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Bank mergers, competition, and liquidity

Listed author(s):
  • Elena Carletti
  • Philipp Hartman
  • Giancarlo Spagnolo

We model the impact of bank mergers on loan competition, reserve holdings and aggregate liquidity. A merger creates an internal money market that affects reserve holdings and induces financial cost advantages, but also withdraws liquidity from the interbank market. We assess changes in liquidity needs for each bank and for the banking system as a whole, and relate them to the degree of loan market competition. Large mergers tend to increase aggregate liquidity needs, and thus the liquidity provision in monetary operations by the central bank. Fiercer loan market competition seems to be beneficial for aggregate liquidity in industrial countries.

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Paper provided by Federal Reserve Bank of Chicago in its series Proceedings with number 854.

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Length: 89-99
Date of creation: 2003
Publication status: Published in Conference on Bank Structure and Competition (2003 : 39th) ; Corporate governance : implications for financial services firm
Handle: RePEc:fip:fedhpr:854
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