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Bank Consolidation and Loan Pricing

  • Lili Xie

    ()

    (Department of Economics, Ball State University)

Registered author(s):

    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.

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    File URL: http://econfac.iweb.bsu.edu/research/workingpapers/bsuecwp200706xie.pdf
    File Function: First version, 2007
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    Paper provided by Ball State University, Department of Economics in its series Working Papers with number 200706.

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    Length: 29 pages
    Date of creation: Nov 2007
    Date of revision: Nov 2007
    Handle: RePEc:bsu:wpaper:200706
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    Web page: http://www.bsu.edu/econ

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    1. Kenneth A. Carow & Edward J. Kane & Rajesh P. Narayanan, 2005. "How have borrowers fared in banking mega-mergers?," Working Paper Series 2005-09, Federal Reserve Bank of San Francisco.
    2. Allen N. Berger & Nathan H. Miller & Mitchell A. Petersen & Raghuram G. Rajan & Jeremy C. Stein, 2002. "Does Function Follow Organzizational Form? Evidence From the Lending Practices of Large and Small Banks," Harvard Institute of Economic Research Working Papers 1976, Harvard - Institute of Economic Research.
    3. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Working Papers 97-1, Federal Reserve Bank of Philadelphia.
    4. Charles Kahn & Ben Sopranzetti, 2005. "Bank Consolidation and the Dynamics of Consumer Loan Interest Rates," The Journal of Business, University of Chicago Press, vol. 78(1), pages 99-134, January.
    5. Cornett, Marcia Millon & Tehranian, Hassan, 1992. "Changes in corporate performance associated with bank acquisitions," Journal of Financial Economics, Elsevier, vol. 31(2), pages 211-234, April.
    6. Edward J. Kane, 2000. "Incentives for banking megamergers: what motives might regulations infer from event-study evidence?," Proceedings 675, Federal Reserve Bank of Chicago.
    7. Allen N. Berger & Loretta J. Mester, 2001. "Explaining the Dramatic Changes in Performance of U.S. Banks: Technological Change, Deregulation and Dynamic Changes in Competition," Center for Financial Institutions Working Papers 01-22, Wharton School Center for Financial Institutions, University of Pennsylvania.
    8. Prager, Robin A & Hannan, Timothy H, 1998. "Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 433-52, December.
    9. Joe Peek & Eric S. Rosengren, 1997. "Bank consolidation and small business lending: it's not just bank size that matters," Working Papers 97-1, Federal Reserve Bank of Boston.
    10. Allen N. Berger & David B. Humphrey, 1992. "Megamergers in banking and the use of cost efficiency as an antitrust defense," Finance and Economics Discussion Series 203, Board of Governors of the Federal Reserve System (U.S.).
    11. Fabio Panetta & Dario Focarelli, 2003. "Are Mergers Beneficial to Consumers? Evidence from the Italian Market for Bank Deposits," CEIS Research Paper 10, Tor Vergata University, CEIS.
    12. Hannan, Timothy H., 1991. "Bank commercial loan markets and the role of market structure: evidence from surveys of commercial lending," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 133-149, February.
    13. Stephen A. Rhoades, 1996. "Bank mergers and industrywide structure," Staff Studies 169, Board of Governors of the Federal Reserve System (U.S.).
    14. Berger, Allen N. & Udell, Gregory F., 2006. "A more complete conceptual framework for SME finance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2945-2966, November.
    15. Pilloff, Steven J, 1996. "Performance Changes and Shareholder Wealth Creation Associated with Mergers of Publicly Traded Banking Institutions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 294-310, August.
    16. Mark J. Garmaise & Tobias J. Moskowitz, 2006. "Bank Mergers and Crime: The Real and Social Effects of Credit Market Competition," Journal of Finance, American Finance Association, vol. 61(2), pages 495-538, 04.
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