The Effect of Mergers on US Bank Risk in the Short Run and in the Long Run

47 Pages Posted: 9 Aug 2017 Last revised: 29 Sep 2019

See all articles by Richard A. Brealey

Richard A. Brealey

London Business School

Ian A. Cooper

London Business School

Evi Kaplanis

London Business School

Date Written: January 1, 2019

Abstract

We examine changes in risk following US bank mergers in the period 1981-2014. Short-run increases in acquirer risk following mergers occur only in the first few mergers undertaken by the same acquirer, and only in systematic risk. The equity volatility of acquirers does not increase. Using a new approach to measure the long-run effect we find that these results persist, consistent with banks maintaining a constant level of total equity risk in the long run. Constant acquirer risk means that all diversification benefits of the mergers are dissipated. We measure the loss of diversification associated with mergers and find it to be 40% of the risk level in 1981. Almost all of this occurred prior to 2004. In addition, there has been a large increase in correlations between the largest banks, much of which has come from sources other than mergers. The results are inconsistent with these mergers being motivated by the ‘too big to fail’ put. They suggest that if one wanted to reduce the risk of the banking system by demerging major banks one would have to reach back to the structure that existed before 2004. Simply reversing recent mergers would not have much effect on stock market measures of risk.

Keywords: bank mergers, bank risk, bank regulation, too big to fail, concentration-fragility

JEL Classification: G01, G21, G28, G32, G34

Suggested Citation

Brealey, Richard A. and Cooper, Ian Anthony and Kaplanis, Evi, The Effect of Mergers on US Bank Risk in the Short Run and in the Long Run (January 1, 2019). Available at SSRN: https://ssrn.com/abstract=3015307 or http://dx.doi.org/10.2139/ssrn.3015307

Richard A. Brealey

London Business School ( email )

Sussex Place
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London, London NW1 4SA
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+44 207 262 5050 Ext. 3462 (Phone)
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Ian Anthony Cooper (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 171 262 5050 (Phone)

Evi Kaplanis

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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