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Banking Industry Consolidation: Efficiency Issues

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  • Robert DeYoung
  • Gary Whalen

Abstract

Failures, intra-company mergers of affiliate banks, and inter-company mergers and acquisitions together account for the disappearance of more than 4000 bank charters since 1987. This process of consolidation is beneficial if it drives inefficient banking organizations from the market and if it facilitates increased efficiency in the banking organizations that survive. In this paper, we consider the findings reported in previous studies and present results from new research of our own in an attempt to determine the impact of consolidation on banking industry efficiency. New evidence presented here suggests that failed banks are significantly less efficient than their peers 5 to 6 years prior to failure and that this performance differential often becomes evident before the appearance of major loan quality problems. Consistent with existing evidence, new evidence drawn from an event study indicates that intra-company consolidation is likely to have a small but significantly positive impact on holding company efficiency and profitability. Finally, both new and existing research on inter-company bank mergers finds that many of these transactions have a potential for efficiency gains that is not systematically exploited postmerger, results that suggest a non-efficiency motivation for bank mergers. When considered together, the results presented here suggest that efficiency is a useful indicator of a bank’s competitive viability, and that intra- and inter-company mergers, at least within states, afford opportunities for banking firms to enhance their efficiency. The results also demonstrate that regulatory restrictions on geographic expansion and organizational form impose costs on banks that should be consciously considered by policy makers.

Suggested Citation

  • Robert DeYoung & Gary Whalen, 1994. "Banking Industry Consolidation: Efficiency Issues," Economics Working Paper Archive wp_110, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_110
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    References listed on IDEAS

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    Cited by:

    1. Rubi Ahmad & Mohamed Ariff & Michael Skully, 2007. "Factors Determining Mergers of Banks in Malaysia’s Banking Sector Reform," Multinational Finance Journal, Multinational Finance Journal, vol. 11(1-2), pages 1-31, March-Jun.
    2. Daniel E. Nolle, 1994. "Banking Industry Consolidation: Changes and Implications for the Future," Economics Working Paper Archive wp_111, Levy Economics Institute.
    3. Ronnie J. Phillips, "undated". "Narrow Banking Reconsidered, The Functional Approach to Financial Reform," Economics Public Policy Brief Archive ppb_17, Levy Economics Institute.
    4. Allard Bruinshoofd & Bertrand Candelon & Katharina Raabe, 2010. "Banking Sector Fragility and the Transmission of Currency Crises," Open Economies Review, Springer, vol. 21(2), pages 263-292, April.
    5. Mercan, Muhammet & Reisman, Arnold & Yolalan, Reha & Emel, Ahmet Burak, 2003. "The effect of scale and mode of ownership on the financial performance of the Turkish banking sector: results of a DEA-based analysis," Socio-Economic Planning Sciences, Elsevier, vol. 37(3), pages 185-202, September.
    6. Christoph Walkner & Jean-Pierre Raes, 2005. "Integration and consolidation in EU banking - an unfinished business," European Economy - Economic Papers 2008 - 2015 226, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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