Acquiring Failed Banks

Abstract

I study the relative importance of lending and deposit-taking for bank value in failed bank acquisitions. Comparing outcomes for winning banks to runner-up bidders in failed bank auctions, I find winners experience a 2.3\% abnormal return and this increase is mainly due to deposits, not loans. After acquisition, the winning bank cuts lending to the failed bank's borrowers and closes branches but it retains almost all acquired deposits. These deposits are not channeled into lending elsewhere. Rather, the acquirer lowers deposit rates, reflecting increased market power. Declines in lending due to the acquisition have negative local economic effects.

Keywords: Bank failure, acquisitions, deposits, lending

JEL Classification: G21, G28, G33, G34