Bank mergers and the fragility of loan markets

Erkki Koskela and Rune Stenbacka
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Rune Stenbacka: Swedish School of Economics, Finland

Finnish Economic Papers, 2000, vol. 13, issue 1, 3-18

Abstract: We address the question of whether competition makes loan markets more fragile in the sense of increasing the equilibrium bankruptcy risk of firms. This is done using a model of the interaction between the concentration of the banking sector and the investment strategies of imperfectly competitive product market firms. It is shown how a merger between two competing bilateral monopoly banks will typically decrease the interest rate and increase the investment volumes of firms if the investment decisions are strategic complements. Under plausible conditions this implies that a merger will lessen, not aggravate, the fragility of loan markets.

JEL-codes: G21 G33 G34 (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (2)

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