The Competitive Consequences of Size in Banking: Evidence from Megabank Mergers

42 Pages Posted: 24 Mar 2010 Last revised: 4 Jan 2011

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management

Rajesh P. Narayanan

Louisiana State University

Multiple version iconThere are 2 versions of this paper

Date Written: December 15, 2010

Abstract

Concerns over size in banking arise from the potential for a megabank to harm competition and extract safety net subsidies. With the worrisome increases in size having been achieved through megamergers, this paper examines whether gains in such mergers trace to efficiency improvements or market power vis-à-vis customers and regulators administering the government safety net. The findings indicate that as statutory restrictions on bank expansion faded over time, size-related efficiency gains receded, and as bank size continued to expand through market overlap mergers, market power gains emerged. When mergers produced extremely large banks that were perceived to be Too-Big-To-Fail, gains arose from the ability to shift risk onto the government safety net. These finding have implications for reform proposals that aim to restrict bank size in the interests of macroeconomic stability.

Keywords: Mergers, Efficiency, Market Power, TBTF

JEL Classification: G21, G34

Suggested Citation

Devos, Erik and Krishnamurthy, Srinivasan and Narayanan, Rajesh P., The Competitive Consequences of Size in Banking: Evidence from Megabank Mergers (December 15, 2010). Available at SSRN: https://ssrn.com/abstract=1571617 or http://dx.doi.org/10.2139/ssrn.1571617

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915 747 7770 (Phone)

HOME PAGE: http://utminers/utep.edu/hdevos

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States

Rajesh P. Narayanan (Contact Author)

Louisiana State University ( email )

Baton Rouge, LA 70803-6308
United States
225-578-6236 (Phone)

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