Bank Mergers, Competition, and Liquidity |
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| Authors: | ELENA CARLETTI PHILIPP HARTMANN† GIANCARLO SPAGNOLO‡ |
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| Institution: | Elena Carletti;is a post-doctoral researcher at the Center for Financial Studies at the University of Frankfurt, a fellow of the Wharton Financial Institutions Center, and an affiliate of the Max Planck Institute for Research on Collective Goods (E-mail:) . Philipp Hartmann;is the Head of the Financial Research Division in the Directorate General Research of the European Central Bank and a fellow of the Centre for Economic Policy Research (E-mail:) . Giancarlo Spagnolo;is professor of economics at the University of Rome "Tor Vergata", Senior Research Fellow at SITE-Stockholm School of Economics, and an Affiliate of the Centre for Economic Policy Research (E-mail:). |
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| Abstract: | We model the impact of bank mergers on loan competition, reserve holdings, and aggregate liquidity. A merger changes the distribution of liquidity shocks and creates an internal money market, leading to financial cost efficiencies and more precise estimates of liquidity needs. The merged banks may increase their reserve holdings through an internalization effect or decrease them because of a diversification effect. The merger also affects loan market competition, which in turn modifies the distribution of bank sizes and aggregate liquidity needs. Mergers among large banks tend to increase aggregate liquidity needs and thus the public provision of liquidity through monetary operations of the central bank. |
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| Keywords: | D43 G21 G28 L13 |
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