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Bank mergers and diversification: implications for competition policy

  • Banal-Estanol, A.
  • Ottaviani, M.

"This paper analyses competition and mergers among risk averse banks. We show that the correlation between the shocks to the demand for loans and the shocks to the supply of deposits induces a strategic interdependence between the two sides of the market. We characterise the role of diversification as a motive for bank mergers and analyse the consequences of mergers on loan and deposit rates. When the value of diversification is sufficiently strong, bank mergers generate an increase in the welfare of borrowers and depositors. If depositors have more correlated shocks than borrowers, bank mergers are relatively worse for depositors than for borrowers." Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

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Paper provided by Department of Economics, City University London in its series Working Papers with number 06/11.

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Date of creation: 2006
Date of revision:
Handle: RePEc:cty:dpaper:06/11
Contact details of provider: Postal: Department of Economics, Social Sciences Building, City University London, Whiskin Street, London, EC1R 0JD, United Kingdom,
Phone: +44 (0)20 7040 8500
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  1. Joseph P. Hughes & William W. Lang & Loretta J. Mester & Choon-Geol Moon, 1996. "Efficient banking under interstate branching," Working Papers 96-9, Federal Reserve Bank of Philadelphia.
  2. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-26, March.
  3. Joseph P. Hughes & Loretta J. Mester, 1997. "Bank capitalization and cost: evidence of scale economies in risk management and signaling," Working Papers 96-2, Federal Reserve Bank of Philadelphia.
  4. Albert Banal-Estañol & Marco Ottaviani, 2006. "Mergers with Product Market Risk," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 577-608, 09.
  5. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  6. Asplund, Marcus, 1995. "Risk-Averse Firms in Oligopoly," SSE/EFI Working Paper Series in Economics and Finance 69, Stockholm School of Economics, revised 21 Sep 1999.
  7. Pyle, David H, 1971. "On the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 26(3), pages 737-47, June.
  8. Paola Sapienza, 2002. "The Effects of Banking Mergers on Loan Contracts," Journal of Finance, American Finance Association, vol. 57(1), pages 329-367, 02.
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