We model the impact of bank mergers on loan competition, reserve holdings and aggregate liquidity. A merger creates an … the interbank market. We assess changes in liquidity needs for each bank and for the banking system as a whole, and relate … liquidity provision in monetary operations by the central bank. Fiercer loan market competition seems to be beneficial for …

-financial firms. In contrast, we find that bank stock prices increase. Cross sectional regressions show that the discretion embedded … in the supervisory control of bank mergers is a major determinant of the positive bank stock returns. This suggests that …

rigorous models of bank and payment system contagion have now been developed, although a general theoretical paradigm is still … missing. Direct econometric tests of bank contagion effects seem to be mainly limited to the United States. Empirical studies …