Does Competition Make Loan Markets More Fragile?
University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; Institute for the Study of Labor (IZA)
Hanken School of Economics
Center for Economic Studies Working Paper at University of Munich, Number 92
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 banks would typically decrease the interest rate and increase the investment volume of imperfectly competitive firms in the product market. Under quite plausible conditions this implies that a merger will increase the stability of loan markets in the sense of decreasing bankruptcy risks.
Keywords: Bank Competition, Bankruptcy Risk, Mergers, Credit Market Stability.
JEL Classification: G21, G33, G34
Date posted: July 9, 1998