Large Bank Mergers Research Articles

Bank Competition and Personal Bankruptcy: Evidence from Large Bank Mergers

This paper studies the role of credit market competition in explaining consumer bankruptcy filings. I exploit variation in bank competition induced by large bank mergers to establish that personal bankruptcy rates are significantly higher in more competitive local banking markets. Higher competition prompts banks to take more risks by increasing credit supply and lowering their credit standards. Finally, using bank balance sheet data, I demonstrate that banks that operate in more competitive counties have higher credit supply and exhibit a greater loan loss rate, consistent with the bank risk-taking channel.

Local Bank Access, Financial Flexibility and Corporate Liquidity Management

Firms hold less cash (i.e. internal-liquidity) when their local bank branching network is dense. The effect is stronger for opaque and financially constrained firms. Further, it weakens with distance and strengthens with urban vibrancy. Finally, firms located in dense local branch networks enjoy better access to bank credit lines with looser covenants (i.e. external-liquidity) and are able to mitigate investment contractions during economic downturns. Using large bank mergers as a source of plausibly exogenous variation in local branch density, we confirm the causality of our results. Taken together, these findings suggest an economic link between financial agglomeration, financial flexibility and the real economy.

Private Information Implications for Acquirers and Targets in Horizontal Mergers

The paper presents a robust theory centred in Private information to assuage event study literature and confirm with Acquirer gains in Bank M&A. The ability of larger firms lies in investments in Intellectual capital, harnessing soft information and critically, purloin value in the deal through bargaining based on its own and the Target’s specific Private information. Recent literature has affirmed that private targets within the core industry generate Positive returns for acquirers, realising the value of Private information through deal making. Recent evidence from large Bank mergers producing large Bidder gains and the robust theory of private information presented herein is likely to renew confidence in the merger and acquisitions strategy and deflect from other unseemly theoretic literature relying on earlier analysis reflecting on event studies as a tool and on the effectiveness of M&A strategies for these acquirers based in negative gains in the Event study literature. The paper presents theoretic models centered around private information of both acquirer and targets and defend a robust theory supporting the large impact strategy of Mergers evidenced in Horizontal mergers in line with recent literature. As evidence, the paper utilizes the Private information construct to explain intuitive results verified in the literature. Banking markets present a unique opportunity in robustly recreating results based on this theory especially in growth memes presented by Asian markets. Foreign portfolio exits are significant opportunity losses for Global players and may not be justified by myopic short term responses to a new policy superstructure.

M&A in the Indian Banking Sector: An Analysis of Public and Private Transactions

The growth memes in the Indian economic environment provide an advantage to banks and uniquely accrete value to M&A based transactions proving benefits to bidders unlike in Bank M&A regimes reflected in the Event study literature. This work provides deeper insight into the linkages between Bank M&A and M&A literature with Indian Banking M&A and reviews the evidence. In a study of 24 M&A transactions in Indian Banks during the period 2006-2016, we find convincing evidence for both bidder and target gains that are used to specify points of comparison in Global US and European markets. These gains reflect on the continuing advantage of M&A as a large impact strategy, foreign bank exits from India and global policy imperatives advantaging the banking superstructure. Our study shows foreign portfolio exits are significant opportunity losses for Global players and may not be justified by myopic short term responses to a new policy superstructure. The 2014 Kotak ING merger produces a 13.47% CAR in the 0 to 15 event window and 23.8% in the longer-range window till trading stops in the ING Groups’ India subsidiary. Large Bank mergers produce large Bidder gains that allow a renewed confidence in the merger and acquisitions strategy and deflect from unfortunate advances in theoretical analysis based in earlier analyses reflecting on event studies as a tool and on the effectiveness of M&A strategies for these acquirers based on negative gains in the Event study literature. (Does not include OLS Decomposition of Abnormal Returns)

La Dolce Vita in Japan: The Effect of Bank Mergers on Corporate Governance

This study examines whether bank mergers change the relationship between market power and efficiency. Using two-stage least-squares instrumental variable estimation to address potential endogeneity between market power and efficiency, we confirm that market power is associated with higher profit efficiency. That analysis is then extended to examine how the relationship between market power and efficiency changes after bank mergers. The results are striking. The relationship between profit efficiency and market power becomes negative after banks merge. This effect is most significant for large and mega bank mergers, which experience significant increases in market power after merger. The increase in market power that accrues due to bank mergers does not lead bank managers to reap potential monopoly profits and boost efficiency. On the contrary, there is evidence that bank managers exploit their higher market power to pursue la dolche vita, or “the sweet life”.

Beta risk and price synchronicity of bank acquirers’ common stock following merger announcements

This article demonstrates that the risk profile of acquiring banks’ common stock changes in the aftermath of a merger announcement when examining 177 large merger deals in the United States spanning from 1998 to 2010 and inclusive of the fifth and sixth merger waves. There is a tendency for beta risk to rise markedly immediately following such announcements and remains relatively high even two years afterwards. This corroborates the view that the newly consolidated big banks resulting from mergers entail higher systematic risk and, instead of providing risk diversification to shareholders, exhibit greater comovement with the market. The broad asset pricing implication here is that the ‘too big to fail’ mentality that arises from large bank mergers actually translates into more risk for shareholders and susceptibility to adverse movements in the aggregate market.

Too Big to Fail: Motives, Countermeasures, and the Dodd-Frank Response

Government forbearance, support, and bailouts of banks and other financial institutions deemed “too big to fail” (TBTF) are widely recognized as encouraging large companies to take excessive risk, placing smaller ones at a competitive disadvantage and influencing banks in general to grow inefficiently to a “protected” size and complexity. During periods of financial stress, with bailouts under way, government officials have promised “never again.” During periods of financial stability and economic growth, they have sanctioned large-bank growth by merger and ignored the ongoing competitive imbalance. Repeated efforts to do away with TBTF practices over the last several decades have been unsuccessful. Congress has typically found the underlying problem to be inadequate regulation and/or supervision that has permitted important financial companies to undertake excessive risk. It has responded by strengthening regulation and supervision. Others have located the underlying problem in inadequate regulators, suggesting the need for modifying the incentives that motivate their behavior. A third explanation is that TBTF practices reflect the government’s perception that large financial firms serve a public interest — they constitute a “national resource” to be preserved. In this case, a structural solution would be necessary. Breakups of the largest financial firms would distribute the “public interest” among a larger group than the handful that currently hold a disproportionate concentration of financial resources. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 constitutes the most recent effort to eliminate TBTF practices. Its principal focus is on the extension and augmentation of regulation and supervision, which it envisions as preventing excessive risk taking by large financial companies; Congress has again found the cause for TBTF practices in the inadequacy of regulation and supervision. There is no indication that Congress has given any credence to the contention that regulatory motivations have been at fault. Finally, Dodd-Frank eschews a structural solution, leaving the largest financial companies intact and bank regulatory agencies still with extensive discretion in passing on large bank mergers. As a result, the elimination of TBTF will remain problematic for years to come.

Performance Changes Around Bank Mergers: Revenue Enhancements versus Cost Reductions

This paper examines operating performance around commercial bank mergers. We find that industry-adjusted operating performance of merged banks increases significantly after the merger, large bank mergers produce greater performance gains than small bank mergers, activity focusing mergers produce greater performance gains than activity diversifying mergers, geographically focusing mergers produce greater performance gains than geographically diversifying mergers, and performance gains are larger after the implementation of nationwide banking in 1997. Further, we find improved performance is the result of both revenue enhancements and cost reduction activities. However, revenue enhancements are most significant in those mergers that also experience reduced costs.

INTERSTATE BANKING DEREGULATION AND THE CHANGING NATURE OF BANK MERGERS

AbstractWe examine a sample of 443 bank mergers between publicly traded banks announced during the 1990s to investigate empirically the role of full interstate banking deregulation. The pre‐deregulation 1990s are characterized by value creation, with mergers involving a high degree of branch overlap experiencing significant announcement gains. Bank mergers in the post‐deregulation 1990s, however, fail to create value, and mergers with a high degree of branch overlap actually experience significant losses. Consistent with prior research, these valuation consequences are magnified for large bank mergers in the 1990s. Overall, our results are consistent with the broader literature on corporate control, suggesting that an economic shock can materially alter industry structure and the economic rationale for the efficient reallocation of assets through merger activity.

Announcement effects of bank mergers in Europe and the US

We investigate the announcement effect of large bank mergers in the European and US stock market. Cumulative abnormal returns are calculated on the basis of the performance vis-à-vis the market and a sector index. Mergers result in small positive abnormal returns. Target banks realize significantly higher returns than bidders. In many respects, there is a difference between the announcement effects of European bank mergers compared to those in the US.

Cross-Border Bank Mergers and Acquisitions in the EU

Beginning at the end of the 1990s the banking industry entered into a new phase of consolidation. The US market is experiencing an increasing number of inter-state bank mergers and acquisitions, whereas cross-border mergers between banks in different countries are becoming ever more common in the EU. This paper examines the motives and gains from large cross-border bank mergers by using what has been called a 'balanced scorecard approach'. It assesses firm performance by using both financial and non-financial (strategic) variables. The paper is explorative and covers a select literature review of bank mergers and acquisitions in general and an analysis of the Nordbanken-Merita merger based on the balanced scorecards approach in particular. It is shown that the balanced scorecard may be a very useful technique to analyse the complexity of large cross-border bank mergers and thereby it adds to our over-all understanding of bank mergers across borders. Furthermore, we demonstrate how the growth strategy behind the merger of the two banks may be organised within the framework of a balanced scorecard highlighting the strategic fit between them. Our findings imply that the strategic fit was of a complementary nature. The banks were completing each other rather well in the different perspectives of the model. The success of the merger will therefore very much depend on the capability of cross-utilising the different characteristics and strengths of the merging banks.

Big‐Bank Mergers in Europe: An Analysis of the Cost Implications

This paper examines the cost implications from hypothetical cross‐border bank mergers in the EU in light of recent claims that substantial cost savings could be expected as the result of the EU’s Single Market Programme for financial services. In fact, our results suggest only limited opportunities for costs saving from big‐bank mergers and indicate that such mergers are more likely to result in an increase in total costs. While there is a large variation in the simulated cost outcomes, the greatest opportunities for cost savings would appear to be generated by mergers between German and Italian banks. In contrast, mergers between French and German banks appear likely to result in substantial cost increases. Although the overall findings suggest limited benefits from cross‐border mergers between large banks, this may be a reflection of the methodology. Merger simulations are carried out hypothetically, ignoring any prior information about the pairings. We assume no premiums or merger costs and no further synergies resulting from such things as branch closures or a restructuring of the product mix. These assumptions may cause us to understate the potential reduction in total costs resulting from large bank mergers, and therefore our estimates provide the most pessimistic of total cost reduction outcomes. In conclusion, the substantial variation of cost outcomes generated suggests that large banks seeking economies through cross‐border mergers should select potential partners with great care.

The overall gains from large bank mergers

We demonstrate that the overall gains (the weighted average of gains to the bidder and target firms) from a recent sample of bank mergers are slightly positive, but statistically indistinguishable from zero. This lends support to recent studies which fail to find any significant cost savings resulting from bank mergers. We also demonstrate the characteristics of mergers that the market perceives as most valuable. These attributes include high prior levels of profitability for the bidder, considerable operations overlap between the target and the bidder, and a method of financing that reveals positive information about the bidder or the synergies likely to be created by the merger.

Changes in corporate performance associated with bank acquisitions

This paper examines the post-acquisition performance of large bank mergers between 1982 and 1987. On the whole, the merged banks outperform the banking industry. Their better performance appears to result from improvements in the ability to attract loans and deposits, in employee productivity, and in profitable asset growth. Further, we find a significant correlation between announcement-period abnormal stock returns and the various performance measures, showing that market participants are able to identify in advance the improved performance associated with bank acquisitions.

INTERSTATE BANKING AND ANTITRUST LAWS: HISTORY OF PUBLIC POLICIES TO PROMOTE BANKING COMPETITION

Over the past several years, antitrust laws' significance as a public policy to promote competition in banking has diminished. Deregulation has intensified competition so much that it has made antitrust laws nonbinding constraints, even during a merger movement of extraordinary proportions. Deregulation and attenuating antitrust raise a question as to whether a distinctive competitive policy for commercial banks should exist as it has in the past.Two earlier policies are identified and reviewed in this paper: (1) free banking, which in several forms existed from the 1830s to the early 1930s, and (2) antitrust, which became relevant during the early 1960s. Experience under both policies illuminates the interaction between competition and regulation in banking. Such experience indicates that the effects of current competitive policy must be evaluated within the developing regulatory environment. Partially evaluating current policy within this context suggests that new charter requirements should be reformulated and that large bank mergers should be limited. So long as a distinctive regulatory system exists, a distinctive competitive policy for banks is needed.

Returns to Acquirers and Competition in the Acquisition Market: The Case of Banking

In this paper we examine the effect of competition in the market for bank acquisitions on the acquirers' stock returns. Bank acquisitions are examined because federal and state regulations greatly facilitate the identification of potential bidders and alternative targets in an acquisition. We find that the gain to acquirers is positively related to the number of alternative target firms available and negatively related to the number of other potential bidders. These results provide some insights into the sources of gains from bank acquisitions.