressive may result in big banks affecting competition in a gi ven local market differently than would be suggested by market shares and o ther structural measures. Understanding the influence of big banks on compe tition has important implications for antitrust policy toward bank mergers. Empirical results reveal that, in rural markets where big banks operate, co mpetition may be reduced, thereby enabling all banks in those markets to ea rn greater returns. The presence of a big bank is associated with an approx imately 0.09 percentage point effect on a bank's return on assets, which re presents about a 7.7% performance advantage for firms that face big banks o ver firms that do not. The relationship between big banks and profitability holds only when banks are classified as big if they are both very large an d regionally prominent. The presence of banks that possess only one of thes e characteristics does not appear to substantially influence competition. F inally, no clear and consistent patterns of variation are found in the rela tionship between the profitability of small banks and the presence of big b anks. The number of big banks, the market shares of big banks, and the leve l of concentration in markets with big banks do not strongly influence the relationship.