Dynamic branching and interest rate competition of commercial banks: Evidence from Hungary

I supplement previous models of bank competition by incorporating the endogenous branching choices of commercial banks. I apply a dynamic structural model of banks' branching and interest rate choices to a unique bank-level dataset on Hungarian commercial banks during 2004-2007. I find that banks charge a premium in interest rates for relative branch network dominance, and banks with relatively smaller networks are less likely to close branches. I present significant and robust estimates of branch setup costs and scrap values, and discuss the potential use of branching restrictions as regulatory tools to alter lending rates and consumer surplus.