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Bank mergers and the fragility of loan markets

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Author Info
Erkki Koskela (Department of Economics, University of Helsinki, Finland)
Rune Stenbacka (Swedish School of Economics, Finland)
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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Publisher 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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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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    Other versions:
  6. Bagwell, Kyle & Staiger, Robert W., 1994. "The sensitivity of strategic and corrective R&D policy in oligopolistic industries," Journal of International Economics, Elsevier, vol. 36(1-2), pages 133-150, February. [Downloadable!] (restricted)
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  12. Koskela, Erkki & Stenbacka, Rune, 2000. "Is there a tradeoff between bank competition and financial fragility?," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1853-1873, December. [Downloadable!] (restricted)
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  18. Michel Poitevin, 1989. "Collusion and the Banking Structure of a Duopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 263-77, May. [Downloadable!] (restricted)
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