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‘Too systemically important to fail’ in banking – evidence from bank mergers and acquisitions

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<mark>Journal publication date</mark>1/12/2014
<mark>Journal</mark>Journal of International Money and Finance
Issue numberPart B
Volume49
Number of pages24
Pages (from-to)258-282
Publication statusPublished
Early online date2/04/14
Original languageEnglish

Abstract

In this paper, we examine the systemic risk implications of banking institutions that are considered ‘Too-systemically-important-to-fail’ (TSITF). We exploit a sample of bank mergers and acquisitions (M&As) in nine EU economies between 1997 and 2007 to capture safety net subsidy effects and evaluate their ramifications for systemic risk. We find that safety net benefits derived from M&A activity have a significantly positive association with rescue probability, suggesting moral hazard in banking systems. We, however, find no evidence that gaining safety net subsidies leads to TSITF bank's increased interdependency over peer banks.