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The economic impact of merger control: what is special about banking?

  • Carletti, Elena
  • Hartmann, Philipp
  • Ongena, Steven

There is a long-standing debate about the special nature of banks. Based on a unique dataset of legislative changes in industrial countries, we identify events that strengthen competition policy, analyze their impact on banks and non-financial firms and explain the reactions observed with institutional features that distinguish banking from non-financial sectors. Covering nineteen countries for the period 1987 to 2004, we find that banks are special in that a more competition-oriented regime for merger control increases banks’ stock prices, whereas it decreases those of non-financial firms. Moreover, bank merger targets become more profitable and larger. A major determinant of the positive bank returns, after controlling inter alia for the general quality of institutions and individual bank characteristics, is the opaqueness that characterizes the institutional setup for supervisory bank merger reviews. Thus strengthening competition policy in banking may generate positive externalities in the financial system that offset unintended adverse side effects on efficiency introduced through supervisory policies focusing on prudential considerations and financial stability. Legal arrangements governing competition and supervisory control of bank mergers may therefore have important implications for real activity. JEL Classification: G21, G28, D4

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Paper provided by European Central Bank in its series Working Paper Series with number 0786.

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Date of creation: Jul 2007
Date of revision:
Handle: RePEc:ecb:ecbwps:20070786
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  1. Asli Demirguc-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation," Econometric Society World Congress 2000 Contributed Papers 1751, Econometric Society.
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  3. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
  4. Dennis W. Carlton & Randal C. Picker, 2007. "Antitrust and Regulation," NBER Working Papers 12902, National Bureau of Economic Research, Inc.
    • Dennis W. Carlton & Randal C. Picker, 2013. "Antitrust and Regulation," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 25-61 National Bureau of Economic Research, Inc.
  5. Tomaso Duso & Damien J. Neven & Lars-Hendrik Röller, 2007. "The Political Economy of European Merger Control: Evidence using Stock Market Data," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 455-489.
  6. Carletti, Elena & Hartmann, Philipp & Spagnolo, Giancarlo, 2006. "Bank mergers, competition and liquidity," CFS Working Paper Series 2006/08, Center for Financial Studies (CFS).
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  10. Berger, Allen N, et al, 2004. "Bank Concentration and Competition: An Evolution in the Making," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 433-51, June.
  11. Asli Demirguc-Kunt & Luc Laeven & Ross Levine, 2003. "Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation," NBER Working Papers 9890, National Bureau of Economic Research, Inc.
  12. Forslid, Rikard & Häckner , Jonas & Muren, Astri, 2005. "When do Countries Introduce Competition Policy?," Research Papers in Economics 2005:6, Stockholm University, Department of Economics.
  13. Becher, David A., 2009. "Bidder returns and merger anticipation: Evidence from banking deregulation," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 85-98, February.
  14. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2006. "Bank concentration, competition, and crises: First results," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1581-1603, May.
  15. Craig O. Brown & I. Serdar Dinç, 2005. "The Politics of Bank Failures: Evidence from Emerging Markets," The Quarterly Journal of Economics, MIT Press, vol. 120(4), pages 1413-1444, November.
  16. R. Alton Gilbert & Adam M. Zaretsky, 2003. "Banking antitrust: are the assumptions still valid?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 29-52.
  17. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
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