Preemptive Distress Resolution Through Bank Mergers

Abstract

This paper suggests a motive for bank mergers that goes beyond alleged and typically unverifiable scale economies: preemptive resolution of banks’ financial distress. Such ”distress mergers” can be a significant motivation for mergers because they can foster reorganizations, realize diversification gains, and avoid public attention. However, since none of these potential benefits comes without a cost, the overall assessment of distress mergers is unclear. We conduct an empirical analysis to provide evidence on consequences of distress mergers. The analysis is based on comprehensive data from Germany’s savings and cooperatives banks sectors over the period 1993 to 2001. During this period both sectors faced significant structural problems and superordinate institutions (associations) presumably have engaged in coordinated actions to manage distress mergers. The data comprise 3640 banks and 1484 mergers. Our results suggest that bank mergers as a means of preemptive distress resolution have moderate costs in terms of the economic impact on performance. We do find strong evidence consistent with diversification gains. Thus, distress mergers seem to have benefits without affecting systemic stability adversely.