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The Safety and Soundness Effects of Bank M&A in the EU: Does Prudential Regulation Have any Impact?

Authors


  • The views expressed here are those of the authors and do not necessarily reflect those of the Banco de España. The authors are particularly indebted to Larry Wall. The authors would like to thank John Doukas (the Editor) and two anonymous referees for valuable comments. We also thank Leonidas Barbopoulos, Allen Berger, Benton Gup, Arnie Cowan, Ignacio Hernando, Paul Kupiec, Chen Liu, Tobias Michalak, Krista Minnick and Francesco Vallascas as well as participants at the 9th INFINITI conference (Dublin), the Southern Finance Association (Key West), the 2012 Eastern Finance Association (Boston) and the 2012 Western Economic Association meetings (San Francisco). This project was completed while Jens Hagendorff was visiting at Banco de España. The usual disclaimer applies. Correspondence: Jens Hagendorff.

Abstract

This paper studies the impact of European bank mergers on changes in key safety and soundness measures of both acquirers and targets. We find that acquirers in cross-border deals tend to perform better when their home country prudential supervisors and deposit insurance funding systems are stricter than that of the target. For target banks, we find that stronger supervision and tougher deposit insurance funding regimes result in positive post merger changes in liquidity and performance. Overall, while bank mergers have undermined bank safety and soundness in some cases, our evidence indicates that strong regulation and supervision can partly ameliorate this.

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