The Economic Impact of Merger Control: What is Special about Banking?
University of Frankfurt - Center for Financial Studies
European Central Bank (ECB); Centre for Economic Policy Research (CEPR) - International Macroeconomics
University of Zurich - Department of Banking and Finance
ECB Working Paper No. 786
There is a long-standing debate about the special nature of banks. Based on a unique dataset of legislative changes in industrial countries, we identify events that strengthen competition policy, analyze their impact on banks and non-financial firms and explain the reactions observed with institutional features that distinguish banking from non-financial sectors. Covering nineteen countries for the period 1987 to 2004, we find that banks are special in that a more competition-oriented regime for merger control increases banks' stock prices, whereas it decreases those of non-financial firms. Moreover, bank merger targets become more profitable and larger. A major determinant of the positive bank returns, after controlling inter alia for the general quality of institutions and individual bank characteristics, is the opaqueness that characterizes the institutional setup for supervisory bank merger reviews. Thus strengthening competition policy in banking may generate positive externalities in the financial system that offset unintended adverse side effects on efficiency introduced through supervisory policies focusing on prudential considerations and financial stability. Legal arrangements governing competition and supervisory control of bank mergers may therefore have important implications for real activity.
Number of Pages in PDF File: 60
Keywords: specialness of banks, mergers and acquisitions, competition policy, legal institutions, financial specialness of banks, mergers and acquisitions, competition policy, legal institutions, financial regulation
JEL Classification: G21, G28, D4working papers series
Date posted: July 26, 2007
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