Optimal lending under strategic acquisition and capital regulation: an option-based optimization

This paper explores the determinants of the acquirer bank's optimal loan rate based on a firm-theoretical option-pricing model under the maximum net gain from strategic acquisition. The model demonstrates how the nature of the loan (substitutes/complements), loan rate strategies (strategic substitutes/strategic complements) and regulation conditions jointly determine the acquirer bank's optimal loan rate. We find that the acquirer bank's loan rate is negatively related to the proportion of the combined banks owned by the acquirer bank's shareholders and also negatively related to the capital regulation under the nature of the loan complements and the loan-rate-setting complement strategy. Our findings provide an alternative explanation for the acquirer bank's strategies for operating and competing in the lending market concerning bank acquisition behavior.