The Impact of Bank Characteristics on Regulatory
Capital during Mergers and Acquisitions
A Longitudinal Operating Performance Study
on 76 U.S. Transactions in the Banking Sector between 2001-2006
By: Adrian M. Wasiak
Master’s Thesis in International Business & Management, specialization in International Financial Management
Date: December 2010
Abstract
This paper researches the effects of bank characteristics on regulatory capital during mergers by testing for quarterly accounting changes in regulatory capital before and after 76 U.S. banking mergers completed during the period 2001 to 2006. The results show that the Total Capital Ratios decrease after mergers, nearly all merging banks comfortably exceeded regulatory capital minimums before and after mergers, and the merging banks have lower Total Capital Ratios than their peers. For the bank characteristics the result is that banks with
high Total Assets, Asset Growth Rates, Net Interest Margin, Efficiency Ratios, Total Loans to
1. INTRODUCTION
1.1 Background
Historically, the U.S. banking sector has been highly regulated. For a long time protective regulations have shaped the banking environment. In 1927 the McFadden Act was implemented, it allowed banks to branch only within the state in which they were situated and further interstate banking was forbidden (Valkanov & Kleimeier, 2007). After the Stock Market Crash of 1929, the Glass-Stegall Act of 1933 was implemented, which prohibited commercial banks to own brokerages and so it forced banks to separate commercial, investment banking, and insurance activities (Valkanov & Kleimeier, 2007). As banks formed bank holding companies in order to make it possible to own both banking and non-banking businesses the Bank Holding Company Act of 1956 was introduced. This Act has prohibited bank holding companies to undertake non-banking activities or acquire companies other than banks (FDIC, 2007-2010). During the 1990s deregulation was commenced. The implementation of the Riegle-Neal Act of 1994 repealed the McFadden Act, as it allowed intrastate and interstate branching and it reduced barriers for mergers allowing banks to merge across state borders (Becher & Cambell, 2005). The recent deregulation of the U.S. banking sector has increased the competition among financial institutions and it has dramatically stimulated consolidation. Between 1992 and 2008 8191 mergers1 took place among banks which are insured at the Federal Deposit Insurance Corporation (FDIC)2, with a peak in 1995 and 1997 (FDIC, 1992-2010). As a result of all of the mergers, the number of FDIC insured banks dropped from 13852 in 1992 to 8012 in 2009 (FDIC, 1992-2010. Figure 1 shows an overview of the number of FDIC-Insured Organizations and the number of mergers among the FDIC-Insured Organizations between 1992 and 2008. The consolidation wave in the late nineties was not limited to the financial services industry or the United States, as it was spread across industries and was taking place globally (Valkanov & Kleimeier, 2007).
1 Including Regular Mergers, Corporate Reorganization Mergers, Interim Mergers, and Failed or Closed Bank
Mergers.
2 The creation of the Federal Deposit Insurance Corporation (FDIC) was a result of the Glass-Stegall Act of
Figure 1
The number of FDIC-Insured Organizations and the number of merger among the FDIC-Insured Organizations, 1992-2010.
Source: FDIC (1992-2010)
exceed even FDIC‟s highest capitalization class “Well Capitalized”3
. Banks keep more capital than is required to have a „cushion‟ for poor performance or unexpected losses (Hannan & Pilloff, 2004). On the other hand, the capital which is maintained at the bank is not used, so keeping too much capital is inefficient. In this paper, I will research the effects of mergers on regulatory capital by testing for quarterly accounting changes in regulatory capital before and after 76 U.S. banking mergers completed during the 2001 to 2006 period. The main question which will be answered in this paper is: What is the impact of various bank characteristics as
size, relative size, growth, profitability, efficiency, liquidity, and time on regulatory capital before and after mergers and acquisitions and what are the differences among the various subsamples as to these issues?
Figure 2
Average Total Capital, Tier 1 Capital, and Leverage Ratios for FDIC-insured Banking Organization, 2000-2010.
Source: FDIC (1992-2010)
1.2 The content
This paper is organized as follows. Chapter 2 singles out the theories involving the research and the main research question. Chapter 3 describes the sample collection and methodology. Chapter 4 presents the empirical results. Chapter 5 will discuss the implications
3 To be qualified under the FDIC‟s Well Capitalized category the minimum capital ratios for Total Capital, Tier
of the results. Finally, chapter 6 concludes and offers some recommendations.
2. LITERATURE
2.1 Introduction
In the following sections I firstly will describe about the introduction of regulatory capital, how it is composed and which researches were done on the topic. Secondly, I will describe the reasons for banks to merge with other banks and what the influence of capital is on mergers. Thirdly, I will describe the characteristics which are important to measure banks on and on which I will focus in this thesis. Finally, I will present the main research question derived from the theory treated in the earlier sections.
2.2 Banks and regulatory capital
Basel Accord. In 1974, in response to the Herstatt crisis4 and to the increased internationalization of banks, the Basel Committee on Banking Supervision (BCBS) was established (Bank for International Settlements, 2007). The Committee stands under the auspices of the Bank for International Settlements (BIS) and it consists of the representatives from central banks and regulatory authorities of the Group of Ten countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States) and Luxembourg. In 1988 the Committee issued the Basel Accord (Bank for International Settlements, 2007). The Accord had two fundamentals objectives which were: “Firstly, that the new framework should serve to strengthen the
soundness and stability of the international banking system; and, secondly, that the framework should be fair and have a high degree of consistency in its application to banks in different countries with a view to diminishing an existing source of competitive inequality among international banks” (Bank for International Settlements, 1998: 1). One of the most
important measures to achieve these objectives was the requirement for banks to maintain adequate capital, this will be explained in the following sections. By 1992 the supervisory standards, guidelines and recommending statements in the Basel Accord were enforced into
4
laws and regulations by most Group of Ten country governments. Through the Committee‟s worldwide promotion of sound supervisory standards other countries followed by implementing items from the Accord (Bank for International Settlements, 2007). In the United States the risk-based capital frame works based upon the Basel Accord were introduced in 1989. The implementation was undertaken by four different federal bank regulatory agencies: The Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), The Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS)5. The agencies have altered their accounting and capital standards to harmonize them and to eliminate as many differences as possible. Some of the remaining differences could arise due to the kind of banking organizations (banks, bank holding companies and savings associations) and their statutorily mandates. The set standards are considered to be substantially similar among the agencies (Federal Reserve Board, 2003). To improve the existing regulations and capital adequacy measures the Bank for International Settlements published a new framework in 2004, the Basel Accord II6. Hereafter several revisions have been made to the Basel Accord II (Bank for International Settlements, 2007). In the United States the rule that was based on the Basel Accord II became effective in April 2008 (Office of the Federal Register, National Archives and Records Administration, 2009)7. However the Basel Accord II is out of the scope of this paper as it was not effective during the research period.
Capital categories. Capital essentially represents the funds provided to the company
by its shareholders in the form of stock, reserves and retained earnings. However there exist hybrid items between equity (capital) and debt, “some of which are able to absorb banking
losses and preserve creditors‟ and depositors‟ interests” and can be (partially) classified as
5 The FRB is among others responsible for examining, supervising, and regulating state member banks
(state-chartered banks that are members of the Federal Reserve System), bank holding companies, and the U.S. offices of foreign banks. The FDIC is the primary regulator and supervisor over insured state-chartered banks that are not members of the Federal Reserve System, furthermore it has the authority to examine any insured financial institution for insurance purposes. The OCC was established to regulate national banks and federal branches of foreign banks in the United States. The OTS has the primary regulatory authority over all federal savings associations, all savings and loan holding companies, and shares joint responsibility with state authorities for supervision of all state savings associations (Federal Financial Institution Examination Council, 2006).
6 The Basel Accord II strives to change the existing regulatory capital requirements to make them more sensitive
to the actual risks banks face (e.g. operational and credit risks). The intension is to make use of banks‟ own internal systems as primary inputs for the assessments of these risks and to calculate the required capital. The Basel Accord II is based on a three pillars approach: (1) minimum capital requirements, (2) supervisory review, and (3) market discipline (Bank for International Settlements, 2004; Hannan & Pilloff, 2004).
7 See Office of the Federal Register, National Archives and Records Administration (2009) for the rule text. See
capital as well (Lee, 2004: 424). Regulators have recognized that different layers of capital exist as they have defined bank capital in the Basel Accord. The capital is divided into two tiers, Tier 1 Capital, also called Core Capital, and Tier 2 Capital, also called Supplementary Capital. Table 1 shows the capital categories and their exact definitions. Tier 1 Capital is the higher quality capital which largely consists of shareholder capital. Not only is the fully paid common stock included, but all the disclosed reserves are. Goodwill is deducted since it is not an easily liquidated asset in cases of losses and so it does not protect depositors and creditors. Several national regulators allow other items to be included into the Tier 1 Capital. Some forms of preferred stock are allowed to be included into Tier 1 Capital in the United States, and undisclosed reserves and different hybrid debt-equity instruments can be included into Tier 2 Capital in several countries (Bardos, 1988). However, these items are close in nature to common stock. Tier 2 Capital is considered the lower quality capital as it consists of hybrid instruments. By adding Tier 1 Capital and Tier 2 Capital together and deducting the investments in unconsolidated banking associates from the total the Total Tier Capital is formed.
Table 1
Capital categories and their definitions.
Capital categories Definitions
Tier 1 Capital (Core Capital) + Permanent shareholders capital, including: Fully paid common stock
All disclosed reserves created by cumulated retained earnings + Perpetual non-cumulative preferred stock
+ Minority interest arising on consolidation of subsidiaries + Externally audited interim profits
- Goodwill and other intangible assets - Current year‟s unpublished losses Tier 2 Capital (Supplementary Capital) + Revaluation reserves
+ Hidden (or undisclosed) reserves + Internally audited current year profits
+ Generic reserves (against possible or unidentified losses) + Reserve for general banking risk
+ Perpetual cumulative preferred stock (potentially convertible into shares) + Perpetual subordinated debt (potentially convertible into shares) + Dated preferred shares
+ Dated subordinated debt (minimum 5 years maturity) Total Tier Capital + Tier 1 Capital
+ Tier 2 Capital
Risk-Weighted Assets. In accordance with the Basel Accord, the FRB and FDIC
regulations classify and weight assets according to their inherent level of credit risk. Five different asset categories have been established and they are weighted with 0%, 10%, 20%, 50% or 100% to calculate the total risk-weighted assets (Lee, 2004). Table 2 presents the different categories of risk weighted assets and the types of assets which are assigned to them. Relatively risk-free assets such as cash or gold are assigned zero weighting. Risky assets, such as claims to the (non-bank) private sector or real estate, are assigned 100% weights on account of relative credit and investment risk. Claims corresponding with housing, such as residential first mortgages, are considered less risky and assigned 50% weights. In addition, certain off-balance-sheet items (e.g. bank guarantees, letters of credit, etc.) are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the five categories (Lee, 2004).
Table 2
Risk-weighted assets categories and the types of assets assigned to them.
Risk-weighted assets
categories Types of assets
0% Cash or exposures collateralized by cash held by the lender
Gold
Exposures other than securities to OECD country central governments and central banks
Exposures other than securities to non-OECD country central governments and central banks in local currency
10% OECD country government securities with less than 1 year maturity or floating rate
Local currency non-OECD country government securities with less than 1 year maturity or floating rate
20% OECD country government securities with more than 1 year maturity or floating rate
Local currency non-OECD country government securities with more than 1 year maturity or floating rate
Exposure to multilateral development banks
Exposure to OECD country credit institutions
Exposure to non-OECD country credit institutions with less than 1 year residual maturity
Exposure to public sector entities
Cash items in course of collection 50% Residential first mortgages
First loans to housing associations
Certain types of mortgages backed securities
100% Foreign currency non-OECD country government securities with more than 1 year maturity or floating rate
Exposure to non-OECD country credit institutions with more than 1 year residual maturity
Exposure to the non-bank private sector
Fixed assets
Real estate
Capital adequacy ratios. From the previously explained capital categories and
risk-weighted assets we can derive the capital adequacy ratios represented by the following formulas:
(Tier 1) Leverage Ratio = Tier 1 Capital (1)
Total Assets
Tier 1 (Risk-Based) Capital Ratio = Tier 1 Capital (2)
Risk-Weighted Assets
Total (Risk-Based) Capital Ratio = Total Risk-Based Capital (3)
Risk-Weighted Assets
By incorporating risk-weighted assets, the ratios are designed to measure the bank‟s capital relative to its risk exposure (Hirtle, 1998). The leverage ratio, however, is according to Hirtle (1998: 2) intended “to provide a measure of a bank‟s capital resources relative to a measure
of the scale of its overall activities without any adjustment for risk”.
capital categories and their requirements. A note has to be made that the federal bank regulatory agencies view the capital adequacy requirements as minimum standards, and most banking institutions are expected to operate well above the capital level minimums,
“particularly those institutions that are expanding or experiencing unusual or high levels of risk” (Federal Reserve Board, 2003: 1).
Table 3
Capital categories and their requirements
Capital categories
Tangible equity to
total assets ratio Leverage Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Well capitalized 5% or above 6% or above 10% or above
Adequately capitalized 4% or above 4% or above 8% or above
Undercapitalized Less than 4% Less than 4% Less than 8%
Significantly
undercapitalized Less than 3% Less than 3% Less than 6%
Critically
undercapitalized 2% or less Source: Valkanov & Kleimeier (2007: 39).
Grollon, Michealy, & Swary (1997) state that the regulations force banks with large growth opportunities to maintain relatively high capital ratios, so they can avoid costly regulatory restrictions. As already mentioned in the introduction, Hannan & Pilloff (2004) suggest that banks keep more capital than is required as a „cushion‟ for poor performance or unexpected losses. Hughes & Mester (1998: 325) mention that this cushion not only can serve against insolvency for potentially risk averse managers, but they add that it can give a signal of bank risk to less informed outsiders. They state that for any given vector of outputs, managers “increase the level of financial capital to control risk and employ additional
amounts of labor and physical capital to improve risk management and preserve capital.”
2.3 Banks and mergers
Rationales for banks to merge. As shown in the introduction an extensive
to synergies. However, according to Díaz, García & Sanfilippo (2004) there is hardly an empirical evidence that U.S. banks have scope of economies, perhaps due to the restrictions to this kind of operations in the U.S. (3) Market power, which can generate benefits due to increase in market share. Berger, Demsetz & Strahan (1999) state that these benefits can arise from the increase in the loans interest rate and a decrease in the deposit interest rate. (4) Improvement of management efficiency, changes in management and/or organization behaviour because of mergers can improve the entity efficiency. And (5) decrease of risk through geographic and product diversification.8
Performance studies. One of the most cited papers on banking mergers is that of
Rhoades (1994). He summarized the results of 40 studies on banking mergers during the period 1980-19939. He divided these studies in two fundamentally different methodologies, the „event study‟ and the „operating performance‟ methodologies (Rhoades, 1994: 1). The operating performance methodology observes the financial performance of companies following mergers. It permits researchers to focus on efficiency, costs, revenues, and profits by analysing the changes in accounting ratios before and after mergers (Rhoades, 1994; Valkanov & Kleimeier, 2007). In opposite, the event study measures the stock return of acquiring and/or target banks around merger announcements relative to portfolios of stocks representing the market (Rhoades, 1994). By using stock prices event studies focus on shareholders‟ wealth creation (Valkanov & Kleimeier, 2007). In the next section, I will only review operating performance studies since these are most relevant to my work.
It is the question if the rationales for banks to merge are all justified as a lot of studies have contradictory results. According to Rhoades (1994) the 19 substantially diverse operating performance studies that he mentions strongly indicate a lack of improvement in efficiency or profitability due to bank mergers. Rhoades (1994: 2) for example states that both Spindt & Tarhan (1991) and Cornett & Tehranian (1992) “find some improvement in return
on equity resulting from mergers, however, they do not find improvement in return on assets or cost efficiency” and that Peristiani (1993) “finds some improvement in return on assets”.
8 Besides the mentioned economical motives, mergers are also driven by personal motives of managers. After
having interviewed 20 German bank managers which were involved in mergers, Lausberg (2009) states that managers are accepting economic disadvantages for the banks and that they change their behavior in following their own motives. The personal motives which were researched and managers were following are power, achievement, sensation seeking, and prestige.
9 Rhoades (1994) describes extensively the variations, main and other findings, weaknesses, and shortcomings of
Peristiani (1997) found no evidence that banks significantly improve efficiency after acquisitions. Cornett & Tehranian (1992) argue that merged banks outperform the banking industry, and that their better performance appears to result from improvements in the ability to attract loans and deposits, in employee productivity, and in profitable asset growth. From a sample of 283 small-scale German bank mergers Lang & Welzel (1999) concluded that positive scale and scope effects from a merger arise only when branches of the target bank are closed. Furthermore, they found that target banks are less efficient than average banks with similar size, but exhibit, on average, the same efficiency as the acquiring banks. They do not find evidence for efficiency improvement after mergers, however, the differences among the merging banks do level off.
The role of capital on mergers. Besides economies of scale and market power White
(1992) proposed that most of the mergers might also have been done by banks looking for capital level improvement. Hannan & Piloff (2004) state that capital is only rarely cited as an important reason for banks to merge and that they only know the study of O‟Keefe (1996) which investigated the acquiring institution‟s capitalization. O‟Keefe (1996) has found that both target as well as acquiring banks had lower equity capitalization ratios compared to non-acquiring banks from the peer group. However, the equity capitalization ratios of target banks were higher than those of the acquiring banks. Grullon, Michealy, & Swary (1997: 99) argue that the effect of measuring a bank‟s capital by using only book value data as is required by regulators gives banks with capital needs “an incentive to merge with banks with relatively
high book value capital ratios”. Hannan & Rhoades (1987) suggested that a target with a high
reduction in regulatory capital requirements for large banking organizations would increase their merger activity, the results though were mostly statistically insignificant.
2.4 Bank characteristics
The following bank characteristics are based on the variables used by Cornett & Tehranian (1992) and Cornett, McNutt & Tehranian (2006) to evaluate the effect of mergers on cash flow performance.
Size. An extensive amount of research is done on the economy of scale advantages of
mergers in the banking sector (e.g. Díaz, García & Sanfilippo, 2004; Cornett, McNutt & Tehranian, 2006). Most of the research concludes that larger banks are more efficient with their resources, these include capital. Linder & Crane (1992) state that large banks also tend to have better access to the money markets and hold lower amounts of liquid reserves relative to assets compared to smaller banks.
Relative Size. Relative size is the relative difference between the size of the acquiring
and target banks. According to Ramaswamy (1997) bigger banks prefer to acquire small banks. The economies of scale can become significant even for banks with deposits under $100 million.
Growth. Hannan & Rhoades (1987) indicate that bank and market growth may be an
indication of higher than average expansion opportunities in the target market subsequent to acquisition and that these variables frequently are mentioned as important by practitioners in mergers and acquisitions processes in the banking industry. As mentioned earlier, banks which do not meet minimum capital requirements have to apply progressively more stringent and costly restrictive constraints on operations, management and capital distributions. Grollon, Michealy & Swary (1997) state that, in order to protect themselves against these costly constraints, banks with large growth aspirations will tend to maintain relatively more capital.
Profitability. According to Díaz, García & Sanfilippo (2004) the traditional measures
that the reason the Return on Equity improves after mergers is that the capital decreases. Valkanov & Kleimeier (2007) argue that banks with a low capital ratio have a higher equity multiplier than banks with a high capital ratio and due to this are able to offer a higher Returns on Equity. Return on Assets measures how successfully the assets of the bank are managed to generate profits, not taking into account how these assets are financed (Knapp, Gart, & Becher, 2005). For banks a third measure of profitability is applicable, (3) the Net Interest Margin, which indicates the profitability of a bank‟s interest earning business (Kosmidou, Pasiouras, Doumpos, & Zopounidis, 2006). This means that the interest income is attracted more successful compared to the interest expenses with the use of the available total assets.
Efficiency. Efficiency measures the ability of banks to generate revenues and to pay
expenses (Cornett & Tehranian, 1992). To measure the efficiency the Efficiency Ratio is used, which is the total noninterest expense as a percent of book value of nominal net interest income plus total noninterest income. Ramaswamy (1997: 705) indicates that acquirers might be able to realize operating synergies to improve efficiency. According to him, in banking, these synergies can improve by: “integrating backroom operations that process individual
financial transactions, information systems that track loans, deposits, and customer data, rationalizing branching structure, and the ability to spread these costs over a larger deposit base given the merger of the acquirer‟s operations with the target”.
Liquidity. Liquidity ratios measure the cash positions of banks. The cash position tells
if a bank can repay its short term financial obligations debt with its liquid assets (Cornett & Tehranian, 1992).
Time. According to Hirtle (1998) the average Total Capital Ratio of banks changes
over time. During the four year period she studied the ratio decreased. She states that the decrease was largely attributable to efforts to manage the banks‟ capital positions by returning earnings to shareholders, in the form of dividend payments and stock repurchases, rather than to rise in risk-weighted exposures.
2.5 Main question
From the previous literature I have derived the following main research question:
efficiency, liquidity, and time on regulatory capital before and after mergers and acquisitions and what are the differences among the various subsamples as to these issues?
3. DATA AND METHODOLOGY
3.1 Sample requirements
Before starting with the data collection I have set several requirements for the mergers to be included in the sample. I require the following:
The acquiring bank, the target bank, and all their branches need to be based in the United States.
The acquiring bank and target bank have to be categorized as a national commercial bank or a state commercial bank by Standard Industrial Classification (SIC) codes. The acquiring bank and target bank need to be banks and not Bank Holding
Companies.
The acquiring bank and target bank need to have quarterly accounting data available. The acquiring bank and target bank need to have merged 4 quarters before September
2007.
The acquiring bank and the target bank may not be involved in any merger or acquisition four quarters before or after the merger.
The acquiring bank and target bank need to have more than $25 million of Total Assets.
This research is focusing on the United States so the acquiring bank, the target bank, and all their branches need to be based in the United States. This requirement reduces the effect of different regulations on capital requirements. The Basel Accord has indeed converged the differences in capital requirements in various countries. However, exceptional differences still exist. As mentioned before some forms of preferred stock are allowed to be included into Tier 1 Capital in the United States, and undisclosed reserves and different hybrid debt-equity instruments can be included into Tier 2 Capital in several countries (Bardos, 1988).
institutions, insurance companies, and brokers as these could affect the pure banks‟ accounting data.
Several studies have analyzed mergers at the level of bank holding companies rather than that of the units actually merged, the banks. One of the reasons is that only bank holding companies are publicly traded and a part of the studies (Cornett & Tehranian, 1992; Cornett, McNutt, & Tehranian, 2006) was using event study methodology to measure the influence of mergers on share price and shareholder maximization. Some studies used operating performance methodologies instead of the event methodology (Hannan & Pilloff, 2004; Knapp, Gart, & Becher, 2005; Knapp, Gart, & Chaudry, 2006), but they still used the bank holding company level. So they actually do not directly answer the question of what happens when banks are merged, but what happens when bank holding companies merged (Linder & Crane, 1992). The difference is that when a bank is acquired by a bank holding company but is kept as a separate subsidiary, the acquiring organization can take some performance-improving measures but will not have the complete freedom to change the subsidiary‟s operations. As a separate legal entity, the acquired bank must have its own governance structure (president and board of directors), its own resources (assets and capital), its own regulatory reporting infrastructure (external reports), and its own capital requirements among others. However, if merged with another bank of the bank holding company, the acquired bank becomes a branch of the new, combined bank and loses its own identity. In this case the merger will offer more opportunities to improve the performance that are not possible when the bank is a separate entity (Linder & Crane, 1992).
All studies which I have found, and which are mentioned throughout this paper, have used annual accounting data to analyze effects of mergers. This has a limitation that it does not exploit the full possibility of the available information. With the use of quarterly accounting data more information is available as the amount of data collection points is extended. The quarterly accounting data could have a flaw as a seasonal effect could emerge, however, annual accounting data can also be adjusted in positive as well as negative ways to the year ends.
there on. See in figure 3 the percentage of unprofitable banks as evidence for this. As a result the acquiring bank and target bank need to have merged 4 quarters before September 2007.
Figure 3
The percentage of unprofitable banks, 1998-2010.
Source: FDIC (1992-2010)
All acquisitions have been eliminated from the sample when the acquiring bank, the target bank, or their subsidiaries had been involved in any merger or acquisition four quarters before or after the merger to reduce the problem of confounding events. Cornett, McNutt, & Tehranian (2006) indicate that mergers influence bank performance. This means that the inclusion of banks that are involved in multiple mergers during the sample period would decrease the ability to empirically measure the impact of the merger in the sample. The sample and results could be distorted by the measure as banks which did not merge as often as other banks in the banking merger wave, which covers the sample period, were not the average banks, but for example underperforming banks. However, it is understood that a significantly smaller, but cleaner sample excluding other mergers will improve the statistical significance of results of this research and this will be more important overall.
3.2 Data collection
approved by the FDIC. The FDIC has to determine that none of the transactions would result in any kind of monopoly in any region of the U.S., unless the public interest clearly would by outweighed. The FDIC publicizes all these approval decisions in the Merger Decisions Annual Reports to Congress (FDIC, 2006-2010) which can be found on its website, the decisions are available from 2000. From 2001 to 2006 2,007 regular mergers10 took place. The choice to collect the data from the FDIC‟s website ensures that the several sample requirements mentioned in the previous section are being met. First, all of the FDIC‟s member banks from the database are based in the United States. Second, they are all categorized as a national commercial bank or a state commercial bank among others. Third, they are all banks and not Bank Holding Companies. And finally, they are all obliged to file quarterly accounting data. After the data collection from FDIC‟s website the following banks or mergers are eliminated from the sample list: (1) Mergers that took place before the first quarter of 2001 (to have a minimum period of four quarters before a merger, as the merger approval data is available from 2000), (2) acquiring and target banks which already merged within the minimum required period of four quarters, and/or acquiring and target banks which had less than $25 million of Total Assets.
The second step is to collect the accounting data itself. The FDIC‟s insured banks have to quarterly file Reports of Condition and Income (Call reports)11. The Call reports can be found on the FDIC‟s website. I rather have collected the accounting data from the Federal Reserve Bank of Chicago‟s website (Federal Reserve Bank of Chicago, 2007), where the Call report data of all banks can be downloaded for one period in one file.
From the whole sample of 2,007 regular mergers made during 2001 to 2006 a final sample of 76 mergers remained. A large part of the mergers needed to be dropped from the sample as the acquiring bank or the target bank had already been involved in a merger or acquisition four quarters before or after the merger, or as the target bank‟s Total Assets were below the minimum of $25 million. The whole sample, with the period of merger, the acquiring bank and the target bank, is shown in the appendix in table A1.
10 Besides Regular Mergers between banks with different shareholders the FDIC decides also upon Corporate
Reorganization Mergers and Interim Mergers which are between banks with the same shareholders. I only have included Regular Mergers in my sample as I expect the banks with the same owners to already have had possible benefits of synergies (e.g. back office) and without them the sample will be cleaner.
11 Every National Bank, State Member Bank and insured Nonmember Bank is by the Federal Financial
3.3 Research design
I follow the Cornett & Tehranian (1992) research design to measure pre-merger performance by combining the accounting data for the target and acquiring banks to obtain the pro forma performance for the merged firms. The comparison between the pre-merger pro forma with the post-merger pro forma values gives the possibility to measure the impact of the merger on the capital ratios of the combined firm.
The difference between the pre-merger and the post-merger values can be influenced by other factors than the merger, such as economy or industry wide factors. To capture these external non-merger factors and to leave only the impact of the mergers in the data, an industry index can be calculated and deducted from the sample. Some papers use the mean of the banking industry as a whole as industry index (DeLong, 2003), others use appropriately sized peer groups to control for the variations in size (Knapp, Gart & Becher, 2005). In this paper I compare each bank with the mean of a proper size-related peer group and deduct it from the sample.
To calculate the industry adjusted figures peer groups were used. The FDIC has created different peer groups based on size, location or institute type about which it publishes data in Quarterly Banking Profiles on its website. As discussed above, I have selected the size-related peer groups for my thesis. The peer group data is collected for the period Q1 2000 – Q3 2007, see the three different groups in table 4. After the peer group data collection, for both the acquiring and target banks the proper peer group was selected. A weighted average of the acquirer‟s and target‟s peer group was composed12
. Finally, the weighted average of the peer group was deducted from the calculated pro forma figure.
TABLE 4 Peer groups.
Type of organization Total assets
Commercial banks Less than $100 million $100 million to $1 billion $1 billion to $10 billion Source: FDIC (1992-2010)
12
For each period prior to the merger the weighted average of the peer group was based on the ratio of the acquirer‟s and target‟s Risk-Weighted assets in that year. After the merger the weighted average of the same peer group was based on the ratio of the acquirer‟s and target‟s Risk-Weighted Assets in the last quarter prior to the merger (t-1). When a new peer group would be selected after the merger the change in Industry Adjusted Total
3.4 Descriptive statistics
Table 5 presents descriptive statistics (mean, median, standard deviation, minimum, and maximum) for the pro forma sample of 76 bank mergers one quarter before the merger (t-1). I present the accounting income data for one period before the merger, as the accounting
income data for the period in which the merger took place (t0) does not always include the
income of the target prior to the merger in that period.
Table 5
Descriptive statistics (mean, median, standard deviation, minimum, and maximum) for the proforma sample of 76 bank mergers at one quarter before the mergerab.
Deal Average Median Standard Deviation
Minimum Maximum
Balance Sheet
Net Total Loans 482,079 299,177 485,414 27,402 2,856,344
Total Assets 690,148 435,398 670,065 60,184 3,508,796
Total Deposits and Escrows 558,129 353,781 531,749 52,289 2,617,360 Total Liabilities 625,678 395,043 608,044 53,541 3,175,063 Minority interest in consolidated
subsidiaries 17 0 143 -1 1,250 Total Equity 64,453 43,072 63,390 6,643 333,733 Income Statement Interest revenue 10,063 6,486 9,786 788 44,386 Interest expense 3,118 2,008 3,483 176 20,571
Net Interest Income 6,945 4,330 6,931 496 34,182
Provision for Loan and Lease Losses 412 174 652 -77 3,897 Net Interest Income after Provision 6,533 4,136 6,571 410 32,089 Total Noninterest Income 1,949 1,037 2,385 -12 11,642 Realized gains on held-to-maturity
securities
1,876 940 2,295 -12 11,635
Realized gains on available-for-sale securities
4 0 30 -14 259
Total Noninterest Expense 69 0 356 -479 2,984
Income Before Taxes 5,639 3,453 5,428 301 26,630
Provision for Income Taxes 2,843 1,528 3,831 -5,184 18,422 Income Before Extraordinary Items
and Effects of Accounting Changes
861 472 1,244 -1,778 5,627
Extraordinary Items, Net of Tax Effect, and Cumulative Effect of Changes In Accounting Principles
1,950 837 3,732 -6,158 24,225 Net Income -6 0 37 -252 37 1,956 841 3,730 -6,158 24,225 Capital Requirement Tier 1 Capital Total Capital
Adjusted Total Assets & Average Total Assets for Leverage Capital Purposes
60,348 37,574 58,495 5,850 314,012
Total Capital Ratio (%) 9.20 8.84 2.04 6.00 21.55
12.19 11.14 3.39 8.49 30.92
Other Ratios 13.42 12.32 3.31 9.68 32.05 Return on Assets (%)
Return on Equity (%)
Net Interest Margin (%) 0.22 0.21 0.30 -0.82 1.04
Efficiency Ratio (%) 2.41 2.60 3.27 -9.60 10.99
Total Loans/Total Deposits (%) 1.00 0.98 0.15 0.71 1.44 Total equity/Total assets (%) 67.30 65.39 17.05 30.32 152.32 Total assets growth rate (%) 85.05 84.01 15.24 50.27 121.10
a All amounts are in thousands of dollars. b
All amounts are measured at period t-1.
Of all of the 76 mergers, 23 took place between acquiring and target banks which both had Total Assets between $100 million to $1,000 million. With a total of 32, most of the mergers were between an acquiring bank which had Total Assets between $100 million to $1,000 million and a target bank which had Total Assets between $25 million to $100 million. Table 6 presents all the numbers of mergers by Total Assets class.
TABLE 6
Number of mergers by Total Assets classab.
Total assets of acquiring bank
Commercial banks $25 -$100 $100 - $1,000 $1,000 < Total assets of target bank Commercial banks $25 - $100 9 32 1 $100 - $1,000 0 23 11 $1,000 < 0 0 0
a All amounts are in millions of dollars. b
Total Assets at period t-1.
3.5 The variables of bank characteristics
To answer the main question (What is the impact of various bank characteristics as
size, relative size, growth, profitability, efficiency, liquidity, and time on regulatory capital before and after mergers and acquisitions and what are the differences among the various subsamples as to these issues?) two groups of banks are composed from the sample; one with
four rankings an average is calculated and from this average the complete sample is subdivided in two groups, a group with the 38 highest ranked banks and a group with the 38 lowest ranked banks. Finally, the Industry Adjusted Total Capital Ratio is calculated for each sub sample.
As no earlier research is done on the effects of different variables on the changes of Total Capital Ratio after mergers, I will use variables which are selected from the variables used by Cornett & Tehranian (1992) and Cornett, McNutt & Tehranian (2006) and are common and considered as important in research on bank performance. By making the choice between variables, their availability for the peer groups was taken into consideration. Table 7 presents the bank characteristic, selected variables and definitions of the variable.
TABLE 7
Bank characteristics, selected variables and definitions of the variable.
Bank characteristic
Selected variable Definition of the variable
Size Total assets Total proforma assets
Relative size Target assets to total proforma assets Total target assets as a percent of book value of total proforma assets
Growth Asset growth rate Change in book value of total proforma assets as a percent of book value of total proforma assets in the previous year Profitability Return on equity Net proforma income after taxes as a percent of book value of
total proforma equity capita1, all annualized
Return on assets Net proforma income after taxes as a percent of book value of total proforma assets, all annualized
Net interest margin Proforma interest income minus proforma interest expense as a percent of book value of total proforma assets, all annualized Efficiency Efficiency Ratio Total proforma noninterest expense as a percent of book value
of nominal net proforma interest income plus total proforma noninterest income
Liquidity Total loans to total deposits Net total proforma loans as a percent of book value of total proforma deposits
Time Period of merger The quarter in which the merger took place Source: Cornett & Tehranian (1992), Cornett, McNutt & Tehranian (2006), FDIC (2006).
To measure the bank growth I use the total asset growth variable in this paper, in contrary to the total deposit growth used by Hannan & Rhoades (1987), which I perceive as too volatile.
4. EMPIRICAL RESULTS
4.1 Introduction
In the following section, I will present my empirical results concerning the effect of mergers on Total Capital Ratio. Firstly, I will present the results of the complete sample for 76 mergers, without any industry adjustments. Secondly, I will present the industry adjusted results of the complete sample. Finally, in the last section I will present the sub samples for each bank characteristic.
4.2 Results of the complete sample
Figure 4 shows the means and figure 5 shows the medians of all three the capital ratios for the four year period surrounding the merger for the complete sample. The means and medians of the capital ratios are unadjusted to industry figures.
Figure 4
Figure 5
The medians of capital ratios for the complete sample of merging banks for the four year period surrounding the merger.
4.3 Industry adjusted results of the complete sample
Correlations. Before presenting the industry adjusted results of the complete sample a
notice has to be made that the results will only be presented for the Industry Adjusted Total Capital Ratio in the remaining part of this paper. I have selected the Industry Adjusted Total Capital Ratio to represent the regulatory capital as I believe this is the least volatile ratio. However, I do not expect the two other ratios, the Industry Adjusted Tier 1 Capital Ratio and the Industry Adjusted Leverage Ratio, to have very different results as all three capital ratios are mutually positively correlated with levels above 75.94% one quarter before the merger. The correlation levels of the three capital ratios with each sample variable also do not show large differences. Table 8 presents the correlation between the various variables.
The most important information from this table is that, besides the mentioned correlations above, all other variables are very weakly correlated. This means that these variables have no relation with each other and that the results for the various variables are independent. While the results for which there is a dependence would have almost the same results for positively correlated variables and opposing results for negatively correlated results, what should be reflected in the sub sample results following further in this thesis.
Table and graph. The Industry Adjusted Total Capital Ratio results of the complete
sample are presented in table 9. For each period before and after the merger the sample size, the mean, the medians, the changes between the pre-merger and post-mergers numbers, the Z-statistics for the differences between the pre-merger and post-mergers numbers, and the percentage of mergers that changed as predicted according to the Z-statistics are presented in the various columns. Furthermore, trend lines of the means and medians for the whole pre-merger and post-pre-mergers periods are presented as well.
Table 9
Industry Adjusted Total Capital Ratios Pre-mergers mean and medians, and Post-mergers mean and medians of the total sample
The sample size (n) decreases as all the banks‟ data was eliminated from the sample period when the acquiring bank or the target bank had been involved in any merger or acquisition in that period. The Z-statistics are conducted with the Wilcoxon signed-rank test13. The test checks for significant changes in variables before and after the merger. Megginson, Nash, & Van Randenborgh (1994) use the test as their principal method testing for significant changes in variables before and after privatizations. In this paper the method tests whether the mean difference in capital ratios between the pre-merger and post-merger samples is zero. Moore and McCabe (2002) give the following equations for the Wilcoxon signed-rank test:
= (4) = (5) Z = (6) a = when (7) a = 0 when (8) a = when (9)
where n is the sample size, is the signed rank sum, is the mean of the signed rank sum, is the standard deviation of the signed rank sum, Z is the Z-score, and a is the continuity correction. The continuity correction is needed to improve the accuracy of the approximation to a normal distribution as the signed rank sums give only integer values (Moore and McCabe, 2002). The percentage of mergers that changed as predicted presented in the last
13
column in the table is suggested by Megginson, Nash, & Van Randenborgh (1994). This additional test determines whether the proportion (p) of merging bank experiencing changes in a given direction is larger than would be expected by chance, normally the chance would be
p = 0.5, so the test checks if this is true. The Microsoft Excel spreadsheet I have used to
calculate the Z-statistics was based on the spreadsheet that can be found at Stephen Sawin's Statistics Resources Page (2007).
The trend lines (formulas) indicate what the direction of change is of the Industry Adjusted Total Capital Ratios and how large the change is. These trend line formulas are calculated automatically in Microsoft Excel 2007 with the trend line function in the graph tool. The trend line formulas indicate the starting level of the line (e.g. - 0.82) and the slope (e.g. 0.03x). The starting level is measured at t0 for both the pre-merger as the post-merger
trend lines. The trend line increases when the slope is positive and decreases when the slope is negative. The industry adjusted results of the complete sample, including the trend lines, are graphically presented in figure 6. The median results are lower than the mean results. This is caused by some outliers who have high Total Capital Ratios and as a consequence increase the means for each period.
Figure 6
4.4 Sub sample results
In this section the results for each bank characteristic described in the previous sections are shown. As describing the results is quite comprehensive and it is not easy to summarize them, the results are visualized by showing the graphs of the all the Industry Adjusted Total Capital Ratio medians‟ trend lines for each bank characteristic, see figure 7.
Figure 7
are presented. For example, the first bank characteristic described is size, which is measured by Total Assets. The results of the subdivided sample based on Total Assets are shown in table A2. Panel A gives the results for the 38 banks with high Total Assets, while Panel B gives the results for the 38 banks with low Total Assets. Figure A1 shows the graph with the sub sample means. Finally, figure A2 shows the graph with the sample medians.
From all the sub samples results I have composed a summary of all the Industry Adjusted Total Capital Ratio medians‟ trend lines, see table A11. For each variable the formulas are shown for pre and post mergers as well as for the banks with high and low value sub samples.
5. DISCUSSION 5.1 General
As shown in table 9 and figures 4, 5, and 6, the Total Capital Ratios of the complete sample decreased directly in the first period after mergers for both mean as well as median and for both industry adjusted as well as unadjusted samples. This is reflected in the Z-scores and the percentage of mergers that changed as predicted for the individual periods (e.g. 5 quarters before and 5 quarter after the merger) as well as for the whole period, with the lowest values of -4.45 and even 100.00% respectively. The decrease is caused by increase of the risk weighted assets after a merger (the denominator), while the equity, which makes a large part of the total capital (the numerator), remains relatively stable. After the mergers the Total Capital Ratios increased, but they stayed below the pre mergers levels, even 2 years after the mergers. The situation of a decrease of the Total Capital Ratios after mergers is applicable for all bank characteristics as well, with the lowest Z-scores and percentage of mergers that changed as predicted of -1.99 and 97.65% respectively for the Total Loans to Total Deposits Ratio. This implies that banks who are planning to make acquisitions should investigate if they have enough of „cushion‟ for after the acquisitions to maintain enough capital according to the requirements and, as Hannan & Pilloff (2004) state, for poor performance or unexpected losses.
The last general point is that in the total sample as in all the subsamples the (Industry Adjusted) Total Capital Ratio was below zero during the whole period 8 quarters before and after mergers. This means the banks used in the sample have lower Total Capital Ratios than their peers. This is consistent with O‟Keefe (1996), who has found that both target and acquiring banks had lower capitalization ratios compared to non-acquiring banks from their peer group.
Combining the last two points indicates that the merging banks balance between having a cushion but also do not have too much capital as their non-merging competitors have. An interesting question is if more efficient banks, which also manage their capital ratios efficient, as discussed in the next section, merge more often.
5.2 Bank characteristics
Size. The results show banks with higher Total Assets have lower capital ratios than
banks with lower Total Assets before mergers. This is consistent with most of the research mentioned previously that larger banks are more efficient with their capital. However, based on the medians, seven quarters after mergers the difference between the two subsamples has deteriorated. There is a possibility that large banks are becoming too large after the mergers (this could take effect quarters after the mergers when the banks finalize their integrations, e.g. six quarters later). As a result, these large banks cannot manage their capital use efficiently with all their different branches and departments. The complexity in organizations might become more a disadvantage than the advantage of economy of scale can make up for it. Banks with lower Total Assets seem to benefit the most from the merger when looking at lower capital ratios.
Relative Size. The results show banks with low Target Assets to Total Proforma Assets
is larger for banks with high Target Assets to Total Proforma Assets Ratios and as an effect the capital ratios will be lower than for banks with low Target Assets to Total Proforma Assets Ratios. However, before mergers the results seem odd but they could be explained by the following: Being a large acquirer, compared to the target, means having a low Target Assets to Total Proforma Assets Ratio and looking at the previous bank characteristic of size, a lower capital ratio than a bank with high Target Assets to Total Proforma Assets Ratio. Also, a large acquirer besides a small target would decrease the capital ratio more by its weight in the proforma figures, than two more equally sized acquirers and targets would do. The results are opposite to the Total Assets results, this is consistent with the negative correlation of -50.24% between both variables.
Growth. Grollon, Michealy & Swary (1997) state that banks with large growth
aspirations will tend to maintain relatively more capital. Assuming that the growth aspiration is reflected by the total asset growth this would mean that banks with a high Total Asset Growth have higher capital ratios than banks with a low Total Asset Growth. Yet, the results show the opposite. Before mergers banks with a high Total Asset Growth have lower capital ratios than banks with a low Total Asset Growth. After mergers the results are more uncertain. The results of both subsamples show that they converge and after two years there is no difference between both subsamples. Of course there can be a discrepancy between banks which have growth aspirations and banks which really grow with their total assets. But right because of their growth aspirations the banks with a high Total Asset Growth might have lower capital ratios. These banks could let their assets grow harder than their equity, which decreases the capital ratio, by acquiring already more banks (although this needed to happen 4 quarters before the mergers in our sample) or increasing their assets by organic growth. When these banks would indeed do more acquisitions they would from experience know that they have to monitor their capital ratios very closely and that their capital ratios should not be too low as this would restrain future acquisitions. This argument would explain why the ratios of banks with a high Total Asset Growth increase after the mergers.
Profitability. I have selected three different measures to investigate the profitability
the available total assets. The results for the three measures are mixed. Before the mergers the results for Returns on Equity and Returns on Assets are slightly unclear as the differences of the subsamples are small and the results for the means and medians differ. After the mergers the banks with high Returns on Equity have high Total Capital Ratios, while banks with low Returns on Equity have low Total Capital Ratios. Banks with high Returns on Assets have higher Total Capital Ratios as well. This confirms what the high correlation between these two variables indicated. For the Net Interest Margin the results are more unclear. When looking at the trend lines before mergers, banks with a low Net Interest Margin have a higher Total Capital Ratios. After the mergers, the means and medians show no severe difference and the lines connecting the Total Capital Ratios cross each other several times.
Efficiency. A lower Efficiency Ratio means the non-interest expenses are lower than
the income, so more efficient banks have a lower Efficiency Ratio. The results show that banks with a low Efficiency Ratio, so more efficient banks, have slightly higher capital ratios than banks with a high Efficiency Ratio. After mergers the capital ratios for the banks with a high Efficiency Ratio increase again, while the capital ratios of banks with a low Efficiency Ratio decrease. Two years after the mergers both sub samples‟ capital ratios cross each other. The negative correlation of the Efficiency Ratio with the Return on Equity and Return on Assets means that less profitable banks are more inefficient. The possibility occurred to my mind that inefficient banks, which lack the ability to generate revenues and to pay expenses (Cornett & Tehranian, 1992), as a result have low capital ratios as they do not earn enough to increase these. While efficient banks can lower capital ratios as these banks manage their ratios efficiently and after mergers they become even more efficient and can even decrease the capital „cushion‟.
Liquidity. The results show that banks with high Total Loans to Total Deposits Ratios
subsamples. This would mean that banks with a high Total Loans to Total Deposits Ratio would have a lower amount of deposits and automatically more equity. Banks with a low Total Loans to Total Deposits Ratio would have a higher amount of deposits and less equity. When calculating the Total Capital Ratio the denominator (loans or risk weighted assets) stays constant, while the numerator (equity) changes. For the first subsample, with a high Total Loans to Total Deposits Ratio, it means that the Total Capital Ratio would be high. For the second subsample, with a low Total Loans to Total Deposits Ratio, it means the opposite, namely a low Total Capital Ratio. This „equation‟ seems not to hold, which implies that when looking at the balance a lower amount of deposits does not necessarily mean more equity.
Time. The results show that banks which merged earlier have higher capital ratios
before and after mergers. The banks which merged later have lower capital ratios. This would mean that the characteristics of banks that merge have changed over time from banks which have average capital ratios into banks which have lower than average capital ratios. The internal reasons for the change can be that banks can monitor and are more in control of their capital, for example through more advanced operating systems which have been developed over time, so they do need to have less capital to merge. The external reasons for change can be that there is more confidence about the market or there is more pressure from competitors than there used to be, which both result in lower capital ratios.
6. CONCLUSION AND RECOMMENDATIONS
6.1 Conclusion
For the bank characteristics the result is that banks with high Total Assets, Asset Growth Rates, Net Interest Margin, Efficiency Ratios, Total Loans to Total Deposits Ratios, and banks which merged most recent all have lower capital ratios than banks which have ratios that are lower as to these variables. In contrary, banks with high Returns on Assets and Returns on Equity all have higher capital ratios than banks which have ratios that are lower as to these variables. For Target Assets to Total Proforma Assets Ratios the results are unclear as both subsamples cross each other after the mergers and the results are turned around.
Economies of scale and market power are seen as important reasons for banks to merge. Looking at the amount of research done about capital level improvement it seems that this reason is not assumed to be important or is just neglected. The results of this paper show that the mean and median Total Capital Ratios decrease after mergers and stay lower than the pre-merger ratios during a considerable time after the merger. This implies that the capital should not be neglected as a reason to merge. In general, banks should take the capital ratios into consideration when they plan to merge or when they select potential merger or acquisition candidates. More specifically, banks should even look more into depth by taking the researched bank characteristics into consideration when selecting potential candidates.
6.2 Recommendations
During the writing of this paper several limitations have emerged. First of all the results of the bank characteristics and their variables have to be investigated more thoroughly. Perhaps additional bank characteristics could be added to the research. Besides these straightforward points I would like to draw future researchers the following ideas and recommendations to their attention.
Large banks. I am confident that the sample I have collected and am using in my
Basel Accord II and Basel Accord III. The introduction of Basel Accord II and the
negotiations of Basel Accord III were out of the scope of this paper, however, as a new set of rules emerged this means that new studies have to be done to measure the effects of these new frameworks on the regulatory capital. The introduction of Basel Accord II should make the comparability larger between banks from different countries when the Basle Accord II is implemented in the same manor in the researched countries. Obviously expanding the sample with cross-country mergers would be interesting as a large part of mergers in the banking sector took place in Europe and beyond. Complications could be: Is the sample of merging banks large enough? Do peer companies need to be from the same country as the merging bank and if so are the peer groups large enough? The proposed regulations of Basel Accord III on capital requirements go even further than Basel Accord I and II, it is the question what the influence will be in the near future when they will be implemented.
The relation between managers and regulatory capital. Besides the suggestions
mentioned in the previous sections, another more fundamental focus is desirable. In this paper I have only focused on the actual situation of the regulatory capital at banks around mergers. The reason was that no other research had this focus, so investigating the basics was needed. This paper bypassed a deeper layer, the relation between managers and regulatory capital. As Lausberg (2009) showed in his research managers pursue their own motives in mergers. I expect that the management of regulatory capital is also (by a part) driven by the managers‟ personal motives. Further research has to investigate what the role of bank managers is and answer for example the following questions. What do manager expect to be a large enough capital „cushion‟ to anticipate for poor performance or unexpected losses? Do managers actively manage capital before mergers? Do the results of mergers match the expectations bank managers had of regulatory capital before the mergers? Is there a kind of „agency‟ theory that there is a mismatch between the goals of bank managers and the effective use of regulatory capital, since a larger regulatory capital cushion might give mangers more control?
7. REFERENCES
Bank for International Settlements (BIS). 1998. International Convergence of Capital
Measurement and Capital Standards (July 1988, updated to April 1998).
