Counterfactual Analysis of Bank Mergers

Abstract

Estimating the impact of bank mergers on credit granted and on interest rates requires a framework that allows to disentangle the effect of changes in market structure generated by mergers from the effects arising from changes in banks’ operating environment. However, most of the literature on the impact of bank mergers relies on a simple differential analysis of the relevant variables. We propose a new methodology. It relies on the estimation of a structural model of the credit market. Using this model we are able to derive a counterfactual scenario, considering the pre-merger market equilibrium together with the post-merger environment. The counterfactual analysis makes possible to take into account changes in market structure and conduct, which could affect the results if neglected. We analyze separately two segments of the credit market (households and firms) and take into account two groups of institutions (those that were directly involved in mergers and those that were not). We find that mergers increased the total amount of credit granted to the corporate sector, but had negative impacts on households’ access to credit. Moreover, we find that mergers led to a widespread decrease in interest rates.