(Revised June 2, 2025)
Motivated by a secular increase in the concentration of the U.S. banking industry, I develop a new macroeconomic model with oligopolistic financial intermediaries and heterogeneous firms. Market power allows banks to price discriminate and charge firm-specific markups, exerting stronger market power over productive firms that are more financially constrained. This dampens capital accumulation and amplifies the effects of macroeconomic shocks. During a crisis, banks exploit the higher number of financially constrained firms to extract higher markups, inducing a larger decline in real activity. When a big bank fails, the remaining banks use their increased market power to restrict credit supply, worsening and prolonging the downturn.