Bank Consolidation and Systemic Risk: M&A During the 2008 Financial Crisis
66 Pages Posted: 26 Jun 2017 Last revised: 8 Jan 2018
Date Written: January 7, 2018
This paper analyzes the relationship between bank consolidation and the stability of the financial system within the United States. In particular, we compare mergers and acquisitions of banks during the 2008 financial crisis with those that occurred during stable market conditions in order to determine whether the effects of bank consolidation on the overall economy at all differ depending upon the macroeconomic climate. We calculate the systemic risk measures of MES, SRISK, NSRISK, and ∆CoVaR both before and after a merger so as to capture the consequent merger-related change in an acquirer's exposure as well as contribution to systemic risk. We then conduct difference-in-differences analysis utilizing a non-merging control group to determine whether the change in these risk metrics is truly unique to the merging banks. For MES, NSRISK, and ∆CoVaR, the results indicate that there is a significant decrease in the acquiring banks' risk after the merger for the sample that merged during the crisis. Furthermore, when examining the underlying characteristics driving this difference through the use of a logit model, we find that mergers during the 2008 financial crisis tended to involve acquirers that possessed more diversified sources of income and less leverage than their stable market counterparts. Meanwhile, the targets of these transactions often were less profitable banks with lower tier 1 capital ratios, yet possessed greater shares of deposits making them more vulnerable to the downturn, but also attractive for acquisition. Overall, the findings of this paper suggest that during the 2008 financial crisis healthy banks acquired poorly performing target banks for diversification purposes, potentially driving the observed reduction in systemic risk.
Keywords: M&As, systemic risk, 2008 financial crisis
JEL Classification: G01, G21, G28, G32, G34
Suggested Citation: Suggested Citation