Impact of Mergers on the Degree of Competition: Application to the Banking Industry

Counterfactual analysis of bank mergers

“…This suggests that there were important changes in market equilibrium after the mergers, given that a pure shift along the demand curve would imply a positive effect on credit due to the decrease in interest rates. For the corporate sector, the sale of credit increased after the merger, as observed in columns (9) and (11), and the interest rate charged decreased, as shown in columns (10) and (12). Post-merger equilibrium loan rates decrease when the merger induces large cost advantages relative to the increase in banks' market power, as shown by Carletti et al (2007).…”

“…given that the effects of mergers should be more strongly and clearly captured in the years immediately after these mergers 11 . Moreover, it would be a very strong assumption to require that the pre-merger equilibrium holds for many years after the merger wave, as changes in economic and financial variables should also shape this equilibrium.…”

“…This decomposition is presented in Table 5. In columns (1), (6) and (11) we present the initial estimation error (for all banks, for the banks directly involved in mergers and for the banks not directly involved, respectively), defined as the difference between the predicted values for the pre-merger period and the observed loan flows and interest rates in this period. On average, this estimation error is virtually negligible.…”

“…The t statistics for the coefficient associated with ln(rit) in columns (3), (7) and (11) are omitted, as this coefficient is determined by a constraint in the model. The lower number of observations in the regressions for households and firms is due to the fact that some small banks show null credit flows in one of these market segments in some quarters (two small banks never grant credit to firms during the entire sample period).…”

“…Focusing on European mergers, Altunbas and Marqués (2008) find that improvements in banks' performance subsequent to mergers are more significant if there are strategic similarities between the merging banks. Mergers also generate important changes in market structure, as discussed in Berger et al (2004), Cerasi et al (2010) or in Gowrisankaran and Holmes (2004). Some authors also find that mergers may enhance cost reduction and improve resource allocation 3 .…”