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The Effect of Bank Mergers on Loan Prices: Evidence from the U.S

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  • Erel, Isil

    (Ohio State U)

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    Abstract

    Bank mergers will increase or decrease loan spreads, depending on whether the increased market power outweighs gains in operating efficiency. Using a proprietary loan-level data set for U.S. commercial banks, I find that, on average, mergers reduce loan spreads, and that the reduction is greater for acquirers with larger declines in operating costs post merger. Market overlap between the acquirer and the target leads to more potential for cost savings, which push spreads down. However, if the overlap is significant, the enhanced market power dominates the cost savings and, therefore, spreads increase. The findings are robust to using variation in dates of intrastate banking deregulation as an exogenous instrument for the timing of the in-market mergers. Furthermore, contrary to what might be expected, bigger acquirers do not impose less favorable terms on small businesses. Indeed, the average reduction in spreads is significant for small loans, showing that small borrowers typically pay lower interest rates to banks that have expanded during the previous few years through mergers.

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    Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2006-19.

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    Date of creation: Dec 2007
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    Handle: RePEc:ecl:ohidic:2006-19

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    Cited by:
    1. Francis, Bill & Hasan, Iftekhar & Wang, Haizhi, 2008. "Bank consolidation and new business formation," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1598-1612, August.

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