Bank Consolidation Research Articles

Theoretical Stable Hydraulic Section based on the Principle of Least Action

Despite decades of effort, stable hydraulic geometry for an open channel water flow has hardly been established because of too many unknown variables for too few rational relationships. This article derives the most efficient channel cross section using calculus of variations for the given flow area at the minimum wetting perimeter length, which is equivalent to the principle of least action. Analysis indicates that water can most efficiently flow in a semi-ellipse section channel with minimum friction and erosion. Anisotropy in channel erodibility was found to be necessary in the natural stable channel characterization because gravitation force and channel bank consolidation cannot be ignored in earth surface material. This channel cross section, based on the principle of least action, may be regarded as the theoretical stable hydraulic section for erodible bed, which was comparable to the observed river cross-sections during high flow periods.

Bank Consolidation and Performance of the Nigerian Economy

This study empirically examined the relationship between banks’ consolidation and performance of the Nigerian economy from 1970 – 2017 using the Ordinary Least Square (OLS) technique. The findings revealed that Banks’ consolidation in Nigeria had a significant impact on the performance of the economy. Banks’ consolidation significantly facilitates and promotes banks’ credit to the economy and economic growth in Nigeria. The economy had performed better in the post-consolidation era than the pre-consolidation era. It is recommended that consolidation policy should be carried out periodically. Keywords : Banks Consolidation, banks’ credit, Nigerian Economy DOI : 10.7176/JESD/10-10-03 Publication date :May 31 st 2019

More than 30 Years of the Hungarian Banking System

The two-tier banking system was (newly) born in Hungary in 1987. The advent of political changes arrived when the over-indebted country had been left without reserves, and nearly went bankrupt. From such a difficult position a functioning banking system had to be built up after the first free elections held in 1990. During the second term, between 1994 and 1998, most of the Hungarian banks were privatised (after consolidation of the individual banks during the first government with the help of government bonds.) In the third cycle there appeared to be too many banks in the country, and most of them were below the optimum. In the period between 2002 and 2010, banks flourished and created a credit boom based on foreign currency. Following the international financial crisis this led to great troubles. The forint was devaluated against the Swiss franc, and numerous clients became insolvent and lost their homes. The government elected in 2010 made efforts at resolving the situation to help citizens by programmes including several steps. Banks were required to take part in this effort by paying special taxes and for a time this cut back on their profitability. The last three governments since 2010 modified the deconcentrated banking structure and repurchased some of the previously privatised banks. In 2013 the government set the goal of increasing the share of Hungarian-owned banks to above 50%, which was achieved in 2019. The profitability of banks has recovered, and their capital position is now strong. The National Bank of Hungary fulfils the supervisory function. Through its monetary policy, unorthodox measures and credit programmes, it helps the smooth functioning of the sector and thus the financing of Hungarian SME’s.

Remittances, Bank Concentration and Credit Availability in Nigeria

The concentration of the Nigerian financial sector has long been recognised to be an important factor affecting the financial stability and welfare at an individual level in the economy. While various studies have been conducted to examine the sensitivity of this phenomenon to macro economy, little has been done to examine the effect of concentration on credit availability in Nigeria. In addition, no study has investigated the role of remittances on the relationship between bank concentration and availability of credit. Taking motivation from the Nigerian banking consolidation exercise, this article examined the effect of remittances and bank concentration on availability of credit in Nigeria. The author employed the autoregressive distributed lag (ARDL) bound test approach for co-integration on Nigerian data for the period of 1986–2015. The results revealed that bank concentration constrains the development of financial sector in Nigeria and remittances improve the level of financial development (credit availability) in the long run but inhibit the availability of credit in the short run. The negative relationship occurs in the short run because of the regulatory framework governing international money transfers in Nigeria, which simply inhibits competition. In the long run, recipients who have received remittances from informal settings would need financial products and services in which those remittances would be banked and further improve the financial sector. It was concluded that since Nigerian financial sector remained underdeveloped, the sector could be driven by encouraging inflow of remittances into the country. Our findings also persist after batteries of robustness check.

Value Creating Mergers – British Bank Consolidation, 1885-1925

The British banking sector had many small banks in the mid-nineteenth century. From around 1885 until the end of World War One there was a process of increasingly larger mergers between banks. By the end of the merger wave the English and Welsh market was highly concentrated, with only five major banks. News of a merger brought a persistent rise in the share prices of both the acquiring and the target bank (roughly 1% and 7%, respectively). Non-merging banks, especially those whose local market concentration rose as a result of the merger, saw their stock prices rise.

Loan Syndication Networks

Banks develop network connections through co-syndication relationships with multiple lenders. We create measures of network centrality based on banks' historical co-syndication ties and find that well-connected lenders are more likely to gain lead underwriter status and offer better loan terms. The results are robust to variation in networks generated by the transferring of firms' lending relationships after bank consolidations. Well-connected banks offer lower spreads to firms with more information asymmetry, underwrite loans faster, and retain less loan ownership. The evidence is more consistent with theory suggesting that networks mitigate information asymmetry in syndicates rather than by superior screening or monitoring.

Structural changes, competition and bank stability in Malaysia’s dual banking system

This paper assesses Malaysia’s competition landscape and its risk implications subsequent to conventional banking consolidation and Islamic banking penetration in the aftermath of the 1997/1998 Asian financial crisis. Employing a panel sample of conventional and Islamic commercial banks, it arrives at the following conclusions. First, the consolidation exercise, which has led to a significant reduction in the number of domestic commercial banks, has not stifled banking competition. Second, the paper provides empirical support for the competition-stability relationship, particularly for the conventional banking sector. Islamic banking sector risk appears to be neutral to market competition or market power, although there is limited evidence that it increases with overall market concentration. Finally, the analysis uncovers the risk-increasing effect of the Islamic banking market structure on the conventional banking sector. By contrast, conventional banking market concentration tends to reduce the credit risk of Islamic banks.

Bank Competition and Firm Credit Availability: Firm-Bank Evidence From Europe

We examine the impact of bank competition on firms' access to credit using a large panel of 900 banks matched to almost 60.000 firms across the euro area over the period 2010-2016. Results provide empirical support for the market power hypothesis whereby low inter-bank competition worsens firms' credit conditions. Specifically, we find that higher bank market power is associated with lower short and long-term bank credit, higher reliance on trade credit and higher funding costs for corporate borrowers. Furthermore, the effect of bank competition is heterogeneous across firms and banks. On the one hand, high bank market power is especially detrimental for small and opaque firms, suggesting that low competition exacerbates the financial constraint of borrowers most exposed to information problems. On the other hand, the reduction in credit availability associated with high market power is attenuated for firms that borrow from small and local community banks, a finding consistent with the information hypothesis, whereby low competition increases banks’ incentive to supply relationship loans. On balance, however, the predominance of medium-large commercial banks in our sample determines that the overall effect of low inter-bank competition on credit conditions is unequivocally adverse for most firms, i.e. the market power effect outweighs the information effect. This evidence contributes to previous research on bank competition, firms’ credit constraint and relationship lending, and has implications for competition policy. Indeed, with respect to the prospect of greater banking consolidation in the European Union, our results suggest that considerations of efficiency and financial stability should be weighed against the potential negative consequences in terms of firms’ access to credit.

Whither competition in Malaysia’s banking industry ex post a restructuring

PurposeThe purpose of this paper is to report how banking competition has fared ex post a major consolidation exercise completed during 2002-2004, which led to a complete restructuring of the sector in Malaysia. Nothing is known about the competitiveness of banking system ex post a major consolidation of banks in any country including Malaysia, a middle-income economy.Design/methodology/approachThe authors apply two models, the Panzar and Rosse (1997) and the Lerner index (1934). The two competitiveness measures are quite refined, well received by researchers, but has yet been applied to measure banking sector competitiveness of a middle-income country to characterize post-merger behavior using post-global-crisis data set. The data were complemented by documentary analysis, including brand documents, descriptions of internal processes and copies of employee magazine articles.FindingsThe results indicate that, after 11 years of consolidation, the banking sector is not operating under perfect or monopolistic competition. Malaysia’s banking industry continues to benefit the charter holders at increasingly lower level because a cartel-like environment still provides trade-off of competition costs before 2002/2004 with the costs from a cartel-like industry structures now. There is only a weak evidence that, in recent years, the banking sector is moving toward more competition.Research limitations/implicationsThe chosen area of research is to test the response of the banking sector ex post consolidation after a crisis. It enables researcher to compare results with those of other countries and may not be generalizable.Practical implicationsThe findings reported in this study using corroborating measures for the first time, appear to suggest increasing concentration from consolidation may lead to the undesirable cartel-like industry structure where the exercise of market power in the name of stability may not be welfare promoting.Originality/valueThis paper fulfills an identified need to study how the banking sector has performed ex post consolidation after a crisis.

The Economic Crisis of 2008 and the Financial System Supervision: Towards an European Banking Union

The significant repercussions of the recent crisis in the financial sector and the real economy have led to the development of policies aimed at strengthening the stability of the international banking system. Banking regulatory reforms (Basel III) improve micro-prudential supervision and involve macro-prudential supervision to avoid systemic risk. Capital requirements are tightening up and the quality of core capital is upgraded in order to provide greater coverage of losses and better risk management. In addition, a new framework for liquidity risk is introduced, as well as a complementary tool for limiting leverage. Recently, an agreement was reached in the EU to establish a Banking Union in the Eurozone, based on uniform regulation, supervision, bank clearing and deposit protection mechanisms. This framework includes a common banking capital for bank consolidation, which aims to reduce the impact on savers. This study aims to analyse the banking sector's activities and the constituent elements of the existing regulatory framework, particularly those involved in the causes of the financial crisis. It also aims to present the dimensions of the new regulatory framework for joint supervision leading to the European Banking Union and to analyse the pillars that form it, even though they are still in progress. The analysis will also build on the experiences from the recent crisis, in order to reach clear conclusions about the necessity and role of the Banking Union.

Bank Consolidation and Financial Stability in Indonesia

This paper extends prior literature on the link between consolidation and stability in banking using a single country setting. From a sample of Indonesian commercial banks over the 2010-2015 time span, our empirical results show that higher bank market power is associated with lower insolvency risk and higher capital ratios. A deeper analysis however reveals that higher market power is detrimental for financial stability in state-owned banks and small private-owned banks. We therefore highlight that although consolidation among state-owned banks reduces cost inefficiency as in Hadad et al. (2013), further efforts to reduce state-owned banks’ market power are necessary after consolidation. This paper also suggests that strengthening market power in large private-owned banks, but encouraging competition in small private-owned banks to reduce market power, are essential for financial stability.

Pre- and post-merger performances of Shinkin banks in Japan

The purpose of this paper is to describe the performances and consequences of Cooperative (Shinkin) bank merger activities that took place from 1994 through 2003 in Japan. Not only were there a large number of mergers, but these bank mergers were complicated during the sample period compared to another type of banking institutions. Banks are classified into three groups; "the surviving bank" (which takes control of another Shinkin bank), "the absorbed bank" (that has been consumed by a surviving one) and "the control bank" (that has not been related to any merger activities in the same region and during the sample period). Financial indicators such as profitability, soundness and efficiency, related to these three classes are analyzed by the difference-in-difference method and panel estimation. Profitability of the surviving banks plummeted immediately after a merger, only to find it improving after a few years. The efficiency of surviving banks improved in terms of cost reduction, especially by reducing labor cost. Soundness of surviving banks which was lower than that of control banks became worse after merging with the absorbed bank. However, their soundness returned to an average level within a few years. Our findings suggest that the consolidation of banks could be an effective measure as a strategy to exist.

On Bank Consolidation in a Currency Union

The paper focuses on the impact of diversification on bank performance and how consolidation through mergers and acquisitions (M&A) affects the banking sector’s stability in the Eastern Caribbean Currency Union (ECCU). The paper finds that a lower level of loan portfolio diversification explains higher non-performing loans and earnings volatility of indigenous banks, as compared to foreign competitors in the ECCU. We then simulate bank mergers both within and across ECCU countries by combining individual banks’ balance sheets. The simulation shows that a typical indigenous bank could better diversify against its idiosyncratic risk by merging with other banks across the border. In addition, we point out that M&A, leading to a more asymmetric banking sector, may increase systemic risk.

Bank Risk Taking behaviour in Malaysia: Role of Board and Ownership Structure

This paper examines the role of board structure and ownership concentration on bank risk-taking of public listed commercial banks in Malaysia from 2001 to 2012. The study focuses on the bank-risk taking behaviour after the major bank consolidation in Malaysia in year 2000. Using two-market model to estimate the risk of the commercial banks in Malaysia, the results suggest that higher ownership concentration and larger board size resulted in higher bank risk-taking of the listed commercial banks in Malaysia. Given that the board structure is an important element of bank risk-taking, regulators should continue to enhance the monitoring of banks (where board size is large and ownership concentration is high) to control the banks’ potential for excessive risk taking.

Monetary Policy and Financial Performance of Nigerian Deposit Money Banks

This paper aims to ascertain the monetary policy instruments of the Central Bank of Nigeria (CBN) during and after the bank consolidation exercise (2000 – 2016) and determine the effects of these policies on the financial performance of deposit money banks (DMBs) in Nigeria. An Autoregressive Lag Model (ADL) analysis of secondary data obtained from the CBN Statistical Bulletin, 2016 shows that monetary policies of the CBN had a significant effect on the performance of DMBs in the short-run but an insignificant effect in the long-run.

Bank Consolidation, Efficiency, and Profitability in Italy

This paper examines the case for efficiency-driven banking sector consolidation in Italy, evaluates its potential effects on profitability, and discusses policy options to facilitate a consolidation process that is as effective as possible. A bottom-up analysis of 386 Italian banks suggests that while profitability is expected to improve as the economy gradually recovers, operational efficiency gains are nonetheless needed to restore large parts of the banking system to healthy profitability. Banking system consolidation can play a role in facilitating such efficiency gains, but its effectiveness is likely to be most as part of a comprehensive strategy that includes complementary reforms to clean up bank balance sheets. Cross-country experience indicates that efficiency gains are more likely to follow consolidations where careful viability analyses are conducted of the synergies and operational improvements that can be achieved.

The impact of bank merger growth on CEO compensation

AbstractWe examine the impact of bank mergers on chief executive officer (CEO) compensation during the period 1992–2014, a period characterised by significant banking consolidation. We show that CEO compensation is positively related to both merger growth and non‐merger internal growth, with the former relationship being higher in magnitude. While CEO pay–risk sensitivity is not significantly related to merger growth, CEO pay–performance sensitivity is negatively and significantly related to merger growth. Collectively, our results suggest that, through bank mergers, CEOs can earn higher compensation and decouple personal wealth from bank performance. Furthermore, we document a more severe agency problem in CEO compensation as a consequence of bank mergers relative to mergers in industrial firms. Finally, we find that the post‐financial crisis regulatory reform of executive compensation in banks has limited effectiveness in curbing the merger–pay links.

Bank Consolidation and Systemic Risk: M&As During the 2008 Financial Crisis

This paper analyzes the relationship between bank consolidation and the stability of the financial system within the United States. In particular, we compare mergers and acquisitions of banks during the 2008 financial crisis with those that occurred during stable market conditions in order to determine whether the effects of bank consolidation on the overall economy at all differ depending upon the macroeconomic climate. We calculate the systemic risk measures of MES, SRISK, NSRISK, and ∆CoVaR both before and after a merger so as to capture the consequent merger-related change in an acquirer's exposure as well as contribution to systemic risk. We then conduct difference-in-differences analysis utilizing a non-merging control group to determine whether the change in these risk metrics is truly unique to the merging banks. For MES, NSRISK, and ∆CoVaR, the results indicate that there is a significant decrease in the acquiring banks' risk after the merger for the sample that merged during the crisis. Furthermore, when examining the underlying characteristics driving this difference through the use of a logit model, we find that mergers during the 2008 financial crisis tended to involve acquirers that possessed more diversified sources of income and less leverage than their stable market counterparts. Meanwhile, the targets of these transactions often were less profitable banks with lower tier 1 capital ratios, yet possessed greater shares of deposits making them more vulnerable to the downturn, but also attractive for acquisition. Overall, the findings of this paper suggest that during the 2008 financial crisis healthy banks acquired poorly performing target banks for diversification purposes, potentially driving the observed reduction in systemic risk.

Does the Agency Problem Exist in Bank Mergers?

This paper examines the effects of bank mergers on CEO compensation and incentives during 1992–2014, a period characterised by significant banking consolidation. The empirical results show that CEO compensation is positively related to both merger growth and non-merger internal growth, with the latter being significantly smaller in magnitude. While CEO vega is not significantly related to merger growth, CEO delta is negatively and significantly related to merger growth. Our results thus suggest that, through bank mergers, CEOs can earn higher compensation from their banks and decouple personal wealth from bank performance. Further, our results highlight a more severe agency problem as a consequence of bank mergers relative to mergers in industrial firms. Finally, our analysis of the global financial crisis suggests that the post-crisis regulatory reforms on executive compensation in banks have limited effectiveness in curbing the merger–pay links.

Application of the theory of planned behavior to customer switching intentions in the context of bank consolidations

PurposeThe purpose of this paper is to examine the factors that affect customers’ switching intentions among banks in the context of mergers and acquisitions, using particularly the case of the merger between Lloyds TSB and Halifax Bank of Scotland, which took place in 2009.Design/methodology/approachOn the basis of the theory of planned behavior, a quantitative survey was developed and administered to 515 account holders from both banks in branches located in Spain. Structural equation modeling was then utilized to evaluate the significance of direct and indirect relationships between the various factors under study.FindingsEmpirical findings indicate a significant direct relationship between switching intentions and each of: behavioral beliefs, normative beliefs, attitudes, and subjective norms. Results also reveal an inverse significant relationship between switching intentions and both control beliefs and perceived behavioral control.Research limitations/implicationsThe absence of a longitudinal study measuring the actual impact of the merger on customer switching behavior is the main limitation of this study. Moreover, despite being insightful, the results of this study should be generalized with caution since the sample was based on a list purposely chosen by the banks’ management.Originality/valueThis paper discusses customer switching behavior in the context of a real-life case of banks’ consolidation.