Bank Mergers, Competition and Liquidity
51 Pages Posted: 27 Apr 2004
Date Written: November 2003
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 interbank 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 statics suggest that a more competitive environment moderates this effect.
Keywords: Credit market competition, bank reserves, internal money market, banking system liquidity
JEL Classification: D43, G21, G28, L13
Suggested Citation: Suggested Citation