The Impact of Bank Consolidation on Credit Supply and Performance

Abstract

Between 2009 and 2011, the Spanish banking system underwent a restructuring process based on savings banks’ consolidation. The program’s design allows us to study how banks’ consolidation affects credit supply and performance. We propose a quasi-experimental analysis showing that bank mergers restrict credit supply and set higher interest rates but also reject fewer applicants and report fewer nonperforming loans. We then estimate a structural model of credit in which banks set interest rates and lending standards. We find that, despite the relaxation in their lending standards, merged banks’ credit performance improved thanks to a significant drop in their screening costs.