56 Pages Posted: 15 Mar 2006 Last revised: 1 May 2009
Date Written: April 30, 2009
Bank mergers can increase or decrease loan spreads, depending on whether the increased market power outweighs efficiency gains. Using proprietary loan-level data for U.S. commercial banks, I find that, on average, mergers reduce loan spreads, with the magnitude of the reduction being larger when post-merger cost savings increase. My results suggest that the relation between spreads and the extent of market overlap between merging banks is non-monotonic. Market overlap increases cost savings and consequently lowers spreads, but when the overlap is sufficiently large, spreads increase, potentially due to the market-power effect dominating the cost savings. Furthermore, the average reduction in spreads is significant for small businesses.
JEL Classification: G21, G28, G34
Suggested Citation: Suggested Citation
Erel, Isil, The Effect of Bank Mergers on Loan Prices: Evidence from the U.S. (April 30, 2009). Fisher College of Business Working Paper No. 2006-03-002 and Charles A. Dice Center Working Paper No. 2006-19. Available at SSRN: https://ssrn.com/abstract=890884 or http://dx.doi.org/10.2139/ssrn.890884