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

64 Pages Posted: 28 Jul 2020 Last revised: 22 Sep 2021

See all articles by Sergio Mayordomo

Sergio Mayordomo

Banco de España

Nicola Pavanini

Tilburg University; Tilburg University - Tilburg University School of Economics and Management; CEPR IO Programme

Emanuele Tarantino

Luiss Guido Carli University; Einaudi Institute for Economics and Finance (EIEF)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

Abstract

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. Using detailed data from the Spanish credit registry, we first show that banks consolidating via mergers or business groups are ex-ante comparable with respect to local market's overlap, financial and economic characteristics. We then find that, relative to business groups, the market power of merged banks produced a contraction in credit supply, higher interest rates, but also a reduction in non-performing loans in the economy, in the loans extended to risky firms and in the risk of bank default. 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' default risk. Through counterfactuals, we quantify cost efficiencies and improvements in the risk of default that consolidation should deliver to outweigh welfare losses from reduced credit supply.

Suggested Citation

Mayordomo, Sergio and Pavanini, Nicola and Tarantino, Emanuele, The Impact of Alternative Forms of Bank Consolidation on Credit Supply and Financial Stability (July 2020). CEPR Discussion Paper No. DP15069, Available at SSRN: https://ssrn.com/abstract=3661412

Sergio Mayordomo (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Nicola Pavanini

Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://https://sites.google.com/site/nicolapavanini/

Tilburg University - Tilburg University School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

CEPR IO Programme ( email )

London
United Kingdom

Emanuele Tarantino

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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