Discussion Paper Details

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Title: Bank Mergers, Competition and Liquidity

Author(s): Elena Carletti, Philipp Hartmann and Giancarlo Spagnolo

Publication Date: February 2004

Keyword(s): bank reserves, banking system liquidity, credit market competition and internal money market

Programme Area(s): Financial Economics, Industrial Organization and International Macroeconomics

Abstract: We model the impact of bank mergers on loan competition, reserve holdings and aggregate liquidity. A merger creates an internal money market that affects reserve holdings and induces financial cost advantages, but also withdraws liquidity from the interbank market. We assess changes in liquidity needs for each bank and for the banking system as a whole, and relate them to the degree of loan market competition. Large mergers tend to increase aggregate liquidity needs, and thus the liquidity provision in monetary operations by the central bank. Fiercer loan market competition seems to be beneficial for aggregate liquidity in industrial countries.

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Bibliographic Reference

Carletti, E, Hartmann, P and Spagnolo, G. 2004. 'Bank Mergers, Competition and Liquidity'. London, Centre for Economic Policy Research.