Abstract
Based on frontier analysis, we derive inferences of bank consumer loan competition from estimating a revenue-cost ‘competition efficiency’ (CE) frontier. The competitiveness of the $400 billion U.S. bank consumer loan market is then assessed by comparing results from our frontier CE measure with other competition measures, such as HHI, Lerner Index, and H-Statistic. These measures are weakly related to one another and only half of them identify banks with the highest loan price as also being the least competitive. This is the opposite of what is expected. Using the frontier CE measure, the most and least competitive banks are not located in the most populous states and the largest banks are underrepresented. Overall, the HHI should not be used to indicate competition.
1 Introduction
Bank loans generate more than half of all U.S. bank revenues and differ between business and consumer loans in both size and borrower sophistication. Consumers are viewed as less informed in financial matters and so are the focus of most state and federal legislation, as well as regulatory concern. Consumer loans in this paper comprise loans to individuals for household, family, and other personal expenditures—a $400 billion dollar market. Concerns about financial services offered to consumers, including all types of consumer loans, led Congress to establish the Consumer Financial Protection Bureau (CFPB) when it passed the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Identifying and correcting potentially unfair or anticompetitive behavior may ultimately increase consumer welfare and raise total economic surplus.
8 Summary and Conclusions
Consumer loans account for $400 billion at U.S. banks and they have been a focus of congressional legislation, Federal Trade Commission and Consumer Financial Protection Bureau investigations, as well as banking regulator rules and guidance. This is because consumer borrowers are both more numerous than business borrowers and are typically less sophisticated in financial affairs so regulatory oversight can assist in achieving a fair outcome for consumer borrowers in dealing with bank lenders. Identifying potentially unfair or anticompetitive behavior can arise through consumer complaints (for which we have no data) as well as from identifying institutions that have relatively higher prices than their peers (after controlling for cost and productivity differences). This is the goal of the indicators of competition presented here—our frontier CE, HHI, H-Statistic, Lerner Index, inefficiency-adjusted Lerner Index, and Mark-up.
