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Bank mergers and the fragility of loan markets

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  • Erkki Koskela

    (Department of Economics, University of Helsinki, Finland)

  • Rune Stenbacka

    (Swedish School of Economics, Finland)

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    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.

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    Bibliographic Info

    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 13 (2000)
    Issue (Month): 1 (Spring)
    Pages: 3-18

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    Handle: RePEc:fep:journl:v:13:y:2000:i:1:p:3-18

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    Cited by:
    1. Shaffer, Sherrill, 2001. "Banking conduct before the European single banking license: a cross-country comparison," The North American Journal of Economics and Finance, Elsevier, vol. 12(1), pages 79-104, March.

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