Merger control policies lead European banks to find value in less anticompetitive mergers, says Cleveland Fed economist
Analysis of European banks finds stricter merger policies are associated with higher announcement premiums for target banks
Unlike the United States, the banking sector in many foreign countries has long been exempted from rigorous enforcement of antitrust policy, due to concerns that strong competition could be detrimental to financial stability. More recently, alongside wider banking liberalization in the 1970s and 1980s and newer research showing a positive link between competition and stability, greater attention has been paid to the enforcement of antitrust and competition rules in the European banking sector.
Building on an analysis of the European banking sector during a period in which stricter merger control policies were being introduced, Federal Reserve Bank of Cleveland economist Jan-Peter Siedlarek and his coauthors find that the merger policies not only prevent excessively anticompetitive mergers, but also replace them with more procompetitive ones.
The study by Siedlarek et al. explores the effects of merger control policy -- one key aspect of antitrust policy -- on merger activity in the European banking sector. The researchers find that new merger control legislation in Europe has led to an increase of around 7 percentage points on average in the announcement premium for banks that are acquired. Announcement premiums are increases in stock prices after a merger is announced. Siedlarek says this stock price response to the news of the merger provides a proxy for the financial market’s expectation of the effect of the transaction on the valuation of the firms involved.
The researchers also find that the higher announcement premium is associated with a reduction in the size of the acquiring company and a decrease in the industry overlap of the merging parties. “This evidence suggests that firms adjust to the new regulatory environment by focusing on increasing efficiencies rather than exploiting market power,” says Siedlarek, who notes that this is consistent with the objective of promoting competitive markets.
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
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