Abstract
This paper intends to evaluate the impact of financial deregulation of US before 2008 through how the risks associated with mergers and acquisitions (M&As) affect banks’ levels of solvency. This paper is the first that hypothesizes bank solvency to be affected by M&As directly and indirectly through banks’ market risk, geographical diversification, and activity diversification. Accordingly, the relationship between bank solvency, diversification, and market risk are estimated as a system using the Generalized Method of Moments (GMM). The key finding is that M&As erode banks’ solvency, both directly and indirectly through the effects associated with their geographical diversification. Financial deregulation contributes to banks’ risk taking.
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