(Revised April 25, 2023)

Motivated by a secular increase in the concentration of the US banking industry, I develop a new macroeconomic model with oligopolistic financial intermediaries and heterogeneous firms. Imperfect competition allows banks to price discriminate and charge firm-specific markups, exerting a higher degree of market power on productive young firms that are more financially constrained. The time-varying effects of the cross-sectional dispersion of markups amplify the impact 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 the supply of credit, worsening and prolonging the downturn. The results suggest that bank market power should be an important concern when designing appropriate bail-out policies.