Abstract
Do banks become more fragile after merging? By constructing a novel forward-looking measure of fragility and exploiting staggered interstate banking deregulation as exogenous shocks to bank mergers, we show that the loan portfolios of merged U.S. banks become more vulnerable to adverse economic conditions. However, merger size matters. The increase in fragility is driven almost entirely by mega-mergers of large banks, suggesting the presence of moral hazard. In addition, we find that increased geographic or portfolio diversification following mergers does not offset the increase in fragility. If anything, mergers between large banks that have significantly dissimilar portfolios can actually worsen fragility, possibly due to added complexity introduced by the merger. But we observe that larger ex ante capital and liquidity buffers appear to limit the increase in fragility, highlighting the role of prudent risk management.
Disciplines
Banking and Finance Law | Law and Economics
Date of this Version
2-3-2025
Working Paper Citation
Jou, Jeffrey; Wang, Teng; and Zhang, Jeffery Y., "Bank Fragility After Mergers" (2025). Law & Economics Working Papers. 288.
https://repository.law.umich.edu/law_econ_current/288
