Consolidation took center stage at a recent conference at the Federal Reserve Bank of New York. Economists presented 13 papers, which covered topics varying from why mergers occur to the consequences of big deals.

For copies of the following papers, call 212-720-6130 or visit The full set of papers will be published shortly in the Journal of Banking and Finance.


Megamergers are being driven not by economics, but by the egos of bank executives and their belief that only large, diversified institutions will thrive in the future.

That is the conclusion of Arnoud W.A. Boot of the University of Amsterdam, Todd T. Milbourn of the London Business School, and Anjan V. Thankor of the University of Michigan.

Writing in "Megamergers and Expanded Scope: Theories of Bank Size and Activity Diversity," the researchers say there is no economic reason for banks to grow through acquisition. Instead, they say, deals are done because bank executives want to prove they can run bigger banks.

"CEOs see great reputational benefits ... even though they may not be entirely rational," they write. Also, the CEOs say the larger bank will increase shareholder value, they write.


Banks with managers who own a significant stake in them are least likely to be acquired, according to Charles J. Hadlock of the University of Illinois and Joel F. Houston and Michael Rynagaert of the University of Florida.

Writing in the "Role of Managerial Incentives in Bank Acquisitions," the researchers said many managers lost their jobs in 84 mergers that occurred from 1982 to 1992. For instance, the top executive left within two years at 53.6% of the banks. They argue this explains why banks with significant management ownership are less likely to be sold.

"Management teams with significant ownership positions block attempts to be acquired at a reasonable price," they write.


Consolidation should not affect how much credit is available for small businesses, according to Jith Jayaratne of the Federal Reserve Bank of New York and John D. Wolken of the Federal Reserve Board.

The researchers, writing in "How Important are Small Banks to Small Business?," examine whether small businesses in areas with several large banks but few community banks got less credit than those in areas with many community banks.

They find businesses are equally likely to get loans under both scenarios. They also find little difference in the repayment of credit by businesses in areas with many community banks and those with fewer such institutions. This suggests both large and small banks apply roughly the same standards to credit decisions, they write.


Four Fed economists, writing in "Consolidation and Depositor Services," find the number of branches per capita remains essentially flat in mergers of banks that do not compete in the same markets.

Branching levels also are unchanged when banks compete in the same market, but not in the same neighborhoods, according to Robert B. Avery, Ralph W. Bostic, Paul S. Calem, and Glenn B. Canner of the Federal Reserve Board. Only mergers of banks that compete in the same neighborhoods result in branch reductions.

"The most striking implication of this analysis is that the local neighborhood appears to be a relevant unit for analyzing the potential consequences of a proposed merger on the level of branching," they write.

Research Scan runs on the second and last Fridays of the month. Submissions should be sent to American Banker, 1325 G St. NW, suite 900, Washington, D.C. 20005.

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