Bank Mergers, Credit Supply and Financial Stability: Evidence from the Spanish Banking Sector Restructuring Program

Abstract:        

In the wake of the Great Recession, the Spanish government restructured its banking system by fostering the consolidation of savings banks. We exploit the institutional design of the restructuring program to study the impact of market power on credit supply and financial stability. We find that the market-power effect of mergers produces a reduction in credit supply, a tightening in credit terms and an increase in interest rates, especially to smaller firms. However, we also find that the market power of bank mergers yields a reduction in the volume of non-performing loans and loan defaults.