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EBA Paper Summary: The Competitive Effect of a Bank Megamerger on Credit Supply

Core Content

This paper by the European Banking Authority (EBA) examines the impact of a bank megamerger on credit supply, firm exit, investment, and employment, with a particular focus on the relationship between market power, concentration, and credit availability. The study is based on a real-world case of a merger between two European megabanks, Bank A and Bank B, which were the 4th and 6th largest banks in the country before the merger. The merged entity became the second-largest bank in terms of firm lending.

Main Findings

• Credit Supply Reduction: The merged bank significantly reduced credit supply in local markets where the pre-merger market concentration of Bank A and B was higher. This suggests a negative correlation between market concentration and credit supply.
• Market Power and Concentration: The study indicates that increased market concentration of the merged bank is associated with a decrease in credit supply. This implies that market power may lead to less competitive lending behavior.
• Short-term vs. Long-term Credit: The effect on credit supply was primarily observed in the short-term credit segment, with no significant impact on long-term credit. This highlights a potential shift in lending strategies post-merger.
• Market Overlap as a Measure of Competition: The paper uses market overlap as a proxy for competition, which is defined as the product of the market shares of Bank A and B in a given local market. However, it acknowledges that market concentration is not always a reliable measure of competition, citing Bikker et al. (2012). It also notes the use of the Lerner index, a more accurate measure of market power, in recent studies.

Methodology

• Data Source: The analysis is based on loan-level data from the national credit register, allowing for granular insights into lending behavior.

• Time Period: The study compares the pre-merger and post-merger periods to assess changes in credit supply.

• Geographical Focus: It examines the impact across different local markets, where the pre-merger market shares of the two banks varied.

• Model Specification: The paper uses a regression model to estimate the change in loans:

  $$
  \Delta \text{Loans} = \alpha + \left(\beta \cdot \text{Merged Bank} \cdot \text{Market Overlap} + \text{Controls} + \varepsilon \right)
  $$

  Where:

  • Market Overlap is calculated as the product of market shares of Bank A and B.
  • Controls include firm-time and bank-time fixed effects to account for time-invariant characteristics.

Key Considerations and Comments

• External Validity: The study is based on a single megamerger, which may limit the generalizability of the findings.
• Capital Buffer and Lending Strategy: The paper raises questions about the combined capital buffer of the merged bank and how its business model, including asset, funding, and revenue composition, might influence lending behavior.
• Credit Register Limitations: The credit register only includes firms with an annual turnover exceeding €750,000 and debt over €25,000. This may affect the conclusions regarding firm exit, as smaller firms with less turnover or debt may not be captured.
• Small vs. Large Banks: Large banks are more likely to focus on lending to larger, more transparent firms, while small banks specialize in relationship lending to smaller, less transparent firms. This distinction is important in understanding the impact of the merger on different segments of the market.

Regulatory Relevance

• SME Support: The findings have implications for the design of policies aimed at supporting small and medium-sized enterprises (SMEs). The EBA notes that SMEs are defined by the Capital Requirements Regulation (CRR) as firms with annual turnover below €50 million and total loans below €1.5 million.
• Capital Market Union: The paper references the Capital Market Union initiative, which seeks to improve access to financing for SMEs and start-ups.
• Capital Buffers for Systemically Important Banks: Since 2014, the EU has introduced additional capital buffers for Global Systemically Important Banks (G-SIBs) and Other Systemically Important Banks (O-SIBs), which could influence their lending behavior.
• EU Merger Regulation: The paper highlights the EU’s regulatory stance on mergers, which prohibits transactions that significantly reduce competition in the Single Market. It also mentions the use of turnover thresholds and market share criteria to assess the competitive impact of mergers.

Conclusion

The merger between Bank A and Bank B resulted in a reduction of credit supply in local markets with higher pre-merger concentration, primarily affecting short-term credit. The study underscores the importance of market competition and the potential negative consequences of increased market concentration on credit availability. It also highlights the need for regulatory attention to the impact of such mergers on SMEs and the broader economy.