Bank Mergers, Interest Rates and the Fragility of Loan Markets

Erkki Koskela and Rune Stenbacka

No 113, Discussion Papers from VATT Institute for Economic Research

Abstract: We model the interaction between the concentration of the banking sector and the investment strategies of imperfectly competitive firms in the product market to address the question of whether competition makes loan markets more fragile. It is shown how a merger between two duopoly banks would typically decrease the interest rate and increase the investment volume of imperfectly competitive firms in the product market if investments were strategic complements and some other fairly mild conditions held. Under highly plausible conditions this implies that a merger will decrease the fragility of loan markets in the sense of decreasing equilibrium bankruptcy risk.

Keywords: Bank Competition, Bankruptcy Risk, Mergers, Credit Market Fragility, Macroeconomic policy, Talouspolitiikka, Taxation and Social Transfers, Julkisen talouden rahoitus ja tulonsiirrot, G210 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, G330 - Bankruptcy; Liquidation, G340 - Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance, (search for similar items in EconPapers)
Date: 1996
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