The Competitive Effect of a Bank Megamerger on Credit Supply

TLDR: In this article, the authors examined how the merger between two European megabanks affects credit supply to small and medium-sized businesses and found that the merged bank decreases the supply of credit to existing firms and new firms, leading to an overall decline in bank credit.

Abstract: We examine how the merger between two European megabanks affects credit supply to small and medium-sized businesses. Using loan-level and firm-level data, we exploit variation in the merging banks' market overlap to identify the competition effect of the merger. We find that the merged bank decreases the supply of credit to existing firms and new firms. This effect is not offset by other banks increasing their lending, leading to an overall decline in bank credit. This reduction in credit supply is associated with higher firm exit. However, for continuing firms, the merger has no adverse effects on investment and employment.