Efficiency and Market Power Gains in Megabank Mergers

Posted by D. Daniel Sokol

Erik Devos, University of Texas at El Paso - College of Business Administration - Department of Economics and Finance, Srinivasan Krishnamurthy, NC State University, SUNY at Binghamton - School of Management, and Rajesh P. Narayanan, Louisiana State University have some interesting findings on Efficiency and Market Power Gains in Megabank Mergers.

ABSTRACT: This paper uses Value Line forecasts to estimate and trace merger-related gains to their ultimate sources in efficiency improvements and enhanced market power. Sidestepping methodological issues that have hampered past attempts at assessing bank mergers, this approach yields estimates that indicate that, on average, megabank mergers generate gains that derive from improvements in cost efficiencies. With the removal of restrictions on bank expansion, these gains decline and previously observed efficiency gains give way to gains that arise at the expense of customers as the extent of geographic overlap between the merging banks increases. In mergers where the resulting size of the combination allows merging banks potential access to previously unavailable regulatory subsidies, gains are substantial and arise from projected revenue increases that are linked to increased risk taking.