Efficiency Effects of Bank Mergers and Acquisitions

Next to technological progress and deregulation, the introduction of the euro is widely considered to be an important catalyst for bank consolidation in Europe. In order to assess the public policy issues surrounding bank mergers, this paper analyzes the efficiency effects of 52 horizontal bank mergers over the period 1994-1998, i.e. the period immediately preceding the start of EMU. We find evidence of substantial unexploited scale economies and large X-inefficiencies in European banking. The dynamic merger analysis indicates that the cost efficiency of merging banks is positively affected by the merger, while the relative degree of profit efficiency improves only marginally. We do not find any evidence that merging banks are able to exercise greater market power in the deposit market. Hence, the bank M&As in this study appear to be socially beneficial.