Welfare analysis of bank mergers with financial instability

Abstract

In this study, we analyze the effect of a merger between banks by extending a structural model of the banking industry with the possibility of bank runs developed by Egan et al. (2017; American Economic Review, 107, 169–216). We use our framework to analyze whether the 2008 merger between Wells Fargo and Wachovia was beneficial for social welfare. The results suggest that the stability of the financial system is critical for evaluating mergers in the banking industry.