DP15069 The Impact of Alternative Forms of Bank Consolidation on Credit Supply and Financial Stability

Author(s): Sergio Mayordomo, Nicola Pavanini, Emanuele Tarantino
Publication Date: July 2020
Date Revised: December 2020
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Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15069

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. We show that banks consolidating via mergers or business groups are ex-ante comparable in terms of local market's overlap, financial and economic characteristics. We find that, relative to business groups, the market power of merged banks produces a contraction in credit supply, higher interest rates, but also a reduction in non-performing loans. 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' survival. Through counterfactuals, we quantify cost efficiencies and improvements in financial stability that consolidation should deliver to outweigh welfare losses from reduced credit supply.