Does Competition Make Loan Markets More Fragile?

We model the interaction between the concentration of the banking sector and the investment strategies of imperfectly competitive firms in the product market to address the question of whether competition makes loan markets more fragile. It is shown how a merger between two banks would typically decrease the interest rate and increase the investment volume of imperfectly competitive firms in the product market. Under quite plausible conditions this implies that a merger will increase the stability of loan markets in the sense of decreasing bankruptcy risks