The impacts of bank mergers and acquisitions (M&As) on bank

300 Pages·2010·1.32 MB·English

by  Duangkamol Prompitak

THE IMPACTS OF BANK MERGERS AND
ACQUISITIONS (M&As) ON BANK BEHAVIOUR

By

Duangkamol Prompitak

A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY

Department of Economics
Birmingham Business School
The University of Birmingham
December 2009
University of Birmingham Research Archive

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Abstract

This thesis examines the impact of bank mergers and acquisitions (M&As) on lending
behaviour by commercial banks. We use the data set of large European commercial
banks from 1997 to 2005. Empirical models are formulated to explain the effects of
mergers on bank loan pricing behaviour, interest margin setting, credit availability
and lending objectives. The analysis provides evidence that mergers have statistically
significant influence on reduced lending rates, interest margins and loan supply. In
addition, lending objectives for merged and non-merging banks are different, in that
merge-involved banks tend to emphasise maximising their utility, while non-merging
banks focus on remaining safe. These results suggest that merged banks can obtain
efficiency gains through mergers and can pass these benefits to their customers in the
form of lower lending rates and interest margins. In addition, diversification gains
could arise from consolidations. This is because merged banks focus more on other
business activities than traditional intermediary activities. As non-interest income
increases in relation to interest income, banks can diversify their business activities
and can reduce their non-interest costs. As a result, they can be exposed to lower risk
and therefore be less risk averse than non-merging banks.
Dedication

To my dear family
especially my grandmother Lila
Acknowledgements

First and foremost, I offer my sincerest gratitude to my supervisor, Professor David
Dickinson, who has supported me throughout my thesis with his patience and
knowledge. He has shared thoughtful suggestions and valuable comments on every
chapter on my work. His guidance helped me throughout the research and writing of
this thesis. Without him, this thesis could not have been completed. Many thanks also
go to my second supervisor Mr. Nicholas Horsewood, who has given me constructive
suggestions throughout the process of my study.

My sincere thanks also go to my examiners, Professor Philip Molyneux and Professor
David Gowland for their time in reading my thesis and their valuable suggestions.
Many thanks also go to Mr. Ralph Bailey for being the Chairperson of the examining
board which organised the oral examination.

I also would like to thank the Fiscal Policy Office, The Ministry of Finance, Thailand,
for giving me permission to commence this thesis in the first instance; their financial
support is acknowledged.

I would like to express my thanks to my friends in Birmingham for their support and
all the fun we have had over these past four years. My special thanks to my dear
friend, Yixin Hou, for her unselfish and patient guidance, and her encouragement in
so many ways.
Most importantly, none of this could have happened without my family. My grateful
thanks go to my parents, Jumpol and Wannapon Prompitak, who always provide me
with support and understanding. Special thanks go to my grandparents, Banyat and
Lila Panitchaattra, who were my best counsellors. Although they are no longer with
me, they are forever remembered. This thesis stands as a testament to their
unconditional love and encouragement.

Finally, I would like to thank everybody who was important to the successful
realisation of my thesis, as well as expressing my apology that I could not mention
personally one by one.

Any remaining errors are mine.
Table of Contents

Chapter 1 Introduction 1
1.1 Overview of the thesis 3
1.2 Review of the literature 4
1.2.1 Bank lending behaviour 5
1.2.2 The impacts of bank M&As on lending behaviour 14
1.2.2.1 Price and credit availability 14
1.2.2.2 Risk-taking attitude 24
1.3 Data sources, M&A samples and econometric package used 27
1.3.1 Data sources 27
1.3.2 Sample data 28
1.3.3 The econometric package used 30

Chapter 2 The European Banking Market Structure and an Overview 31
of Bank Mergers and Acquisitions (M&As) in the European
Banking Market
2.1 European banking market structure 31
2.2 Overview of M&As in the European banking market 36
2.2.1 Factors facilitating European banking M&As 36
2.2.2 European banking M&A situation 38

Chapter 3 Bank Mergers and Acquisitions (M&As) and 48
Loan Pricing Behaviour
3.1 Introduction 48
3.2 The impacts of bank M&As on loan pricing behaviour: 50
the empirical evidence
3.3 The Monti-Klein model of the banking firm 53
3.3.1 The Monti-Klein model and market competition 59
3.3.2 The Monti-Klein model and risks 63
3.4 The empirical model 67
3.5 Data 86
3.5.1 Description of the data 86
3.5.2 Data multicollinearity 88
3.6 Methodology: the panel data models 90
3.6.1 The fixed effects model 91
3.6.2 The random effects model 92
3.7 Empirical results 94
3.8 Conclusion 106

Chapter 4 Difference-in-Differences (DID) Estimation and 108
the Effects of Bank Mergers and Acquisitions (M&As)
on Bank Lending Behaviour
4.1 Introduction 108
4.2 The Difference-in-Differences (DID) method 113
4.3 The empirical model 122
4.4 Data and variables 129
4.4.1 Data 129
4.4.2 Definitions and specifications of the variables 130
4.4.2.1 Dependent variables 130
4.4.2.2 Explanatory variables 132
4.4.2.3 Checking for robustness 135
4.5 Empirical results 140
4.5.1 The impacts of bank M&As on loan interest rate 140
4.5.2 The impacts of bank M&As on bank margin 145
4.5.3 The impacts of bank M&As on credit availability 149
4.6 Conclusion 156

Chapter 5 Bank Mergers and Acquisitions (M&As) and 159
Bank Lending Objectives: a Non-nested Test
5.1 Introduction 159
5.2 The Expected Utility Maximisation model 163
5.2.1 Literature review 163
5.2.2 The application of the Expected Utility Maximisation model to 175
bank lending behaviour
5.3 The Safety First Principle 181
5.3.1 Literature review 181
5.3.2 The Principle of Safety First and a commercial bank’s portfolio 189
behaviour
5.3.3 The empirical application of the Safety First model and bank 203
lending behaviour
5.4 Non-nested hypothesis testing 206
5.4.1 Literature review 206
5.4.2 The J-test and the P-test 207
5.5 Data and variables 210
5.6 Methodology and empirical models 218
5.6.1 Assumptions in the estimations 218
5.6.2 Empirical models 219
5.6.3 Empirical models for the Non-nested hypothesis testing 223
5.7 Results 226
5.8 Conclusion 231

Chapter 6 Conclusion and remarks 233
6.1 The summary of the results of the thesis 234
6.2 Remarks 239

Bibliography 243