Bank Concentration and Product Market Competition

We argue that a distinguishing feature of credit concentration is the higher incidence of competing firms sharing common lenders, which lowers the cost of debt financing in an industry. This is because common lenders internalize potential adverse effects of higher loan rates on the product market behavior among their competing borrowers. Exploiting plausibly exogenous variation in banks’ industry market shares stemming from bank mergers, we find that high-market-share lenders charge lower loan rates. The effect is confined to industries with competition in strategic substitutes where negative output externalities would be greatest.