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Bank Mergers, Competition and LiquidityElena CarlettiUniversity of Frankfurt - Center for Financial Studies Philipp HartmannEuropean Central Bank (ECB); Centre for Economic Policy Research (CEPR) - International Macroeconomics Giancarlo SpagnoloStockholm School of Economics (SITE) February 2004 CEPR Discussion Paper No. 4260 Abstract: We model the impact of bank mergers on loan competition, banks' reserve holdings and aggregate liquidity. Banks compete in a differentiated loan market, hold reserves against liquidity shocks, and refinance in the inter-bank market. A merger creates an internal money market that induces financial cost advantages and may increase reserve holdings. We assess changes in liquidity risk and expected liquidity needs for each bank and for the banking system. Large mergers tend to increase expected aggregate liquidity needs, and thus the liquidity provision by the central bank. Comparative statistics suggest that a more competitive environment moderates this effect.
Number of Pages in PDF File: 46 Keywords: Credit market competition, bank reserves, internal money market, banking system liquidity JEL Classification: D43, G21, G28, L13 working papers seriesDate posted: April 5, 2004Suggested CitationContact Information
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