Bank Consolidation and Systemic Risk: M&A During the 2008 Financial Crisis
75 Pages Posted: 26 Jun 2017 Last revised: 26 Oct 2017
Date Written: October 25, 2017
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. The systemic risk measures of MES, SRISK, NSRISK, and ∆CoVaR are calculated 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. Difference-in-differences analysis is subsequently conducted with a non-merging control group to determine whether the change in these risk metrics can accurately be attributed to the merger. For MES, NSRISK, and ∆CoVaR the results indicate that mergers during the defined crisis period contained a distinct diminishing effect on the acquiring bank's risk. Furthermore, when examining the underlying characteristics driving this observable 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, but possessed a greater share of deposits making them more vulnerable to the downturn, but also attractive acquisition targets. Overall, the findings of this paper suggest that during the 2008 financial crisis healthy banks acquired poorly performing target banks and successfully integrated them into their own operations.
Keywords: M&As, systemic risk, 2008 financial crisis
JEL Classification: G01, G21, G28, G32, G34
Suggested Citation: Suggested Citation