Counterfactual Analysis of Bank Mergers

Abstract

Estimating the impact of bank mergers on credit granted and on interest rates requires a framework that allows to disentangle the effect of changes in market structure generated by mergers from the effects arising from changes in banks' operating environment. However, most of the literature on the impact of bank mergers relies on a simple differential analysis of the relevant variables. We propose a new methodology. It relies on the estimation of a structural model of the credit market. Using this model we are able to derive a counterfactual scenario, considering the pre-merger market equilibrium together with the post-merger environment. The counterfactual analysis makes possible to take into account changes in market structure and conduct, which could affect the results if neglected. We analyze separately two segments of the credit market (households and firms) and take into account two groups of institutions (those that were directly involved in mergers and those that were not). We find that mergers increased the total amount of credit granted to the corporate sector, but had negative impacts on households' access to credit. Moreover, we find that mergers led to a widespread decrease in interest rates. JEL codes: G21; G34; L10.

Recent trends in the study of merges and acquisitions

“…For example, [1] show that, as pre-M&A process equilibrium is altered, effects are different for the parties involved in the process, the economic sector and households. A merger in the banking sector facilitates access to credit for companies, but reduces it for households.…”

A test of the impact of mergers on bank competition

“…demand and supply parameters. In the banking industry, this is done by substituting into the premerger structural equations, the sum of the branches for the new entities (see, e.g., Barros, Bonfim, Kim, & Martins, 2014;Molnar, 2008;Zhou, 2008;among others). Such a procedure rests on the assumptions that "… the form of competition, the demand system and the functional form of marginal cost do not change due to the merger …" as noted by Budzinski and Ruhmer (2010).…”

“…Within this approach, Barros et al (2014) perform an interesting counterfactual analysis to disentangle the effect of mergers from the influence of other macro-economic factors, exploiting a wave of mergers that occurred in 2000 in Portugal. Using a structural model, they derive the estimated coefficients of the demand and supply of credit in the premerger equilibrium.…”