How U.S. Bank M&A Affect Systemic Risk

During the 2008 financial crisis, the U.S. government viewed the survival of large consolidated banks as inextricably linked to the welfare of the overall economy, prompting such institutions to be labeled too-big-to-fail (TBTF) and granted government assistance. The primary and preferred means of bank resolution by federal regulators was, however, mergers and acquisitions (M&A). The basic idea was that through a merger a healthy bank would acquire a failing bank, saving the economy from the full cost of the distressed bank’s collapse. This private-sector solution was preferred because the government did not have to use public funds to bail out the failing institution, which would have been more costly and highly unpopular with the public (White & Yorulmazer  (2014)). Some of the largest and best known examples of such mergers include JP Morgan Chase’s acquisition of Bear Stearns, Bank of America’s purchase of Merrill Lynch, and Wells Fargo’s merger with Wachovia.

While this policy certainly has merits, it also prompts the criticism that if the initial problem was that the distressed banks were TBTF, then the solution of a merger would only result in an even larger bank. In other words, a merger could pose an even greater risk to the stability of the aggregate financial system. Therefore, the events of the 2008 financial crisis present a truly striking tension between the possible destabilizing as well as stabilizing impact that bank M&A can have on financial stability, consequently revitalizing the broader debate surrounding this topic in the academic literature.

Our paper, Bank Consolidation and Systemic Risk: M&A During the 2008 Financial Crisis, analyzes the relationship between bank mergers in general and financial stability within the United States through the use of several different risk measures that are common in the literature. In particular, we aim to reconcile the tension between bank mergers helping to make a financial system more vulnerable (concentration-fragility hypothesis) and bank mergers improving financial stability through the reduction of an individual bank’s risk (concentration-stability hypothesis). We also explore how economic conditions may affect this issue, comparing mergers and acquisitions of banks during the 2008 financial crisis with those that occurred during stable market conditions to determine whether the effects of bank consolidation on the overall economy differ with the macroeconomic climate. Our goal is to evaluate how the state of the economy affects M&A transactions and their impact on a bank’s systemic risk. Our hypothesis is that the nature of bank mergers might be different during the crisis than in stable periods and therefore may have a different effect on an acquirer’s risk.

Methodology & Results

We test our hypothesis using multiple measures to compare various dimensions of systemic risk. Specifically, the core risk analytics used in our paper are the Marginal Expected Shortfall (MES) developed by Acharya et al. (2017), the SRISK measure created by Brownlees & Engle (2016), and the Delta Conditional Value at Risk (∆CoVaR) constructed by Adrian & Brunnermeier (2016). The MES and the SRISK are two different measures that quantify a firm’s exposure to systemic risk while ∆CoVaR captures a firm’s contribution to systemic risk. A bank’s exposure to systemic risk is simply defined as the likelihood of a bank being in distress in a weakening financial market. Meanwhile, a bank’s contribution to systemic risk explores the extent to which an individual bank adds to the overall risk in the financial system. In addition, MES and ∆CoVaR are calculated using market return data while SRISK requires market returns as well as balance sheet characteristics. This means that SRISK is prone to size effects and therefore we also calculate a version of SRISK normalized with respect to a bank’s market capitalization referred to as NSRISK.

The systemic risk measures of MES, SRISK, NSRISK, and ∆CoVaR are calculated both six months before and six months after a merger to capture the consequent merger-related change in an acquirer’s exposure as well as contribution to systemic risk. Difference-in-differences analysis is subsequently conducted to compare the bank mergers that occurred during the 2008 financial crisis with those that took place during the stable times in terms of their impact on the acquirer’s risk. In order to do this, a comparison between merging and non-merging banks is also necessary to determine whether the change in these risk metrics can accurately be attributed to the merger as opposed to an overall trend throughout the banking sector. Therefore, we implement two different strategies to construct a non-merging control group. The first method involves collecting the daily returns of all non-merging banks from the CRSP database and weighting them according to each individual bank’s market capitalization. In this way, we create a broad non-merging cap-weighted bank sector index. The second procedure involves pairing a merging bank with a particular non-merging bank based upon similar balance sheet characteristics.

When we take into account the overall trend of the market with the help of two distinct control groups, we find that mergers during the crisis reduced an acquirer’s risk for all measures tested, regardless of the control group. Meanwhile, we find that acquirers that merged during the stable periods on average actually underwent an increase in their risk. This interesting and robust result implies that, although there is a greater amount of risk in the system during the crisis, mergers that occurred during then actually diminished a bank’s exposure as well as contribution to systemic risk. In addition, we find that this reduction was more pronounced for the mergers that had a higher relative size as well as larger targets in absolute terms.

We aim to understand the underlying characteristics that separate the banks that merged during the 2008 financial crisis with those of the stable periods. We use logit regression analysis to determine the probability that a bank will be involved in a merger as an acquirer and as a target based upon the firm’s pre-merger characteristics as well as the macroeconomic environment at the time of the merger. In this way, we analyze how the prior conditions of a bank, specifically the balance sheet variables, affect the likelihood of its involvement in a merger with respect to the economic climate. Altogether, the goal of the regression analysis is to discover what kinds of banks are the acquirers and what banks are targets within and outside of the crisis period, which in turn will provide insight into our results.  

We find that mergers during the 2008 financial crisis tended to involve acquirers with more diversified sources of income and less leverage than their stable market counterparts. Meanwhile, the targets of these transactions often were less profitable banks with lower tier 1 capital ratios, but a greater share of deposits making them more vulnerable to the downturn, yet also attractive acquisition targets. Based on this result, it is more likely that the acquirer’s gains due to diversification rather than the enhanced profitability of the target is the driver behind this reduction in risk. Overall, the findings of this paper suggest that during the 2008 financial crisis healthy banks acquired poorly performing target banks and successfully integrated them into their own operations, potentially supporting the use of M&A as a means of bank resolution by the U.S. government during the 2008 financial crisis.

Further questions remain.  For instance, government-assisted mergers can be isolated and separately analyzed to determine the impact of U.S. economic policy during the 2008 financial crisis. In addition, the risk measures of the acquiring banks can be examined two years later to understand the long run implications of these mergers. The results may be skewed, however, because, after the 2008 financial crisis, the banking system underwent significant change, including becoming subject to more stringent regulations such as higher capital requirements and living wills.


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This post comes to us from Gregory D. Maslak, an economics graduate of Bowdoin College, and Gonca Senel, a professor at the school. It is based on their recent article, “Bank Consolidation and Systemic Risk: M&A During the 2008 Financial Crisis,” available here.