The Cost Implications of Hypothetical Bank Mergers in Italy

This paper examines the evidence of cost efficiencies resulting from hypothetical mergers in the Italian banking market. The approach adopted is similar to that of Shaffer (1992, 1993) where bank mergers are simulated and then total costs are calculated using the hybrid translog methodology for the hypothetically merged banks. These costs are then compared with the sum of the original predicted total costs for the individual banks. The results generally indicate that opportunities for cost savings seem to be rather limited in the Italian market. If we consider bank mergers between the largest twenty banks, hypothetical cost savings can generally be noticed for banks that merge with Monte dei Paschi di Siena, Credito Italiano, Cariplo, Banco di Santo Spirito and Cassa di Risparmio di Verona-Vicenza-Belluno. Specifically, the pairs Cassa di Risparmio di Verona-Vicenza- Belluno and Credito Italiano, Credito Italiano and Banco di Santo Spirito, Monte dei Paschi di Siena and Credito Italiano, result in small cost reductions. The vast majority of hypothetical mergers, however, show an increase in predicted costs. For exampie, the largest banks such as Istituto Bancario San Paolo di Torino, Banca Nazionale del Lavoro, Banca Commerciale Italiana, Banco di Napoli, Banca di Roma and Banco di Sicilia are not cost efficient and their specific pairs raise costs e.g. Istituto Bancario San Paolo di Torino and Banca Nazionale del Lavoro (10.19%), Banca Nazionale dei Lavoro and Monte Dei Paschi di Siena (2.13%), Banco di Napoli and Istituto Bancario San Paolo di Torino (10.40%), Banca Commerciale Italiana and Banco di Sicilia (3.25%), Banca Popolare di Milano and Banca Nazionale del Lavoro (3.42%).