Productivity of Banks : Implications for Interest Rates, Economic Profits and Branches

This paper examines the transmission of productivity differences among banks and of industry productivity growth over time to lower (higher) interest rates of loans (deposits) and higher customer accessibility to bank services. For this purpose, it models spatial competition in retail banking among bank branches with different productivity level. In the short-term banks compete in interest rates. In the mid-term, banks expand their network of branches until economic profits per branch converge to zero. In equilibrium, banks that are more productive set lower (higher) interest rates of loans (deposits) and their market share increases as a result of both a higher demand of loans and deposits per branch and a larger network of branches. The model fits well the data for Spanish banks over period 1993-2007