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Bank Consolidation and Loan Pricing

Author

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  • Lili Xie

    () (Department of Economics, Ball State University)

Abstract

This paper examines the e®ects of bank mergers on loan pricing. Using a sample of U.S. commercial and industrial loans, I ¯nd that banks reduce loan interest rates after they acquire target banks with small market shares, suggesting that the e±ciency gains e®ect dominates the market power e®ect in such mergers. This merger e®ect is largest in the ¯rst year and almost disappears by the third year after the merger. Ex-ante conditions such as the concentration of the banking market and the market overlap of merging banks signi¯cantly a®ect merger e®ects in ways consistent with theory predictions. Merger e®ects are also found to vary across ¯rms: mergers lead to larger rate reductions for informationally opaque ¯rms than for informationally transparent ¯rms. This provides counter evidence for the concern that bank mergers will particularly hurt ¯rms lacking high-quality quantitative information. Although merging banks reduce their loan interest rates, rival banks, i.e., banks located in the same markets as the merging banks, leave their loan interest rates unchanged after mergers occur. This can be attributed to the fact that rival banks do not get e±ciency gains as merging banks do and thus do not ¯nd it pro¯table to follow the pricing change of merging banks.

Suggested Citation

  • Lili Xie, 2007. "Bank Consolidation and Loan Pricing," Working Papers 200706, Ball State University, Department of Economics, revised Nov 2007.
  • Handle: RePEc:bsu:wpaper:200706
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    File URL: http://web.bsu.edu/cob/econ/research/papers/bsuecwp200706xie.pdf
    File Function: First version, 2007
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    References listed on IDEAS

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    Cited by:

    1. Böhme Enrico & Müller Christopher, 2011. "Searching for the Concentration-Price Effect in the German Movie Theater Industry," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 231(4), pages 479-493, August.
    2. Pérez Montes, Carlos, 2014. "The effect on competition of banking sector consolidation following the financial crisis of 2008," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 124-136.

    More about this item

    Keywords

    Bank Merger; Economies of Scale; Economies of Scope; and Market Power.;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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