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We model the impact of bank mergers on loan competition, reserve holdings, and aggregate liquidity. A merger changes the distribution of liquidity shocks and creates an internal money market, leading to financial cost efficiencies and more precise estimates of liquidity needs. The merged banks may increase their reserve holdings through an internalization effect or decrease them because of a diversification effect. The merger also affects loan market competition, which in turn modifies the distribution of bank sizes and aggregate liquidity needs. Mergers among large banks tend to increase aggregate liquidity needs and thus the public provision of liquidity through monetary operations of the central bank. | ELENA CARLETTI PHILIPP HARTMANN GIANCARLO SPAGNOLO Bank Mergers Competition and Liquidity We model the impact of bank mergers on loan competition reserve holdings and aggregate liquidity. A merger changes the distribution of liquidity shocks and creates an internal money market leading to financial cost efficiencies and more precise estimates of liquidity needs. The merged banks may increase their reserve holdings through an internalization effect or decrease them because of a diversification effect. The merger also affects loan market competition which in turn modifies the distribution of bank sizes and aggregate liquidity needs. Mergers among large banks tend to increase aggregate liquidity needs and thus the public provision of liquidity through monetary operations of the central bank. JEL codes D43 G21 G28 L13 Keywords credit market competition bank reserves internal money market banking system liquidity monetary operations. The last decade has witnessed an intense process of consolidation in the financial sectors of many industrial countries. This merger movement We would like to thank Franklin Allen Giuseppe Bertola Ulrich Bindseil Urs Birchler Jurg Blum Vittoria Cerasi Hans Degryse Fiorella De Fiore Mark Flannery the editor Charles Goodhart Martin Hellwig Cornelia Holthausen Haizhou Huang Roman Inderst Andreas Irmen Simone Manganelli Loretta Mester Bruno Parigi Rafael Repullo Jean-Charles Rochet Richard Rosen Martin Ruckes Rune Stenbacka Andy Sturm and Jurgen Weigand for comments and suggestions. Thanks also to participants at a number of seminars and conferences. We appreciated the excellent research assistance by Andres Manzanares and Sandrine Corvoisier. Any views expressed are only the authors own and do not necessarily coincide with the views of the ECB or the Eurosystem. Elena Carletti is a post-doctoral researcher at the Center for Financial Studies at the University of Frankfurt a fellow of the Wharton Financial Institutions Center and an affiliate .
