Spillover Effects of Cross-Border Bank Acquisitions on Systemic Risk

Abstract

We examine the financial stability implications of cross-border (CB) bank acquisitions on host country banks. CB bank acquisitions lead to increases in systemic risk for peer banks in host countries. These acquisitions are associated with higher funding costs and shifts towards more volatile noninterest income sources for peer banks, suggesting that these are channels driving the results. The effects are concentrated in countries where banks have high market power. In contrast, target banks’ contribution to systemic risk declines following a CB acquisition. Our findings underscore the importance of incumbent banks’ market power in understanding the effects of CB bank acquisitions.

Keywords: Global Banking, Cross-Border Mergers and Acquisitions, Systemic Risk.

JEL Classification: G21, G34, F30