More Banks Drive Borrowing Costs Up

New research finds that increased bank competition leads to higher interest rates on loans

Published on Feb. 10, 2026

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A new study from Texas McCombs professor Cesare Fracassi found that paradoxically, a larger number of banks in a lending market sends the price of a loan up, as measured by the interest rate charged by the lender. For every six additional banks in a county, interest rates are 7 basis points higher. The researchers reviewed over 20,000 U.S. bank loans and found that increased competition also led to more loans and riskier ones.

Why it matters

This counterintuitive finding challenges the traditional economic theory that increased supply leads to lower prices. In the lending market, more banks can actually drive up borrowing costs for businesses and individuals due to the 'winner's curse' dynamic, where banks worry about missing hidden risks in borrowers that other banks have already turned down.

The details

The study, co-authored by researchers from the Federal Reserve Board and McGill University, found that the more banks in a market, the greater the fear that a lender might have missed hidden bad news about a borrower. To protect itself, the bank boosts the interest rate. The researchers also found that when a company got multiple loans from the same bank, it faced markups of 9 basis points, presumably because the bank now knew more about the borrower and the borrower's risks.

  • The study reviewed Federal Reserve records of more than 20,000 U.S. bank loans over 2014-2019.

The players

Cesare Fracassi

Associate professor of finance at Texas McCombs and lead author of the study.

Mehdi Beyhaghi

Researcher at the Federal Reserve Board and co-author of the study.

Gregory Weitzner

Researcher at McGill University and co-author of the study.

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What they’re saying

“The usual story we tell says the more suppliers of a product are out there, the better it is. It's not true when it comes to loans.”

— Cesare Fracassi, Associate professor of finance at Texas McCombs (Mirage News)

“Instead of giving a really good rate, you give a higher rate because you want to be conservative and say, 'Hey, this person might actually default.'”

— Cesare Fracassi, Associate professor of finance at Texas McCombs (Mirage News)

“We say sometimes, it actually is good to have fewer banks.”

— Cesare Fracassi, Associate professor of finance at Texas McCombs (Mirage News)

What’s next

The study's findings may prompt regulators to reconsider policies aimed at boosting bank competition, as reducing the number of banks in a market could potentially lead to lower borrowing costs for businesses and individuals in some cases.

The takeaway

This research challenges the conventional wisdom that more competition is always better in the lending market. It suggests that in some cases, having fewer banks can actually benefit borrowers by leading to lower interest rates, as banks worry less about the 'winner's curse' dynamic and are more willing to offer competitive rates.