Bank Mergers, Interest Rates and the Fragility of Loan Markets
We model the interaction between the concentration of the banking sector and the investment strategies of imperfectly competitive firms in the product market to address the question of whether competition makes loan markets more fragile. It is shown how a merger between two duopoly banks would typically decrease the interest rate and increase the investment volume of imperfectly competitive firms in the product market if investments were strategic complements and some other fairly mild conditions held. Under highly plausible conditions this implies that a merger will decrease the fragility of loan markets in the sense of decreasing equilibrium bankruptcy risk.
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