Working Paper: CEPR ID: DP4260
Authors: Elena Carletti; Philipp Hartmann; Giancarlo Spagnolo
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.
Keywords: banking system; liquidity; internal money market; credit market competition; bank reserves
JEL Codes: D43; G21; G28; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank Mergers (G21) | Internal Money Market (E49) |
| Internal Money Market (E49) | Reserve Management Strategies (E63) |
| Reserve Management Strategies (E63) | Liquidity in Interbank Market (E43) |
| Bank Mergers (G21) | Reserve Holdings (G51) |
| Bank Mergers (G21) | Aggregate Liquidity Needs (E51) |
| Competition in Loan Markets (G21) | Liquidity in Industrial Countries (F65) |
| Competition in Loan Markets (G21) | Liquidity in Emerging Markets (F65) |