# Presentation: 458583

## M&As IN THE BANKING SECTOR: LESSONS FROM THE ITALIAN EXPERIENCE

**Fabio Panetta**
- Monetary Policy and Economic Outlook Dept.
- Banca d’Italia
*Washington – 1 December 2007*

## ORGANIZATION  

**Why do we care about bank M&As?**
**Why do we care about **_**Italian**_** M&As?**
**Impact of M&As on the Italian economy**** **
**Main lessons and open issues **

## WHY DO WE CARE ABOUT M&As?

**M&As can improve efficiency of the industry:**
- for the parties involved: scale and scope economies, transfer of superior managerial skills;
- competitors might be forced to become more efficient too;
**M&As can impose social costs:**
- price increases due to higher market power, especially in local markets;
- higher risk due to the creation of large and complex institutions;
- diversion of credit from small to large business lending.

## ITALY: AN INTERESTING CASE STUDY

- _Bank-based system_: loans >50% of  funding of the corporate sector
- _Many mergers_:
- more than 6oo deals
- No. of banks has  decreased by 33%

**Bank M&As in Italy**** ***(1990-2004)*

**Financing the corporate sector: Italy & US**

## BoI’s RESEARCH PROJECT ON M&As

**Effects on Banks (costs, profitability, risk):**
-  Amel-Barnes-Panetta-Salleo _*J. of Banking & Finance*_ (2004)
-  Focarelli-Panetta-Salleo _*J. of Money Credit and Banking*_ (2003)
**Effects on Depositors (remuneration of deposits):**
-  Focarelli-Panetta _*American Economic Review*_ (2003)
**Effects on Firms:**
-  Loan rates: Sapienza _*Journal of Finance*_, 2003
-  Information: Panetta-Schivardi-Shum (2005) (*WP, CEPR*)
-  SBL: Bonaccorsi-Gobbi _*Journal of Finance*_, 2006
** ****Interaction between Consolidation and Competition**
-  Angelini-Cetorelli _*Journal of Money Credit and Banking*_ (2003)
_**Great data base: i**_**nfo on individual banks, firms, bank-firm-specific relationships (quantities and prices)**

## EFFECTS ON BANKS

- Previous evidence: on average no large gains from M&As
- _Berger-Demsetz-Strahan_, JBF 1999; Pillof-Santomero, 1998
- Previous studies in general do* *_*not*_* *distinguish between different types of deals & do _*not*_* *link results & ex ante motives.
- Italy: detailed info on (i) type of deal (ii) ex-ante motives Result: _some deals improve efficiency, others do not. __Better insight on why some deals fail to improve efficiency_
- Mergers: increase fee-based income; gains offset by higher costs
- Acquisitions: improve efficiency (labor costs) and the risk-return profile of the loan portfolio. Profitability improves
- Differences between ST & LT results

## EFFECTS ON DEPOSITORS (1)

- Previous evidence: in-market M&As increase market power & harm consumers (_Praeger-Hannan_, JIE, 1998).
- But this may be only the SR effect. LR effects may differ: while mkt power can increase _rapidly_, efficiency gains may only emerge _slowly_
- ITALY: _long series of bank-depositor-market-specific_ rates allow us to estimate precisely SR & LR effects
- SR confirm US results: in-mkt M&As lead to lower dep rates BUT in the LR  efficiency prevails: deposit rates ↑ (_[Chart](slide8.xml)_)
- NOTE: heterogeneity among deals: deposit rates increase only for banks successful in cost cutting

## SR & LR EFFECTS ON DEPOSIT RATES 

**(*) ****This graph summarizes the results of Focarelli-Panetta, AER (2003) **

- _[Back](slide7.xml)_

## EFFECTS ON FIRMS (1) 

- Use of _bank-firm-market-specific_ data (Central Credit Registrar) to analyze 3 issues:
- Do M&As increase or decrease loan rates?
- Do M&As improve use of banks’ information?
- Do M&As  reduce small business lending (SBL)?

## EFFECTS ON FIRMS (2): LOAN RATES 

- Effect on loan rates:
- _Efficiency_ gains: on average loan rates  by 83 b.p.
- _Market Power_: loan rates  by 13 b.p. for every 1% of  local market share acquired
- Efficiency prevails if market share acquired <6.5%
- About 70% of M&As lead to lower loan rates

## EFFECTS ON FIRMS (3): INFORMATION

**EFFECTS ON FIRMS ****(3): INFORMATION**

- M&As lead to steeper loan rate profile (r-risk)
- Effect consistent with better information pro-cessing & better pricing of default risk

**Merger effect beyond average p change. Distributional effect relevant: each deal has winners **_**and**_** losers **

## EFFECTS ON FIRMS (4): SBL

- In the SR firms borrowing from a merging bank experience a credit reduction, but after 3 years this is completely absorbed
- Bank M&As do not seem to affect borrowing firms’ overall investment strategies.
- Even though small firms are more dependent on tight relationships with banks, they don’t do worse than average
- There is no evidence of a reduction in overall credit supply to small firms after consolidation

## Effects on Competition

- Previous evidence: mergers reduce competition. But: what is the interplay with other market dynamics, such as deregulation and financial innovation?
- Italy: use local market data (better approximation of relevant market) and dynamic approach. Results:
- Consolidation a reaction to deregulation; the net effect seems to be an increase in competition
- Consolidation generated efficiency gains that were passed on at least in part to consumers

## Research project: the bottom-line

- _Efficiency_: Italian bank mergers seem to have  generated gains for a subset of banks
- _Welfare effects_: the gains have been shared with firms and depositors. No significant reduction in SBL
- Consolidation mainly a reaction to deregulation. Net effect: higher competition
- BUT: distributional effects. Not all banks gained, some customers lost out, sometimes because of market power, sometimes because of bank dynamics

## CONCLUSIONS

- Mergers: complex events; effects depend on many dimensions:
- type of deal (merger vs. acquisition)
- type of merger (in-market vs out-of-market)
- type of customers (large vs small firms)
- time (SR effect differ from LR effects)
- Even within the same deal there are winners and losers
- The lack of results on average may hide significant heterogeneities. Need for highly disaggregated data
- M&As are a dynamic process: for welfare analysis they cannot be analyzed in isolation from industry’s response
- Topics for further research: x-border deals, conglo-meration, M&As & individual and systemic risk

## A NEW WORLD?

- Previous research has been done within the “tradi-tional” intermediation framework. But as banks shift towards the OTD model, results could change. Possible examples:
- Efficiency: economies of scale and scope more relevant? (distribution networks & diversification of  funding more relevant?)
- Lending relationships: does securitization reduce their importance for banks?
- Market power: less relevant even for very small firms and households?