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Branching Deregulation and Merger Optimality

  • Ana Lozano-Vivas

    ()

    (Department of Economic Theory, Universidad de Málaga)

  • Miguel A. Meléndez-Jímenez

    ()

    (Department of Economic Theory, Universidad de Málaga)

  • Antonio J. Morales

    ()

    (Department of Economic Theory, Universidad de Málaga)

The U.S. banking industry has been characterized by intense merger activity in the absence of economies of scale and scope. We claim that the loosening of geographic constraints on U.S. banks is responsible for this consolidation process, irrespective of value-maximizing motives. We demonstrate this by putting forward a theoretical model of banking competition and studying banks’ strategic responses to geographic deregulation. We show that even in the absence of economies of scale and scope, bank mergers represent an optimal response. Also, we show that the consolidation process is characterized by merger waves and that some equilibrium mergers are not profitable per se -they yield losses- but become profitable as the waves of mergers unfold.

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File URL: http://webdeptos.uma.es/THEconomica/malagawpseries/Papers/METCwp2010-2.pdf
File Function: First version, 2010
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Paper provided by Universidad de Málaga, Department of Economic Theory, Málaga Economic Theory Research Center in its series Working Papers with number 2010-02.

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Length: 20 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:mal:wpaper:2010-2
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  1. Kevin J. Stiroh, 2002. "Diversification in banking: is noninterest income the answer?," Staff Reports 154, Federal Reserve Bank of New York.
  2. Gary Gorton & Matthias Kahl & Richard J. Rosen, 2009. "Eat or Be Eaten: A Theory of Mergers and Firm Size," Journal of Finance, American Finance Association, vol. 64(3), pages 1291-1344, 06.
  3. Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999. "The consolidation of the financial services industry: Causes, consequences, and implications for the future," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 135-194, February.
  4. Joseph P. Hughes & Loretta J. Mester & Choon-Geol Moon, 2000. "Are scale economies in banking elusive or illusive? evidence obtained by incorporating capital structure and risk-taking into models of bank production," Proceedings 700, Federal Reserve Bank of Chicago.
  5. Allen N. Berger & Anil K. Kashyap & Joseph Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been," Center for Financial Institutions Working Papers 96-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. Economides, Nicholas & Hubbard, R Glenn & Palia, Darius, 1996. "The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition among Small and Large Banks," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 667-704, October.
  7. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  8. Larry D. Qiu & Wen Zhou, 2007. "Merger waves: a model of endogenous mergers," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 214-226, 03.
  9. Randall S. Kroszner & Philip E. Strahan, 1999. "What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1437-1467.
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