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Size, Risk, and Governance in European Banking$
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Jens Hagendorff, Kevin Keasey, and Francesco Vallascas

Print publication date: 2013

Print ISBN-13: 9780199694891

Published to Oxford Scholarship Online: January 2014

DOI: 10.1093/acprof:oso/9780199694891.001.0001

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Increases in Size and Bank Default Risk: Evidence from European Bank Mergers

Increases in Size and Bank Default Risk: Evidence from European Bank Mergers

Chapter:
(p.33) 3 Increases in Size and Bank Default Risk: Evidence from European Bank Mergers
Source:
Size, Risk, and Governance in European Banking
Author(s):

Jens Hagendorff

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199694891.003.0003

This chapter analyzes the implications of European bank consolidation on the default risk of acquiring banks. For a sample of 134 bidding banks, we employ the Merton distance to default model to show that, on average, bank mergers are risk neutral. However, for relatively safe banks, mergers generate a significant increase in default risk. This result is particularly pronounced for cross-border and activity-diversifying deals as well as for deals completed under weak bank regulatory regimes. Also, large deals, which pose organizational and procedural hurdles, experience a merger-related increase in default risk. Our results cast doubt on the ability of bank merger activity to exert a risk-reducing and stabilizing effect on the European banking industry.

Keywords:   Bank Default Risk, Consolidation, Regulatory Regimes

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