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Bank mergers and the fragility of loan markets

Author

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  • Erkki Koskela

    (Department of Economics, University of Helsinki, Finland)

  • Rune Stenbacka

    (Swedish School of Economics, Finland)

Abstract

We address the question of whether competition makes loan markets more fragile in the sense of increasing the equilibrium bankruptcy risk of firms. This is done using a model of the interaction between the concentration of the banking sector and the investment strategies of imperfectly competitive product market firms. It is shown how a merger between two competing bilateral monopoly banks will typically decrease the interest rate and increase the investment volumes of firms if the investment decisions are strategic complements. Under plausible conditions this implies that a merger will lessen, not aggravate, the fragility of loan markets.

Suggested Citation

  • Erkki Koskela & Rune Stenbacka, 2000. "Bank mergers and the fragility of loan markets," Finnish Economic Papers, Finnish Economic Association, vol. 13(1), pages 3-18, Spring.
    • Handle: RePEc:fep:journl:v:13:y:2000:i:1:p:3-18
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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