Bank Mergers, Information, Default and the Price of Credit

This paper addresses the impact of bank mergers on the price of firm credit, through an information channel. It is shown that, as bank mergers imply a wider spreading of information among banks concerning firms' past defaults, they may increase the expected revenue from lending. Therefore, interest rates may decline as long as a sufficiently competitive environment is preserved. A fall in interest rates, in turn, reduces the incentives for firms to strategically default, which reinforces the downward effect on the price of credit. The results are a function of the level of information sharing and of the sensitivity of the default probability to the interest rate .