The Effects of Banking Mergers on Loan Contracts


  • Paola Sapienza

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    • Sapienza is affiliated with Northwestern University and CEPR. The author thanks Allen Berger, Richard Caves, Nicola Cetorelli, Ben Esty, Gary Gorton, Luigi Guiso, Anil Kashyap, Rafael La Porta, Mitchell Petersen, Jack Porter, Andrei Shleifer, Jeremy Stein, René Stulz, Catherine Wolfram, Luigi Zingales, and an anonymous referee for helpful comments and suggestions. The author also benefited from comments of participants at seminars at Harvard University, London Business School, Northwestern University, Ohio State University, University of Chicago, University of Southern California, University of Texas at Austin, and the CEPR/ ESI conference in Brussels on the Changing European Financial Landscape and 1999 WFA Meetings. The author is grateful to Stefania De Mitri for facilitating my understanding of the database. All errors are the author's responsibility.


This paper studies the effects of banking mergers on individual business borrowers. Using information on individual loan contracts between banks and companies, I analyze the effect of banking consolidation on banks' credit policies. I find that inmarket mergers benefit borrowers if these mergers involve the acquisition of banks with small market shares. Interest rates charged by the consolidated banks decrease, but as the local market share of the acquired bank increases, the efficiency effect is offset by market power. Mergers have different distributional effects across borrowers. When banks become larger, they reduce the supply of loans to small borrowers.