Banks getting bigger?

by James W. Kolari Chase Professor of Finance

Big banks may soon be getting bigger through cross-Atlantic consolidation. Over the past 25 years in the Mays finance department, I have focused most of my research on banking and financial markets issues, most recently turning to examine the operating efficiency of banking institutions. In my current research, a co-author and I have pinpointed efficiency as a motivation for major banks in the U.S. and Europe to reach across the Atlantic for consolidation partners.

A 2005 co-authored paper in the Journal of Business examines whether cost and profit efficiencies are possible in mergers of U.S. and European banks. Deregulation of the banking industry in Europe and the United States in the 1980s and 1990s stimulated an unprecedented merger and consolidation wave, though most geographic expansion was limited to continental borders. But financial systems in Europe and the U.S. have become increasingly integrated in the past 50 years by virtue of the international flow of money and capital in securities markets. In the near future the process of integration could be completed through cross-Atlantic consolidation, which increases structural overlap among financial institutions.

Is it possible that mega-institutions combining geographically-dispersed operations are more efficient in terms of costs and profits than otherwise? Efficiency differences between large banks in Europe and the U.S. would imply that there is an opportunity to enhance efficiency via cross-Atlantic expansion. Of course, bank consolidation could also be motivated by factors including market power, diversification and management incentives.

Our findings support the notion that profit efficiency gains are possible in cross-Atlantic bank mergers between European and U.S. banks, which means that an economic motivation in favor of geographic expansion exists. The evidence also suggests that intra-European mergers among large banks are possible because of the considerable differences among those banks in cost and profit efficiency.

While other motivations may well exist for cross-Atlantic mergers among large banks, potential profit efficiency gains appear to be a plausible factor in decisions to merge beyond continental shores and form global organizations comprised of large Europe/U.S. bank combinations.

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