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FDIC Banking Review

Table A3.
Summary of Recent Empirical Studies on the Causes of Consolidation in the Banking Industry
Empirical Finding Study Reference Summary
Some evidence of increase in market power (share) with some evidence of price effects in concentrated market Shull and Hanweck (2001); Berger, Demsetz, and Strahan (1999) Surveyed the literature and found evidence of market power effects (with higher loan rates and lower deposit rates in concentrated markets) in the 1980s. Data for the 1990s, however, suggested a weaker relationship between local market concentration and deposit rates.
  Pilloff (1999) Found that banks in more concentrated markets earned higher profits and that the number of multimarket contacts was positively related to profitability-suggesting that multimarket contact may reduce competition.
  Prager and Hannan (1998) Found that a reduction in interest rates on local deposit accounts was associated with horizontal mergers that raised market concentration significantly.
  Simons and Stavins (1998) Using data for the period 1986-1994, found that after a bank's participation in a merger, a 1.0 percent higher HHI was associated with a 1.2 percent reduction in interest rates on MMDA, a 0.3 percent lower rate on CDs, and lower rates on deposit accounts across the board.
  Moore and Siems (1998) Found that the relationship between concentration and profitability was much weaker in 1997 than it had been a decade earlier.
  Berger and Hannan (1997) Found that banks in more concentrated markets charged higher rates on small business loans and paid lower rates on retail deposits.
Some evidence of greater profit efficiencies Berger (1998); Akhavein, Berger, and Humphrey(1997) Found that mergers led to an improvement in profit efficiency. The improvement seemed to result from an increase in lending activity to securityd tosecurity investments) and a more efof capitalse ofcapital.
  Boyd and Graham (1998) Found that being merged helped small banks-increasing ROA and decreasing expense measures.
Some evidence of improvements from geographic diversity Group of Ten (2001) Reviewed the latest research, which suggested that because of geographic diversification, consolidation of banks within the United States was likely to lead to reductions in risk. However, the studies also noted that these positive benefits might be offset by shifts to higher-risk portfolios or by operational risks.
Some evidence of improvements from geographic diversity Berger and DeYoung (2001) Found that the negative effects of distance tended to be modest in size. This finding suggests that efficient organizations can successfully export their superior skills, policies, and practices to their out-of-state affiliates.
  Hughes, Lang, Mester, and Moon (1996, 1999) Found that when organizations diversified geographically, especially via interstate banking, efficiency tended to be higher and insolvency risk tended to be lower.
Some evidence of improvements in payment system efficiency Hancock, Humphrey, and Wilcox (1999) Found substantial scale economies in Fedwire operations and an improvement in cost efficiency of Fedwire from consolidation of processing sites. Suggested results were likely to carry over to consolidation of private sector processors.
  Adams, Bauer, and Sickles (2002) Found indications of significant and positive scale economies in the provision of electronic payment processing services by the Federal Reserve (Fedwire, ACH, and Book-Entry securities). Results also showed that during the 1990s, technological change lowered marginal costs significantly.
Some evidence that management may act in self-interest Hughes, Lang, Mester, Moon, and Pagano (2003) Found evidence that managerial entrenchment at U.S. bank holding companies was associated with asset sales that yielded smaller improvements and with acquisitions that resulted in worse performance. Suggested that these results were consistent with empire-building strategies that sacrificed value.
  Bliss and Rosen (2001); Gorton and Rosen (1995) Argued that two primary motivmergers were mergerswere empire building and increased managerial compensation, especially on the part of managers who were entrenched or insulated from the market
  Hadlock, Houston, and Ryngaert (1999) Found that banks with higher levels of management ownership were less likely to be acquired; argued that this evidence was consistent with an entrenchment hypothesis, which holds that management teams with significant owner ship positions block attempts to be acquired at reasonable prices.
Some support for the too-big-to-fail motive Shull and Hanweck (2001) Found that the top 10 largest banks paid less for funds than smaller banks and operated with lower capitalization rates.
  Penas and Unal (2004) Showed that positive bond returns and a decline in credit spreads were related to the incremental size attained in bank mergers by medium-sized banks-those most likely to become largbe consideredbeconsidered TBTF.
  Kane (2000) Showed thatmega mergers megamergers of 1991-98, stockholders of large-bank acquirers gained value when a target institution was large. Argued that the effect of size underscored the possibility that too-big-to-discipline subsidies had distorted deal-making incmega banksor megabanks.
Some potential for increased systemic risk and safety net expansion De Nicola and Kwast (2002) Showed that, among large complex banking organizations during the 1990s, there was a significant upward trend in the degree of interdependency.
  Group of Ten (2001) Concluded that there were reasons to believe that financial consolidation in the United States had increased the risk that the failure of a large complex banking organization would be disorderly.
  Saunders and Wilson (1999) Found a dramatic reduction in bank capital ratios associated with increased safety-net support; also found that the structure and strength of safety-net guarantees might affect risk taking.
BUT Mixed evidence on cost efficiencies from scale economies Stiroh (2000) Examined the improved performance of U.S. BHCs from 1991 to 1997 and found that the gains were due primarily to productivity growth and changes in scale economies. Estimated cost functions showed modest economies of scale present throughout the period, with the largest BHCs showing stronger economies of scale.
  Hughes, Mester, and Moon (2001); Hughes, Lang, Mester, and Moon (1999); Hughes and Mester(1998) Claimed to have found evidence of large-scale economies once risk diversification, capital structure, and endogenous risk taking were explicitly considered in the analyses of production.
  Berger, Demsetz, and Strahan (1999) Extensively reviewed the literature on cost efficiency and found-on the basis of data from the 1980s and early 1990s-little efficiency improvement from mergers and acquisitions. However, cost efficiency effects might depend on the type of merger, the motivations of the managers, and the implementation of the merger.
  Kwan and Wilcox (1999) Found significant (but still relatively small) expense savings in mergers that occurred in the mid-1990s,after the pure accounting effects on reported expense data were removed.
  Boyd and Graham (1998) Examined the effects of mergers and found evidence of cost efficiency gains for only the smallest banks. The gains disappeared quickly with increases in size and were negative for larger banks.
  Peristiani (1997) Found that acquiring banks in the 1980s achieved moderate improvements in scale efficiency-attributable in part to the fact that the smaller target banks were on average less scale-efficient than their acquirers.
Mixed evidence on cost efficiencies from scope economies Stiroh (2004) Examined the link between the banking industry's growing reliance on noninterest income and the volatility of bank revenue and profits. Found almost no evidence that this shift offers large diversification benefits in the form of more stable profits or revenue.
  Amel et al. (2002) In reviewing the literature, found little evidence that mergers yielded significant economies of scope.
Mixed evidence on cost efficiencies from scope economies (cont.) DeLong (2001) Found that mergers that focused banks geographically and among product types created value, where as those that diversified generally failed to benefit shareholders.
   Demsetz and Strahan (1997) Showed that large bank-holding companies had better diversification across loan portfolios; it allowed them to operate with greater leverage and engage in more risky (and potentially more profitable) lending without increasing firm-specific risk.
  Kwan (1998) Found that securities subsidiaries pin theed BHCs inthe United States with potential benefits of diversification because revenues from the subsidiaries were not highly correlated with revenues from the rest of the BHC.
  Berger, Humphrey, and Pulley (1996) Found no evidence of statistically significant revenue economies (and only small cost economies) of scope among either small or large banks over the period 1978-1990, even for the most efficient banks.
Little evidence of any significant, permanent increase in shareholder value Calomiris and Karceski (1998); Pilloff and Santomero (1998) Reviewed the literature and concluded that although some event studies found that acquirers increased their market value, most studies found that the market value of the acquiring bank declined where as that of the target bank increased.
  Houston, James, and Ryngaert (2001) Found (like previous studies) that the market value of the acquiring bank declined, on average, whereas that of the target bank increased. However, compared with the 1980s, the 1990s were a period of higher average abnormal returns for both bidders and targets. Results also suggested that the realization of anticipated cost savings was the primary source of gains in the majority of recent bank mergers.
  Cornett et al. (2003) Found that diversifying bank acquisitions earn significantly negativperiod abnormal-periodabnormal returns forwhereas focusingwhereasfocusing acquisitions earn zero abnormal returns.
Little evidence of lower consumer prices Shull and Hanweck (2001) After reviewing prices for retail banking services over the last decade, found no evidence that retail prices had declined. In fact, the evidence suggested the opposite-that consumer prices had increased.
  Kahn, Pennachi, Sopranzetti (2000) Found that mergers appeared to increase rates on unsecured personal loans charged by all banks in the market in which the meplace .Thisaken place.This was consistent with an increase in market power in the market for personal loans. However, the opposite effect was observed for rates on automobile loans.
  Prager and Hannan (1998) Found a reduction in deposit rates attributable to substantial horizontal mergers (mergers between banks competing in the same geographic markets).
Little effect on the availability of services to consumers Avery et al. (1999) Found that mergers of banks with branches in the same zip code reduced the numbper capitanches percapita, whereas other mergers had little effect on branch office availability.
  DeYoung et al. (1998) Found that small business lending declined as banks aged and increased in size. But an increase in market concentration was found to have a positive effect on small business lending in urban markets and only a modest negative effect in rural markets.
  Jayaratne and Wolken (1999) Found (using survey data on small business borrowers) that the probability that a small firm would have a line of credit from a bank did not decrease in the long run when there were fewer small banks in the area.
  Peek and Rosengren (1996, 1998); Strahan and Weston (1996, 1998); Berger, Kashyap, and Scalise (1995) Found that large banking organizations generally devoted smaller proportions of their assets to small business loans and that mergers between large and small banks resulted in a decrease in small business lending. Mergers between smaller banks,however, did not appear to reduce small business lending.
  Cole, Goldberg, and White (2004) Found that large banks tended to base their small business loan decisions more on financial ratios than on prior lender-borrower relationships. In contrast, small banks relied to a greater extent on the character of the borrower.

Last Updated 1/19/2006 Questions, Suggestions & Requests