Bank Mergers, Information, Default and the Price of Credit

Margarida Catalão-

Economic Notes, 2006, vol. 35, issue 1, pages 49-62

Abstract: This paper addresses the impact of bank mergers on the price of firm credit, through an information channel. It is shown that, as bank mergers imply a wider spreading of information among banks concerning firms' past defaults, they may increase the expected revenue from lending. Therefore, interest rates may decline as long as a sufficiently competitive environment is preserved. A fall in interest rates, in turn, reduces the incentives for firms to strategically default, which reinforces the downward effect on the price of credit. The results are a function of the level of information sharing and of the sensitivity of the default probability to the interest rate. Copyright Banca Monte dei Paschi di Siena SpA, 2006

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