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The effect of mergers on US bank risk in the short run and in the long run

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  • Brealey, Richard A
  • Cooper, Ian A
  • Kaplanis, Evi

Abstract

We examine changes in risk following US bank mergers in the period 1981–2014. Short-run increases in acquirer risk following mergers occur only in the first few mergers undertaken by the same acquirer, and only in systematic risk. The equity volatility of acquirers does not increase. Using a new approach to measure the long-run effect we find that these results persist, consistent with banks maintaining a constant level of total equity risk in the long run. Constant acquirer risk means that all diversification benefits of the mergers are dissipated. We measure the loss of diversification associated with mergers and find it to be 40% of the risk level in 1981. Almost all of this occurred prior to 2004. In addition, there has been a large increase in correlations between the largest banks, much of which has come from sources other than mergers. The results are inconsistent with these mergers being motivated by the ‘too big to fail’ put. They suggest that if one wanted to reduce the risk of the banking system by demerging major banks one would have to reach back to the structure that existed before 2004. Simply reversing recent mergers would not have much effect on stock market measures of risk.

Suggested Citation

  • Brealey, Richard A & Cooper, Ian A & Kaplanis, Evi, 2019. "The effect of mergers on US bank risk in the short run and in the long run," Journal of Banking & Finance, Elsevier, vol. 108(C).
  • Handle: RePEc:eee:jbfina:v:108:y:2019:i:c:s0378426619302353
    DOI: 10.1016/j.jbankfin.2019.105660
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    5. Nevermann, Daniel & Heckmann-Draisbach, Lotta, 2023. "Effects of mergers on network models of the financial system," International Review of Financial Analysis, Elsevier, vol. 90(C).

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    More about this item

    Keywords

    Bank mergers; Bank risk; Bank regulation; Too big to fail; Concentration-fragility;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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