Systemic Risk and Bank Consolidation: International Evidence

Abstract

This paper analyzes the systemic risk effects of bank mergers to test the “concentration-fragility” hypothesis. We use the marginal expected shortfall as well as the lower tail dependence between a bank’s stock returns and a relevant bank sector index to capture the merger-related change in an acquirer’s contribution to systemic risk. In our empirical analysis of a dataset of international domestic and cross-border mergers, we find clear evidence for a significant increase in the merging banks’, the combined banks’ as well as their competitors’ contribution to systemic risk following mergers, thus confirming the “concentration-fragility” hypothesis.