This paper studies how bank divestitures in M&As affect local credit markets. We find that combined market shares of merging banks in local mortgage markets decline following divestitures in M&A. This decline is less in mortgages to black borrowers and refinance mortgages, which rely more on relationship lending. In contrast, combined market shares of merging banks in local small business lending markets, which heavily rely on relationship lending, do not change. Divestitures incur following negative externalities: mortgage credit availability is deteriorated for minority group borrowers in M&A counties; mortgage interest rates increase more in M&A counties than those in nearby non-M&A counties; mortgages originated in M&A counties are more likely to enter foreclosure than those in adjacent non-M&A counties; and house prices in M&A counties declined more dramatically during the subprime crisis. 

JEL Classifications: G20, G21
Keywords: Divestitures, M&A, Soft Information, Mortgage, Small Business Lending​