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Bank mergers as scale-free coagulation

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  • Pushkin, Dmitri O
  • Aref, Hassan
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    Abstract

    The asset size distribution of US banks is viewed as the result of a scale-free coagulation process. When two banks merge, the assets of the combined institution equals the sum of the assets of the constituent banks. Analysis of the Smoluchowski coagulation equation suggests the emergence of a steady state, power-law distribution with an exponent that only depends on the degree of homogeneity of the coagulation rate. Bank merger data satisfies such power-law scaling. We develop an underlying theoretical framework for bank mergers quite different from prevailing ideas based on game theory on the one hand, and recent econophysical models on the other. As a corollary we show that in order to avoid the emergence of a mega-bank, the rate of return should decrease with the bank size. Finally, we suggest that stochastic coagulation may provide a unifying description of fast integration processes characteristic of globalization.

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    Bibliographic Info

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 336 (2004)
    Issue (Month): 3 ()
    Pages: 571-584

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    Handle: RePEc:eee:phsmap:v:336:y:2004:i:3:p:571-584

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    Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

    Related research

    Keywords: Coagulation; Bank mergers; Bank-size distribution; Power-law; Self-similarity; Mean field; Merger market; Growth; Gelation; Globalization;

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    Cited by:
    1. Xavier Gabaix & Parameswaran Gopikrishnan & Vasiliki Plerou & H. Eugene Stanley, 2006. "Institutional Investors and Stock Market Volatility," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 461-504, May.
    2. Blank, Sven & Buch, Claudia M. & Neugebauer, Katja, 2009. "Shocks at large banks and banking sector distress: the Banking Granular Residual," Discussion Paper Series 2: Banking and Financial Studies 2009,04, Deutsche Bundesbank, Research Centre.
    3. Tedeschi, Gabriele & Iori, Giulia & Gallegati, Mauro, 2012. "Herding effects in order driven markets: The rise and fall of gurus," Journal of Economic Behavior & Organization, Elsevier, vol. 81(1), pages 82-96.

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