The Real Effects of Distressed Bank Mergers

Abstract

In this paper we employ a novel identification scheme to show the causal effect of negative shocks to banks on the real economy. The identification is based on exploiting distressed mergers of German savings banks. We show that these mergers represent exogenous shocks to the (initially non-distressed) acquiring bank. We find that in the years after a distressed merger: (i) the performance of acquiring savings banks deteriorates; (ii) the shock is transmitted to firms in the acquirer’s region which cut back their investments and reduce employment and (iii) the overall macroeconomic dynamics in the region of the acquirer deteriorates, leading to reductions in investment and employment growth. To support a causal interpretation of our results we also perform several tests that confirm that local economic dynamics is affected by the shock to the acquiring bank and not by real economic contagion.

Keywords: Bank distress, merger, growth, real eects

JEL Classification: E44, G21