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The dollars and sense of bank consolidation

Author

Listed:
  • Joseph P. Hughes
  • William W. Lang
  • Loretta J. Mester
Abstract
For nearly two decades banks in the United States have consolidated in record numbers--in terms of both frequency and the size of the merging institutions. Rhoades (1996) hypothesizes that the main motivators 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, the authors examine how consolidation affects expected profit, the riskiness of profit, profit efficiency, market value, market-value efficiencies, and the risk of insolvency. Their 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 U.S. bank holding companies in Hughes, Lang, Mester, and Moon (1996). Here, the authors also estimate two additional measures that gauge efficiency in terms of the market values of assets and of equity. Their 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.

Suggested Citation

  • Joseph P. Hughes & William W. Lang & Loretta J. Mester, 1998. "The dollars and sense of bank consolidation," Working Papers 98-10, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:98-10
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    References listed on IDEAS

    as
    1. Steven J. Pilloff & Anthony M. Santomero, 1996. "The Value Effects of Bank Mergers and Acquisitions," Center for Financial Institutions Working Papers 97-07, Wharton School Center for Financial Institutions, University of Pennsylvania.
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    More about this item

    Keywords

    Bank mergers;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • D2 - Microeconomics - - Production and Organizations
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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