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Bank Mergers, Information, Default and the Price of Credit

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  • Margarida Catal�o-

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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Article provided by Banca Monte dei Paschi di Siena SpA in its journal Economic Notes.

Volume (Year): 35 (2006)
Issue (Month): 1 (02)
Pages: 49-62

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Handle: RePEc:bla:ecnote:v:35:y:2006:i:1:p:49-62

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