Bank Mergers and Diversification: Implications for Competition Policy

Albert Banal-Estanol () and Marco Ottaviani ()

No 06/11, City University Economics Discussion Papers from Department of Economics, City University, London

Abstract: This paper analyses competition and mergers among risk averse banks. We show that the correlation between the shocks to the demand for loans and the shocks to the supply of deposits induces a strategic interdependence between the two sides of the market. We characterize the role of diversification as a motive for bank mergers and analyse the consequences of mergers on loan and deposit rates. When the value of diversification is sufficiently strong, bank mergers generate an increase in the welfare of borrowers and depositors. If depositors have more correlated shocks than borrowers, bank mergers are relatively worse for depositors than for borrowers.

Keywords: risk aversion; imperfect competition; bank mergers; welfare of depositors and borrowers (search for similar items in EconPapers)
JEL-codes: D43 G21 G32 G34 (search for similar items in EconPapers)
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Date: 2006-12
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Journal Article: Bank Mergers and Diversification: Implications for Competition Policy (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:cty:dpaper:0611

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