The impact of alternative forms of bank consolidation on credit supply and financial stability
Series: Working Papers. 2021.
Author: Sergio Mayordomo, Nicola Pavanini and Emanuele Tarantino.
Published in Journal of Economic History, v. 84, Issue 1, 2024, pp. 40 - 73
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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. Compared
to bank business groups, we find that bank mergers’ market power produces a
contraction in credit supply, higher interest rates, but also a reduction in non-performing
loans. We then estimate a structural model of credit demand and supply. We show that
short-run welfare gains from improved financial stability outweigh losses from reduced
credit supply, while small long-run cost efficiencies generate large welfare increases.