The Impact of European Bank Mergers on Bidder Default Risk
نویسندگان
چکیده
We analyze the risk implications of European bank consolidation on the probability of default of acquiring banks. Using the Merton distance to default model, we show that the average bank merger is risk neutral. We examine the extent to which merger motives linked to risk diversification and regulatory incentives explain the observed risk effects of M&A. However, we find only limited evidence consistent with either of these explanations. Mergers that expand the geographic or product scope of banks do not generate a reduction in default risk. Also, stricter regulation does not facilitate risk reduction via M&A. Instead, we show that the risk profile of bidding banks before M&A determines the risk effects of a deal. This finding is robust to different merger strategies, regulatory incentives and pre-merger characteristics of the acquirer. Also, large banks, with limited scope for risk reduction, experience a merger-related increase in default risk. JEL Classification: G21, G34, G33, G28
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