A note on the ‘‘risk-adjusted’’ price–concentration relationship in banking Elijah Brewer III a,b,1 , William E. Jackson III c,d, * a Finance Department, Suite 6100, DePaul University, 1 East Jackson Boulevard, Chicago, IL 60604, USA b Research Department, 11th Floor, 230 South LaSalle Street, Federal Reserve Bank of Chicago, Chicago, IL 60604-1413, USA c Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street, NE, Atlanta, GA 30309, USA d Kenan-Flagler Business School, Campus Box 3490, McColl Building, University of North Carolina, Chapel Hill, NC 27599-3490, USA Received 28 August 2000; accepted 9 June 2005 Available online 7 December 2005 Abstract Price–concentration studies in banking typically find a significant and negative relationship between consumer deposit rates (i.e., prices) and market concentration. This implies highly concen- trated banking markets are ‘‘bad’’ for depositors. It also provides support for the Structure-Con- duct-Performance hypothesis and rejects the Efficient-Structure hypothesis. However, these studies have focused almost exclusively on supply-side control variables and neglected demand-side vari- ables when estimating the reduced form price–concentration relationship. For example, previous studies have not included in their analysis bank-specific risk variables as measures of cross-sectional derived deposit demand. We find that when bank-specific risk variables are included in the analysis the magnitude of the relationship between deposit rates and market concentration decreases by over 50%. We offer an explanation for these results based on the correlation between a bankÕs risk profile and the structure of the market in which it operates. These results suggest that it may be necessary to reconsider the well-established assumption that higher market concentration necessarily leads to anticompetitive deposit pricing behavior by commercial banks. This has direct implications for the antitrust evaluations of bank merger and acquisition proposals by regulatory agencies. And, in a more general sense, these results suggest that any Structure-Conduct-Performance based study 0378-4266/$ - see front matter Ó 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.jbankfin.2005.06.006 * Corresponding author. Address: Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street, NE, Atlanta, GA 30309, USA. Tel.: +1 404 498 8708. E-mail addresses: ebreweri@depaul.edu, ebrewer@frbchi.org (E. Brewer III), william.jackson@atl.frb.org, wej3@unc.edu (W.E. Jackson III). 1 Tel.: +1 312 322 5813. Journal of Banking & Finance 30 (2006) 1041–1054 www.elsevier.com/locate/jbf