Spillover Effects of Cross-Border Bank Acquisitions on Systemic Risk

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We examine the spillover and direct effects of cross-border bank M&As on the systemic risk of banks in the target’s country. We document that higher cross-border bank M&A activity is associated with higher systemic risk for peer banks, while target banks exhibit a decrease in systemic risk post-merger. The effect is stronger for deals involving large acquirers from developed countries and from countries with weaker regulatory quality than the target’s country. Our data suggest that the channels for these effects are reductions in peer banks’ market value of equity and income diversity and an increase in market value of equity for target banks post-merger relative to the control group. Our findings show destabilizing effects of cross-border bank M&As that stem from improvements in the quality of the target banks that exert pressure on peer banks.