The Effect of Bank Mergers on Loan Prices: Evidence from the U.S. Review of Financial Studies

Bank mergers can increase or decrease loan spreads, depending on whether the increased market power outweighs efficiency gains. Using proprietary loan-level data for U.S. com-mercial banks, I find that, on average, mergers reduce loan spreads, with the magnitude of the reduction being larger when postmerger cost savings increase. My results suggest that the relation between spreads and the extent of the market overlap between merging banks is nonmonotonic. The market overlap increases cost savings and consequently lowers spreads, but when the overlap is sufficiently large, spreads increase, potentially due to the market-power effect dominating the cost savings. Furthermore, the average reduction in spreads is significant for small businesses. (JEL G21, G28, G34) During the 1990s, the number of commercial banks in the United States de-creased from about 12,500 to about 8000, primarily due to a wave of bank mergers that led to an increase in the average size of banks. In this article, I analyze the implications of bank mergers for borrowers in the United States. In particular, I investigate whether mergers create efficiency gains, which are passed on to borrowers through reductions in loan rates, or whether the en