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Journal of Financial Services Research

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10-03-2022

Bank Consolidation and Systemic Risk: M&A During the 2008 Financial Crisis

Authors: Gregory D. Maslak, Gonca Senel

Published in: Journal of Financial Services Research | Issue 2/2023

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Abstract

In this paper, we analyze the relationship between US bank consolidation and systemic risk before, during, and after the 2008 financial crisis. We find that mergers during the crisis decreased market-adjusted systemic risk. This effect was more pronounced for mergers with smaller acquirers of larger targets. Meanwhile, mergers of larger banks increased the aggregate systemic risk. In the years following the crisis, we find that banks that merged during the crisis had lower return volatility and fewer nonperforming loans than non-merged banks. Comparing pre-and post-crisis mergers, we do not find a significant difference with respect to their effect on systemic risk.

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Statistics refer to the years 2007-2009 and are obtained from the Federal Deposit Insurance Corporation (FDIC), accessed through the Federal Reserve Economic Data (FRED) on the website of the Federal Reserve Bank of St. Louis.

Up until this point, we have implied the term systemic risk refers to the stability of the overall financial system but have not explicitly defined it as such. In 2001, the Group of Ten (G-10) formally defined systemic risk as “the risk that an event will trigger a loss of economic value or confidence in, and attendant increases in uncertainty about, a substantial portion of the financial system that is serious enough to quite probably have significant adverse effects on the real economy.” This is the official definition used by Weiss et al. (2014) as well as DeNicolo and Kwast (2002) and which this paper adopts.

The results are similar for the NSRISK and \(\Delta\)CoVaR risk measures.

See Evanoff et al. (2009) for a review of the post-2000 M&A literature. See Amihud and Lev (1981); Furfine and Rosen (2006); Vallascas and Hagendorff (2011) for a discussion of mergers and risk. Moreover, see Berger et al. (2019); Ivashina and Scharfstein (2010); Kowalik et al. (2015); DeYoung and Torna (2013) for a discussion of 2008 financial crisis.

Referred as “competitive-adjusted” in Weiss et al. (2014)

For specific relative size thresholds, see Furfine and Rosen (2006); Minnick et al. (2011).

While capturing the target effect on the systemic risk is important, it also reduces the sample size significantly and can lead to potential sample selection bias. For instance, it may be the case that only larger targets may have price data that are publicly available that would affect the MES results in the subsample.

A key underlying assumption implicit in the DiD analysis is that the treatment group and the control group have parallel trends. Please refer to the online appendix for a visual examination of the trends prior to the mergers during stable and crisis periods.

The findings for the other risk measures are in line with these results. Namely, for both NSRISK and \(\Delta\)CoVaR, the market-adjusted systemic risk is significantly lower during the crisis as compared to the stable periods.

We assume ceteris paribus that other banks are not directly affected by this merger.

Similarly, Acemoglu et al. (2015) recognize that the effect of interconnectedness varies depending on the economic conditions.

Further, even though OLS cannot establish causality, we replicate our results using the OLS analysis in the online appendix.

Srivastav et al. (2018) use asset growth for the three years prior to the merger. Due to constraints in data availability, we use two years prior to the merger.

We use bootstrapping with 500 replications in order to estimate the asymptotic standard errors.

In the online appendix, we change the assumption of normally distributed errors and repeat the analysis of the Heckman selection model with a logit distribution. The results are in line with the probit specification.

These findings are in line with Shen et al. (2020), where authors show that the gains are larger for banks that merged during the crisis using a global banking sample from 1994 to 2009.

It is important to acknowledge that our results may be affected by the policy changes as the banking system itself underwent significant changes after the 2008 financial crisis, including becoming subject to more stringent regulations such as higher capital requirements and living wills. Moreover, whenever a time horizon is expanded, there is more room for unaccounted variation that makes it harder to assign the merger as the specific cause.

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Title: Bank Consolidation and Systemic Risk: M&A During the 2008 Financial Crisis
Authors: Gregory D. Maslak
Gonca Senel
Publication date: 10-03-2022
Publisher: Springer US
Published in: Journal of Financial Services Research / Issue 2/2023
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-022-00380-5

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