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Hidden cost reductions in bank mergers: accounting for more productive banks

  • Simon H. Kwan
  • James A. Wilcox

Over the past decade, the banking industry has undergone rapid consolidation; indeed, on average, for the past three years there were more than two bank mergers every business day. Before the 1990s, most bank mergers involved banks with less than $1 billion in assets; more recently, even the very largest banks have merged with other banks and with nonbank financial firms. ; Globalization, technological advances, and regulatory retreat are often cited as factors that have stimulated and allowed more banks to merge. Mergers may reduce costs if they enable banks to close redundant branches or consolidate back-office functions. Mergers may make banks more productive if they increase the range of products that banks can profitably offer. Mergers may also diversify further bank portfolios and thereby reduce the probability of insolvency. Increased diversification then may reduce banks’ total costs by reducing desired capital-asset ratios. Increased diversification and size may also raise revenues if they increase banks’ attractiveness to customers who will deal only with very safe institutions. Though banks’ loan rates or noninterest revenues might rise or their deposit rates or capital requirements might fall as a result of mergers, we do not focus on those aspects of mergers here. Rather, we focus on the effects of merging on banks’ noninterest expenses.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Papers in Applied Economic Theory with number 99-10.

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Date of creation: 1999
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Handle: RePEc:fip:fedfap:99-10
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  1. Rhoades, Stephen A., 1998. "The efficiency effects of bank mergers: An overview of case studies of nine mergers," Journal of Banking & Finance, Elsevier, vol. 22(3), pages 273-291, March.
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