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E-MailJan-Peter Siedlarek is a Research Economist at the Federal Reserve Bank of Cleveland. This post is based on a recent paper by Mr. Siedlarek; Elena Carletti, Professor of Economics at the European University Institute; Steven Ongena, Professor of Banking at the University of Zurich; and Giancarlo Spagnolo, Professor of Economics at the University of Rome.
How do changes in merger control legislation affect merger activity in the banking sector? This is the question we investigate in our new research paper, The Impact of Changes in Merger Control Legislation on Bank Mergers. Using data on bank mergers and acquisitions in Europe, we find evidence that stricter merger control laws lead to an increase in the merger premium that target banks experience when an acquisition is announced. We interpret this as suggestive of merger legislation being effective in bringing about more efficient and pro-competitive transactions.
We study the effect of merger legislation on banking because this sector is often regarded as holding a unique position in developed economies in a number of respects. Two of these are central to our research. First, banking is arguably one of the most regulated industries, as governments aim to control systemic risk and protect consumers in financial markets. Second, partly as a consequence of a strong focus on financial stability, the banking sector has long been largely exempted, at least in Europe, from other objectives or policy that may interfere with this aim. In particular, antitrust considerations concerning the degree of competition or the level of concentration in the sector, which have impacted many other industries throughout the 20th century, have been historically downplayed in banking in many European countries precisely because of the fear that competition could be detrimental to financial stability.
Only more recently, thanks to the process of liberalization that started in the 1970s and 1980s and to research findings showing a beneficial link between competition and stability, the attention paid to considerations of competition in banking has increased, and the sector has been gradually subject to greater competition legislation in many countries. This has included, for example, the more rigorous enforcement of bans on cartels as well as greater scrutiny of bank mergers in terms of their effect on market concentration. Despite this, special provisions in the application of competition policy to the banking sector remain pervasive, and the (scarce) available research on the implementation of competition laws in practice suggests that concerns about competition have frequently been overridden.
In our paper, we analyze the effect that competition legislation in Europe has had on the banking sector by empirically studying the impact of the introduction of merger control on the valuation and other characteristics of bank mergers and acquisitions. In particular, we analyze a dataset of announced bank mergers and acquisitions between 1986 and 2007 in 15 European countries that experienced changes in merger control legislation during that period. We construct a comparison between transactions before and after the change in legislation, and measure differences in the characteristics of the transactions, as well as of the merging parties.
Our main finding is a statistically significant and economically meaningful increase of around 7 percentage points in the market premium that target stocks experience around the announcement of a merger. This premium can be interpreted as a proxy for the value that financial markets expect to be created by a transaction for target shareholders. An increase in the premium might be due to a number of reasons, including greater surplus being created or a reallocation of value from acquirers to targets. From an antitrust point of view, it is furthermore of interest whether a transaction is profitable because of the efficiencies it creates or because it leads to market power in the affected market.
We explore these possible explanations for the increase in the target premium by analyzing other characteristics of the transactions in our sample. We find that after the introduction of merger control, the average and relative size of the acquiring banks fell significantly, while the share of bank acquisitions by non-banks increased relative to before the legislation. Both effects are consistent with a decrease in the extent to which transactions involve parties with closely overlapping activities, both in geographic markets and product markets, implying that these transactions had less potential to increase the market power of the merging banks. Other characteristics, including the profitability and risk profile of targets as well as the market response of rival banks, are unaffected. This appears to rule out explanations such as a selection of buyers into riskier target banks. Overall, we interpret this evidence as suggestive of an effective implementation of merger control in banking, leading to more efficient and more competitive transactions in the countries in our sample.
The complete paper is available for download here.
