The real effects of distressed bank mergers

We show that distressed bank mergers that are a widely used instrument for bank resolution have the potential to generate adverse real economic effects. We analyze distressed mergers of German savings banks and show that they represent exogenous shocks to the (initially non-distressed) acquiring bank. In the years after a distressed merger: (i) the performance of the acquiring savings bank deteriorates; (ii) the shock is transmitted to firms in the acquirer’s region which cut back their investments and reduce employment and (iii) the overall macroeconomic dynamics in the region of the acquirer deteriorates, leading to reductions in investment and employment growth. To support a causal interpretation of our results we perform several tests that confirm that local economic dynamics is affected by the shock to the acquiring bank and not by real economic contagion.