The Impact of Alternative Forms of Bank Consolidation on Credit Supply and Financial Stability

Emanuele Tarantino, Nicola Pavanini and Sergio Mayordomo

No 15069, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Between 2009 and 2011, the Spanish banking system underwent a restructuring process based on consolidation of savings banks. The program's design allows us to study how alternative forms of consolidation affect credit supply and financial stability. Using detailed data from the Spanish credit registry, we first show that banks consolidating via mergers or business groups are ex-ante comparable with respect to local market's overlap, financial and economic characteristics. We then find that, relative to business groups, the market power of merged banks produced a contraction in credit supply, higher interest rates, but also a reduction in non-performing loans in the economy, in the loans extended to risky firms and in the risk of bank default. To determine the welfare effects of consolidation, we estimate a structural model of credit demand and supply. In our framework, banks compete on interest rates and can ration borrowers. We also allow borrower surplus to depend on banks' default risk. Through counterfactuals, we quantify cost efficiencies and improvements in the risk of default that consolidation should deliver to outweigh welfare losses from reduced credit supply.

Date: 2020-07
New Economics Papers: this item is included in nep-ban, nep-com and nep-fdg
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Working Paper: The impact of alternative forms of bank consolidation on credit supply and financial stability (2020)
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