This paper provides a critical analysis of the subadditivity axiom, which is the key condition for coherent risk measures. Contrary to the subadditivity assumption, bank mergers can create extra risk. We begin with an analysis how a merger affects depositors, junior or senior bank creditors, and...

A model of loan rate competition with liquidity provision by banks is used to study bank mergers. Both loan rate competition and liquidity needs are seen to be "localised" phenomena. This allows for tracing down the effects of particular types of bank mergers. As such, we contrast the effects of...