The Impact of Bank Consolidation on Commercial Borrower Welfare

55 Pages Posted: 8 Nov 2000

See all articles by Jason J. Karceski

Jason J. Karceski

LSV Asset Management

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

David C. Smith

University of Virginia - McIntire School of Commerce

Date Written: February 2004

Abstract

We estimate the impact of bank merger announcements on borrowers' stock prices for publicly traded Norwegian firms. In addition, we analyze how bank mergers influence borrower relationship termination behavior and relate changes in the propensity to terminate to borrower abnormal returns. We find that borrowers lose, on average, about 0.8 percent in equity value when an announcement identifies their bank as a merger target. Smaller borrowers of target banks are especially hurt in mergers involving two large banks, where they lose an average of about 1.8 percent. In contrast, borrowers of acquiring banks tend to earn positive abnormal returns. These results suggest that the welfare of borrowers may be influenced by a strategic focus that favors acquiring borrowers. In addition, bank mergers lead to higher relationship exit rates among borrowers of target banks, and small bank mergers lead to larger increases in exit rates than large mergers. Finally, larger merger-induced increases in relationship termination rates are associated with higher abnormal returns. These results suggest that when a bank merger is harmful to borrowers, firms with low switching costs switch banks while similar firms with high switching costs are locked in to their current relationship.

Keywords: Bank relationships, bank mergers, market power

Suggested Citation

Karceski, Jason J. and Ongena, Steven R. G. and Smith, David Carl, The Impact of Bank Consolidation on Commercial Borrower Welfare (February 2004). FRB International Finance Discussion Paper No. 679. Available at SSRN: https://ssrn.com/abstract=244071 or http://dx.doi.org/10.2139/ssrn.244071

Jason J. Karceski (Contact Author)

LSV Asset Management ( email )

155 N Wacker Dr.
Chicago, IL 60654
United States
352-246-7674 (Phone)

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

David Carl Smith

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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