Bank Mergers and Diversification: Implications for Competition Policy

13 Pages Posted: 24 May 2007

See all articles by Albert Banal-Estañol

Albert Banal-Estañol

Universitat Pompeu Fabra - Department of Economics and Business (DEB); City University London - Department of Economics

Marco Ottaviani

Bocconi University - Department of Economics

Abstract

This paper analyses competition and mergers among risk averse banks. We show that the correlation between the shocks to the demand for loans and the shocks to the supply of deposits induces a strategic interdependence between the two sides of the market. We characterise the role of diversification as a motive for bank mergers and analyse the consequences of mergers on loan and deposit rates. When the value of diversification is sufficiently strong, bank mergers generate an increase in the welfare of borrowers and depositors. If depositors have more correlated shocks than borrowers, bank mergers are relatively worse for depositors than for borrowers.

Suggested Citation

Banal Estañol, Albert and Ottaviani, Marco, Bank Mergers and Diversification: Implications for Competition Policy. European Financial Management, Vol. 13, No. 3, pp. 578-590, June 2007, Available at SSRN: https://ssrn.com/abstract=988214 or http://dx.doi.org/10.1111/j.1468-036X.2007.00372.x

Albert Banal Estañol (Contact Author)

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Marco Ottaviani

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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