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Bank mergers, competition and liquidity

Author

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  • Carletti, Elena
  • Hartmann, Philipp
  • Spagnolo, Giancarlo

Abstract

We model the impact of bank mergers on loan competition, banks' reserve holdings and aggregate liquidity. Banks compete in a differentiated loan market, hold reserves against liquidity shocks, and refinance in the interbank market. A merger creates an internal money market that induces financial cost advantages and may increase reserve holdings. We assess changes in liquidity risk and expected liquidity needs for each bank and for the banking system. Large mergers tend to increase expected aggregate liquidity needs, and thus the liquidity provision by the central bank. Comparative statics suggest that a more competitive environment moderates this effect. JEL Classification: D43, G21, G28, L13

Suggested Citation

  • Carletti, Elena & Hartmann, Philipp & Spagnolo, Giancarlo, 2003. "Bank mergers, competition and liquidity," Working Paper Series 292, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2003292
    Note: 229414
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    More about this item

    Keywords

    banking system liquidity; bank reserves; credit market competition; internal money market;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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