TY - JOUR
T1 - The dollars and sense of bank consolidation
AU - Hughes, Joseph P.
AU - Lang, William W.
AU - Mester, Loretta J.
AU - Moon, Choon Geol
PY - 1999/2
Y1 - 1999/2
N2 - For nearly two decades banks in the US have consolidated in record numbers - in terms of both frequency and the size of the merging institutions. Rhoades (1996) (S.A. Rhoades, 1996. Bank Mergers and Industrywide Structure, 1980-1994. Board of Governors of the Federal Reserve System, Staff Study 169) hypothesizes that the main motivations were increased potential for geographic expansion created by changes in state laws regulating branching and a more favorable antitrust climate. To look for evidence of economic incentives to exploit these improved opportunities for consolidation, we examine how consolidation affects expected profit, the riskiness of profit, profit efficiency, market value, market-value efficiencies, and the risk of insolvency. Our estimates of expected profit, profit risk, and profit efficiency are based on a structural model of leveraged portfolio production that was estimated for a sample of highest-level US bank holding companies by Hughes et al. (1996) (Hughes et al., 1996. Efficient banking under interstate branching, Journal of Money, Credit, and Banking 28, 1045-1071.) Here, we also estimate two additional measures that gauge efficiency in terms of the market values of assets and of equity. Our findings suggest that the economic benefits of consolidation are strongest for those banks engaged in interstate expansion and, in particular, interstate expansion that diversifies banks' macroeconomic risk. Not only do these banks experience clear gains in their financial performance, but society also benefits from the enhanced bank safety that follows from this type of consolidation.
AB - For nearly two decades banks in the US have consolidated in record numbers - in terms of both frequency and the size of the merging institutions. Rhoades (1996) (S.A. Rhoades, 1996. Bank Mergers and Industrywide Structure, 1980-1994. Board of Governors of the Federal Reserve System, Staff Study 169) hypothesizes that the main motivations were increased potential for geographic expansion created by changes in state laws regulating branching and a more favorable antitrust climate. To look for evidence of economic incentives to exploit these improved opportunities for consolidation, we examine how consolidation affects expected profit, the riskiness of profit, profit efficiency, market value, market-value efficiencies, and the risk of insolvency. Our estimates of expected profit, profit risk, and profit efficiency are based on a structural model of leveraged portfolio production that was estimated for a sample of highest-level US bank holding companies by Hughes et al. (1996) (Hughes et al., 1996. Efficient banking under interstate branching, Journal of Money, Credit, and Banking 28, 1045-1071.) Here, we also estimate two additional measures that gauge efficiency in terms of the market values of assets and of equity. Our findings suggest that the economic benefits of consolidation are strongest for those banks engaged in interstate expansion and, in particular, interstate expansion that diversifies banks' macroeconomic risk. Not only do these banks experience clear gains in their financial performance, but society also benefits from the enhanced bank safety that follows from this type of consolidation.
KW - Bank
KW - Consolidation
KW - Diversification
KW - Efficiency
KW - Mergers
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U2 - https://doi.org/10.1016/S0378-4266(98)00088-0
DO - https://doi.org/10.1016/S0378-4266(98)00088-0
M3 - Article
VL - 23
SP - 291
EP - 324
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
IS - 2
ER -