Banking Industry Consolidation: Efficiency Issues

Jerome Levy Economics Institute Working Paper No. 110

41 Pages Posted: 13 Oct 1998

See all articles by Robert DeYoung

Robert DeYoung

University of Kansas School of Business

Gary Whalen

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Abstract

Failures, intra-company mergers of affiliate banks, and inter-company mergers and acquisitions together account for the disappearance of more than 4000 bank charters since 1987. This process of consolidation is beneficial if it drives inefficient banking organizations from the market and if it facilitates increased efficiency in the banking organizations that survive. In this paper, we consider the findings reported in previous studies and present results from new research of our own in an attempt to determine the impact of consolidation on banking industry efficiency. New evidence presented here suggests that failed banks are significantly less efficient than their peers 5 to 6 years prior to failure and that this performance differential often becomes evident before the appearance of major loan quality problems. Consistent with existing evidence, new evidence drawn from an event study indicates that intra-company consolidation is likely to have a small but significantly positive impact on holding company efficiency and profitability. Finally, both new and existing research on inter-company bank mergers finds that many of these transactions have a potential for efficiency gains that is not systematically exploited postmerger, results that suggest a non-efficiency motivation for bank mergers. When considered together, the results presented here suggest that efficiency is a useful indicator of a bank's competitive viability, and the intra- and inter-company mergers, at least within states, afford demonstrate that regulatory restrictions on geographic expansion and organizational form impose costs on banks that should be consciously considered by policy makers.

JEL Classification: G21

Suggested Citation

DeYoung, Robert and Whalen, Gary, Banking Industry Consolidation: Efficiency Issues. Jerome Levy Economics Institute Working Paper No. 110. Available at SSRN: https://ssrn.com/abstract=126288 or http://dx.doi.org/10.2139/ssrn.126288

Robert DeYoung (Contact Author)

University of Kansas School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-1806 (Phone)

Gary Whalen

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

400 7th Street SW
Washington, DC 20219
United States
202-874-5250 (Phone)

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