Effects of Bank Consolidation on the Bank Insurance Fund

Abstract

During the 1990s, mergers of large banks have changed the industry dramatically, with the concentration amoung the 100 largest banking organizations increasing from 54.6 percent as of year-end 1990 or 72.6 percent as of mid-1990. This paper examines changes in the BIF's ability to remain solvent using a Monte Carlo model, under various levels of industry concentration. To better examine the effects of consolidation, the top 100 banking organizations were simulated individually while other banks were simulated in aggregate. The results show that, based on historical loss and failure rates, the consilidation that took place between 1990 and 1997 increased the risk of BIF insolvency by approximately 50 percent, and that megamergers that took place or were announced during the 18 months between year-end 1997 and mid-year 1999 increased the risk of insolvency further. Moreover, unlike the BIF of 1990, the solvency of the BIF of today is inseparably tied to the health of the largest banking organizations.