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Why do Banks Merge?

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  • Fabio Panetta

    ()
    (Bank of Italy - Research Department)

  • Dario Focarelli

    (Bank of Italy - Research Department)

  • Carmelo Salleo

    ()
    (Bank of Italy - Research Department)

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    Abstract

    The banking industry is consolidating at an accelerating pace, yet no conclusive results have emerged on the benefits of mergers and acquisitions. We analyze the Italian market, which is similar to other main European countries. By considering both acquisitions (i.e. the purchase of the majority of voting shares) and mergers we evidence the motives and results of each type of deal. Mergers are more likely between a more and a less services-oriented bank; they seek to improve income from services, but the resulting increase is offset by higher staff costs; return on equity improves because of changes in the capital structure. Acquisitions are more targeted towards banks with a poor credit management record; they aim to restructure the loan portfolio of the acquired bank; improved lending policies result in higher profits.

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    File URL: ftp://www.ceistorvergata.it/repec/rpaper/No-03-PanettaetAl.pdf
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    Bibliographic Info

    Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 3.

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    Length: 33
    Date of creation: 31 Jan 2003
    Date of revision:
    Handle: RePEc:rtv:ceisrp:3

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    Web page: http://www.ceistorvergata.it
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    Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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    Web: http://www.ceistorvergata.it

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    References

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    1. Allen N. Berger & Anthony Saunders & Joseph M. Scalise & Gregory F. Udell, 1997. "The Effects of Bank Mergers and Acquisitions on Small Business Lending," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 97-1, New York University, Leonard N. Stern School of Business-.
    2. Houston, Joel F. & Ryngaert, Michael D., 1994. "The overall gains from large bank mergers," Journal of Banking & Finance, Elsevier, Elsevier, vol. 18(6), pages 1155-1176, December.
    3. Frei, F.X. & Harker, P.T., 1996. "Measuring the Efficiency of Service Delivery Processes: With Application to Retail Banking," Papers, Rochester, Business - Operations Management 96-04, Rochester, Business - Operations Management.
    4. Allen N. Berger & Robert DeYoung & Hesna Genay & Gregory F. Udell, 2000. "Globalization of financial institutions: evidence from cross-border banking performance," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-04, Board of Governors of the Federal Reserve System (U.S.).
    5. Rhoades, Stephen A., 1993. "Efficiency effects of horizontal (in-market) bank mergers," Journal of Banking & Finance, Elsevier, Elsevier, vol. 17(2-3), pages 411-422, April.
    6. D. McFadden & J. Hausman, 1981. "Specification Tests for the Multinominal Logit Model," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 292, Massachusetts Institute of Technology (MIT), Department of Economics.
    7. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 59(2), pages 197-216, April.
    8. Paola Sapienza, 2002. "The Effects of Banking Mergers on Loan Contracts," Journal of Finance, American Finance Association, American Finance Association, vol. 57(1), pages 329-367, 02.
    9. Dario Focarelli & Fabio Panetta & Carmelo Salleo, 1999. "Why Do Banks Merge?," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 361, Bank of Italy, Economic Research and International Relations Area.
    10. Saunders, Anthony, 1999. "Consolidation and universal banking," Journal of Banking & Finance, Elsevier, Elsevier, vol. 23(2-4), pages 693-695, February.
    11. Allen, Franklin & Santomero, Anthony M., 2001. "What do financial intermediaries do?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(2), pages 271-294, February.
    12. Berger, Allen N. & Mester, Loretta J., 1997. "Inside the black box: What explains differences in the efficiencies of financial institutions?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 21(7), pages 895-947, July.
    13. Milbourn, Todd T. & Boot, Arnoud W. A. & Thakor, Anjan V., 1999. "Megamergers and expanded scope: Theories of bank size and activity diversity," Journal of Banking & Finance, Elsevier, Elsevier, vol. 23(2-4), pages 195-214, February.
    14. Allen N. Berger & David B. Humphrey, 1992. "Megamergers in banking and the use of cost efficiency as an antitrust defense," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 203, Board of Governors of the Federal Reserve System (U.S.).
    15. Jalal D. Akhavein & Allen N. Berger & David B. Humphrey, 1996. "The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 96-03, Wharton School Center for Financial Institutions, University of Pennsylvania.
    16. Focarelli, D. & Panetta, F. & Salleo, C., 1999. "Why do Banks Merge?," Papers, Banca Italia - Servizio di Studi 361, Banca Italia - Servizio di Studi.
    17. Cybo-Ottone, Alberto & Murgia, Maurizio, 2000. "Mergers and shareholder wealth in European banking," Journal of Banking & Finance, Elsevier, Elsevier, vol. 24(6), pages 831-859, June.
    18. Boot, Arnoud W. A., 1999. "European lessons on consolidation in banking," Journal of Banking & Finance, Elsevier, Elsevier, vol. 23(2-4), pages 609-613, February.
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