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Bank Mergers and Diversification: Implications for Competition Policy
Author(s) -
BanalEstañol Albert,
Ottaviani Marco
Publication year - 2007
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2007.00372.x
Subject(s) - diversification (marketing strategy) , loan , competition (biology) , monetary economics , economics , welfare , business , mergers and acquisitions , financial system , market economy , finance , ecology , marketing , biology
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.

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