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

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: Bank mergers, Efficiency gains, Market power

JEL Classification: D4, G21, G34