Tracing the M&A Footprints in Bailouts and Credit Ratings of European Banks During the 2008 Financial Crisis

Abstract

We empirically investigate whether and how the ex-ante M&A activity of banks relate to their much debated bailouts and credit ratings during the 2008 financial crisis. Our M&A sample comprises of 1603 transactions performed by 41 large sized European banks over the period 1990-2006. We find that the intensity of bank M&A activity relates in a positive and statistically significant manner – both in likelihood and extent terms – with their bailout support during the financial crisis. Moreover, this activity negatively (positively though in a limited manner) affects issuer (individual) ratings, suggesting towards a higher default risk and better solvency for the sample banks. We also substantiate a significantly positive link of the bank bailout support with the joint effect of M&A activity and “too big to fail” factor. While we obtain widely robust results on credit rating analysis under alternate specifications, relatively weaker evidence of robustness exist in case of rating based alternate measure of external bailout support. Further, findings of additional analysis over post crisis M&A activity suggest that the bailout beneficiary banks in our sample generally appeared to demonstrate a significant restraint on their acquisitiveness after the 2008 financial crisis. However, terming this restraint as the one chosen by banks or enforced by the regulators rests an open question.