Abstract/Summary

Banks, as a key financial intermediary, have been found of playing a critical role in the healthy development of modern economies. In this thesis, focusing on the US banking industry, we provide an in-depth investigation of the impact of changing banking market structure on the product market competition, bank liquidity creation and wider economic development. Employing data from the US market over the period of 1997 to 2020, the first two essays focus on the role played by banking market structure in determining the product marker structure (Chapter 3) and bank liquidity creation (Chapter 4) and the third essay (Chapter 5) further investigates the effect of bank liquidity creation on firm innovation. In general, it can be concluded that the banking market structure can generate a significant impact on the structural characteristics of the product market and firm activities. A higher level of bank concentration may lead to a lower amount of credit created in the real economy, and hence reduced product market competition, but the impact can be different in different time periods and/or among firms with different external-financial dependence conditions. In addition, after controlling the characteristics of banks and the macroeconomic situation of different states, the results confirm that banks with stronger market power tend to create more liquidity. In particular, when the joint impact of bank market power and capital adequacy ratio is considered, they are found of contributing positively to banks’ liquidity creation. It, therefore, indicates that tighter regulator control would increase market confidence, especially when the banks with high market power. Finally, regarding the role played by bank liquidity on the real economy, it is found that when increased liquidity is created by banks, firms are more willing to innovate as this may assist them to build up long-term sustained competitive advantages. In particular, such a positive relationship would be further consolidated when the market is competitive as monopolistic firms tend to have less incentive to innovate and are more willing to enjoy the status quo. Based on the conclusions reached, important policy implications could be drawn related to the further development of the banking sector. It is proposed that in countries like the US which has a well-developed financial sector and effective regulatory control, banking consolidation could be encouraged rather than restricted as it may contribute positively to effective resource allocation and the further promotion of economic growth.