Bank Mergers, Competition and Liquidity

Carletti, Elena; Hartmann, Philipp; Spagnolo, Giancarlo

Bank Mergers, Competition and Liquidity

46 Pages Posted: 5 Apr 2004

Elena Carletti

Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Philipp Hartmann

European Central Bank (ECB); Centre for Economic Policy Research (CEPR) - International Macroeconomics

Giancarlo Spagnolo

Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF

There are 2 versions of this paper

Date Written: February 2004

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.

Keywords: Credit market competition, bank reserves, internal money market, banking system liquidity

JEL Classification: D43, G21, G28, L13

Suggested Citation: Suggested Citation

Carletti, Elena and Hartmann, Philipp and Spagnolo, Giancarlo, Bank Mergers, Competition and Liquidity (February 2004). CEPR Discussion Paper No. 4260. Available at SSRN: https://ssrn.com/abstract=510322