Regulatory Capital: A Catalyst for Bank’s Merger and Acquisition?

(1)

Regulatory Capital: A Catalyst for Bank’s

Merger and Acquisition?

MSc IB&M Specialization in International Financial Management

Supervisor: Niels Hermes Student: Jiaqi Fu

Student No.: s1659758

Email: s1659758@student.rug.nl

fujq545@hotmail.com

(2)

Abstract

This paper investigates two possible effects resulting from the implementation of Basel II on banks M&A activities: In the first place, Basel II could lead to excess regulatory capital by making banks take less capital for a given business loan pattern compared to Basel I; Secondly, banking institutions under Basel II apply either standardized approach, F-IRB or A-IRB approach to manage credit risks. Due to the substantial differences in the ways they measure credit risks, the banks could have more diversified capital ratios compared to Basel I. There are two hypotheses developed with regard to the two influences, namely “excess regulatory capital” argument and “relative capital advantage” argument. This study tests both hypotheses by conducting a two-stage test. The first test examines the first argument to estimate the relationship between banks’ excess regulatory capital and subsequent M&A activities based on a developed regression model. The second test compares acquirer’s pre-acquisition capital ratios with targets’ to examine the other argument. Based on a number of 198 acquisition transactions in the context of EU banking industry from 1999 to 2007, it is found that both arguments are supported based on the EU sample in this study.

Key words: Basel II, Bank M&As, “Excess regulatory capital”, “Relative capital

(3)

1. Introduction

Merger and acquisition (M&A) among very large financial institutions, especially among large banks, are becoming more frequent around the world. Data provided by Amel et al. (2004) indicate that bank’s M&A activity between 1990 and 2001, accounts for nearly 53% of all mergers in the financial sector, representing a value of $1,835 billion, approximately 68% of the total value of financial M&As ($2,693.9 billion). In the US, the number of commercial banks has consequently fallen from more than 15000 banks in 1984 to just around 8500 in 1999 (Valkanov et al., 2005). Similarly, the number of European banking institutions fell from 12,378 in 1990 to 8,395 in 1999 (European Central Bank – ECB, 2000). As claimed as Sobek (2000), during the second half of the 1990s the most frequent words used in reports on banking were “merger” and “acquisition”. This consolidating trend in banking organizations has grabbed the attention of policymakers, researchers, and the financial press and continually restructured the ranking of the world’s largest financial services firms.

(5)

effects impact on M&A activities in global banking industry. The two hypotheses address the issue from two different perspectives. The first hypothesis argues that Basel II could reduce banking institution’s regulatory requirements and result in excess regulatory capital as a driver of bank’s M&A activities. The second hypothesis discusses that banking M&A transactions under Basel II are embedded with a characteristic that acquiring banks usually have lower regulatory capital ratios than target banks because they apply different approaches to estimate credit risk exposures. The authors use panel data from US banking industry and only test the argument of “excess regulatory capital”. They fail to find a significant result due to its small sample size. The present study aims to investigate the impact of regulatory changes on banking institutions’ M&As by focusing on the influences of the new Basel Capital Accord, so I continue with the examination of these two arguments in a different regime - EU banking industry, where M&A activities are significant but are scarcely discussed in empirical studies.

To achieve this goal, I conduct a two-step test for the empirical investigation. The first-step test aims at examining the “excess regulatory capital” argument by using recent data on acquisition activity and banks’ capital ratios to determine if a significantly positive relation existing between their excess regulatory capital and subsequent M&A activities, so a regression model is developed to estimate the coefficient between them. The second-stage test is performed to bear on the “relative capital advantage” argument by comparing the differences in regulatory capital ratios between acquiring and target banks involved in each acquisition transaction.

(6)

The rest of this paper is organized as follows: Section II states the theoretical background to better understand why Basel II could be a motivation for bank manager’s M&A decisions; Section III introduces the two versions of capital accord (Basel I and Basle II), and discusses the two possible effects caused by the application of Basel II. Afterwards, Section IV reviews relevant studies to analyze how Basel II affects the consolidation activities in banking industry; and Section V describes methodology, sample, and data used for the two-stage test. Later, in section VI, empirical findings and discussions are stated. Finally, this paper will be end up with the conclusions and limitations.

2. Motives of Banking M&As – Legal & Regulatory Changes

(7)

which include regulation/law changes, trend of globalization, economic conditions, development of technology and some other external factors. Scholars believe that factors depending on firms’ external environment will indirectly influence manager’s M&A decisions through company’s internal motives. The structure of these two-layer motives is shown in Figure 1. Because the objective of this study is to investigate how the second Basel capital accord influences banking organization’s convergence, the discussion in this section will focus on how rules and regulation changes impact on firm level motives, and further encourage managers’ decisions to take over other banking organizations.

Figure 1: Motives and Factors for M&As

Source: Bank M&A: Motives and Evidence

Regarding the roles of legal and regulatory changes in banking M&A activities, the results in former studies suggest that these changes may facilitate or prohibit M&As activities through releasing or placing barriers to organizational consolidation. In the report of Group of Ten in 2001, it is claimed that there are four main ways by which

(8)

they can influence the restructuring process. They are:

1. Through effects on market competition and entry conditions (e.g. placing limits on or prohibiting cross-border mergers or mergers between banks and other types of service providers in the interests of preserving competition). 2. Through approval / disapproval decisions for individual merger transactions. 3. Through limits on the range of permissible activities for service providers. 4. Through public ownership of institutions.

(9)

the creation of economic and monetary union leading to the single currency (1993-1999), and the financial services action plan (1999-2005). Tourani-Rad and Van Beek (1999) argue that merger wave in European banking industry in the late 1980s and late 1990s appear to be largely related to the Second Banking Directive for the reason that this directive introduced the idea of a single banking license valid throughout the EU and established the universal banking structure for all member states.

3. The Basel Capital Accord and Effects of Basel II

3.1 The First Basel Capital Accord (Basel I)

In order to reduce the risk of the international banking system and reduce the competitive inequality that arose from differences among national bank-capital regulations, in 1988, the Basel Committee on Banking Supervision introduced the so-called Basel Accord that is a landmark law and regulation agreement unifying the regulatory standards for international banking industries for the first time. The accord dictates the regulation for banks’ minimum capital requirements by establishing the uniform calculation for the minimum regulatory capital ratios. The minimum capital ratios are represented by Tier 1 and Total risk-weighted ratios calculated by Tier 1 capital or Total capital (Tier 1 plus Tier 2 capital) divided by risk-weighted assets. The formula is below:

Capital Ratios =

For calculating capital ratios, Basel I decided to use a uniform definition of bank capital for the international comparison between banking institutions, in which bank capital is divided into two tiers. Tier 1 capital (core capital) is the core measure of a bank’s financial strength from a regulator’s point of view and is common to all of the

(10)

member countries, thus making it useful for cross-country comparisons. Tier 1 capital has two main components: ordinary shares or common stock (including retained earnings) and disclosed reserves, less good will. Some forms of preferred stock are also considered as the part of Tier 1 capital by US banking institutions. Tier 2 capital (supplement capital), is a measure of a bank’s financial strength with regard to the second most reliable form of financial capital, from a regulator’s point of view. This type of capital consists of elements that at least one member country considers bank capital. Thus, it can include any combination of the eligible capital elements permitted by the national regulators. Generally, Tier 2 capital contains the less permanent forms of capital, or includes the capital that carries a fixed or cumulative cost, such as general provisions, redeemable preference shares, hybrid instruments, etc. Total capital that a bank holds is the sum of two tiers of capital. The content of the bank capital is shown in Table 1.

Table 1: International Definitions of Bank Capital Provided by the Basel I

Source: Bardos (1988: pp. 26-34)

(11)

quantify banks’ credit risk exposure, for which bank’s assets are firstly classified and grouped into five categories according to credit risk, and then they each are assigned with risk weights of 0%, 20%, 50%, and 100%. Generally, riskier assets are placed with higher percentage of risk weights, and less risky assets are incorporated with low risk weights. For example, cash and US Treasury securities are adjusted by 0%, while loans are generally weighted by 100%. Off-balance-sheet exposures (bank guarantees, letters of credit, etc.) are included with their appropriate conversion factors1. Thus, the total risk-weighted assets are the sum of each asset class after being adjusted by the assigned risk weights.

The capital ratio is the principal measurement of capital adequacy for internationally active banks, which indicates the capability of a bank’s capital to cover the risk exposures. Thus, the higher the ratios, the fewer risks are encountered by banks to go bankrupt due to the capital’s better capability to guard against the risks with business loans. In order to protect the safeness and soundness of global banking industry, in this capital accord Basel Committee on Banking Supervision decides that bank’s capital ratios calculated based on its own risk portfolios should be at least 8% of Total risk-weighted capital ratios and 4 % of Tier 1 ratios for every banking institution in all member countries.

Over time, limitations of the 1988 Basel Accord became apparent, and it is criticized in two ways: First, it is argued that the regulatory measure of bank risk as stipulated by the risk weights can differ substantially from the actual risk the bank faces. Basel I primarily focus on bank’s credit risk exposures. Nevertheless, some banks today derive a large portion of their income not from their traditional deposit-taking and

1

(12)

lending activity but from trading activities and service fees, which exposes them to significant market risk but could not be reflected in bank’s capital requirements under Basel I. Thus, capital ratios do not demonstrate banking organizations’ actual riskiness. Secondly, the old capital accord is criticized by its lack of risk sensitivity, since capital requirement on a credit exposure does not differ according to the rating of the obligor. For example, the risk weight of corporate loans is placed with 100% for all obligors implying that there is no difference whether a bank has a credit exposure with an AAA rated company or with a C rated company.

3.2 The Second Basel Capital Accord

3.21 General Overview of Basel II

In response to these concerns above, the Basel Committee released its proposal for the future capital adequacy rules, and a new capital accord, known as Basel II, came into force in 1998. Basel II uses a “three pillars” concept - minimum regulatory capital requirements, supervisory review, and market discipline to promote greater stability in the financial system globally. The structure of the new accord is illustrated in Picture

1.

Pillar I intends to provide approaches which are both more comprehensive and more sensitive to risks than the 1988 Accord. Capital requirements that are more in line with underlying risks can allow banks to manage their business more efficiently. The Committee believes the benefits of this new regime in which capital is aligned more closely to risk profiles will lead to the increase in safety, soundness, and efficiency in banking system.

(13)

capital remains the same compared to the definition in Basel I, consisting of core capital and supplement capital. However, the computation of risk-weighted assets has changed substantially. To more accurately reflect a bank’s exposed risks, Basel II incorporates another two types of risk that might be faced by banking organizations during their operation - operational risk as well as market risk, and it implements a set of methodologies to quantify them. For credit risk exposure, the methods used to quantify it have completely changed compared with Basel I which simply defined it as the sum of risk weighted assets. Operational risk that is not taken into consideration in Basel I is introduced as a new risk category in Basel II, so the ways to compute the capital charge for the operational risk are included in the capital accord for the first time. The market risk fraction in Basel II remains basically unchanged compared to that in Basel I2. A bank’s capital ratio will be calculated based on the sum of the assets incorporated with credit, market, and operational risks. The Committee claims that the capital ratios that are calculated based upon their risk portfolios should be at least 4% for Tier 1 ratio and 8% for Total capital ratio, which again remains the same compared to that in Basel I.

Besides, Basel II introduces additional two pillars as the necessary supplement of minimum capital requirements to assure that banks hold sufficient capital for the overall risk profiles. Pillar II addresses the task of supervisors to analyze whether a specific bank’s capital adequacy assessment is in line with its overall risk profile and business. Pillar III reflects the effort of the Basel Committee to promote market discipline through transparency and improved disclosure of banks in terms of risk measures, risk management and business profile. The description below will primary concentrate on the measurement of credit risk in Pillar I to investigate how credit risk management affects banks’ M&As, since Pillar I is the core content of Basel II in which credit risk constitutes the core of regulatory capital requirements: for the average G-10 international banks, credit risk makes up about 95% of total capital

2 _{The market risk was introduced to Basel I in 1996 when the Basel Capital Accord}

(14)

requirements (Group of Ten, 2001) implying that credit risk plays the primary role in determining bank’s minimum capital ratios. Thus, operational risk, market risk, Pillar II and Pillar III are not considered further.

Picture 1: Framework of Basel II

Source: Dierick et al. (2005)

3.22 Credit Risk Management in Basel II

(15)

In the first place, both approaches require banks to categorize their assets into different classes. Under the standardized approach, bank’s assets exposing to credit risk are classified into a set of standardized asset classes: sovereign, bank, corporate, retail, residential property, commercial real estate, and other assets. However, under the IRB approach, bank’s assets are classified more specifically in terms of the types of funds provided to the obligors and the objective of obligors’ to use them, including: corporate, sovereign, bank, retail and equity, within which corporate asset class indentifies five separate sub-classes and retail asset class includes three sub-classes.

Secondly, both approaches need to assign risk weights for each class of asset. The standardized approach requires banks to use ratings from External Credit Rating Agencies to quantify the credit risk exposure, so the decision of risk weights is based on external information. As compared to Basel I, the standardized approach takes ratings of obligors into consideration and assesses the riskiness of different loans more specifically. For example, Basel I assigned 100% to all corporate loans, however, Basel II offers 20% to AAA (to AA-) rated obligors, and 150% to the obligors rated below BB-(Picture 2).

Picture 2: Claims on Corporate

Source: BCBS (2005a)

(16)

components required for calculating risk-weighted asset in the IRB approach. They are (BCBS, 2005a):

l Probability of default (PD) – is the likelihood that a loan will not be repaid and will fall into default.

l Exposure at default (EAD) – can be seen as an estimation of the extent to which a bank may be exposed to a counterparty in the event of, and at the time of, that counterparty’s default. It is a potential exposure (in currency) as calculated by a Basel Credit Risk Model for the period of 1 year or until maturity whichever is sooner.

l Loss given default (LGD) – is the fraction of EAD that will not be recovered following default.

l Effective maturity (M) – M should be measured separately between bank’s underlying exposure and hedging behaviors. For the underlying exposure, M should be gauged as the longest possible remaining time before the counterparty is scheduled to fulfill its obligation. For the hedge, the shortest possible M is used due to the embedded options that may reduce the term of the hedge.

(17)

3.3 The Effects of Basel II on Bank’s Capital Requirements

The above description suggests that the capital requirements under the second Basel Capital Accord systematically differ from the first accord. It is expected that the significant differences would strongly impact bank’s capital in global banking industry. Generally, it is believed that there are two major effects derived from the utilization of Basel II on bank’s capital: reduction in the capital requirements through following Basel II, and more diversified capital ratios resulting from using different approaches among banking organizations to measure credit risk. The detailed analysis of these two effects is discussed below.

3.31 Capital Reduction Resulting from Basel II

Basel II introduced a two-layer regime (consisting of a revised standardized approach and a new IRB approach) for credit risk management intending to enable banks to differentiate risk more systematically across different classes of lending and separates frameworks for retail lending, project finance, equity exposures, in addition to corporate, bank and sovereign risk. This implies that the new Basel capital accord is more risk-sensitive than Basel I. The main effect of carrying out this more risk-sensitive accord is that compared to Basel I, the estimation of the same risk exposure might be lower under Basel II due to the application of the new methods.

(18)

maintain the same risk portfolios under the both accords, if Basel II could decrease the capital requirements of banking organizations’, the capital use to protect them from the potential loss embedded with the given risk portfolio should be lower compared to Basel I. Lower capital requirements are associated with lower risk-weighted assets, so for the given risk profiles, the risk-weighted would be lower under Basel II. On the contrary, the higher level of capital that is calculated based on Basel I for the given risk profiles indicates banks face more constrained capital requirements implying the risk-weighted assets are higher compared to Basel II. Again, if there is decrease in the capital requirements, the lower risk-weighted assets associated with the reduction in capital requirements would lead to higher capital ratios under the new regulatory regime3. The increased capital ratios demonstrates that banks become safer and sounder by implementing the new accord, so the same amount of capital can be used to guard against more possible loan loss under the new accord, or compared to the Basel I less capital needs to be held for protecting banks from the same risk profiles. There are number of studies discussed below providing the empirical evidence to prove the decreased capital requirements resulting from the new accord.

The Basel Committee conducted four Quantitative Impact Studies (QIS) on possible changes in capital requirements for credit risk under Basel II. These studies include all banks from countries all over the world and report bank’s own estimates of risk-weighted assets under standardized and internal rating-based (IRB) approach. In a recently one of QIS-4 in the fall and winter of 2004-2005, the results show a substantial average decline in the risk-based capital requirements across bank’s portfolios. Academic research on the standardized approach of Basel II focuses on the proposed assignment of risk weights according to the external ratings. Several studies have proved that banks’ capital requirements for the portfolios composed of loans to externally rated counterparties would be lower than Basel I. In the study of Carpenter

3

(19)

et al. (2001), the authors evaluate the potential effects of the standardized approach for a representative portfolio, by using the ratings of external agencies: Moody, Survey of Terms of Business Lending and the estimations of risk profile from Treacy & Carey (1998). They find that in the US, the level of capital against corporate loans would be noticeably lower under the standardized approach than that under Basel I. Altman and Saunders (2001) use actual loss results in the bond market through 2000 to analyze risk weights under the new standardized approach. They find that the standardized approach decreases the risk weights for several asset classes. Wyatt (2004), using a sample of 27 New York banks, reports the estimated risk-weighted assets after applying the provisions of the standardized approach. The findings suggest that under the same risk profiles using the standardized approach elements would lead to less capital compared with Basel I. There are also a number of studies focusing on the changes in the capital requirements in the IRB adopting banks in EU countries. For the Portuguese economy, Fernandes (2005) calculates minimum capital requirements for a data set of private firm’s bank loans of a Portuguese bank with the conclusion that the IRB approach yields lower regulatory capital requirements compared to the Basel I approach. In a study of the Austrian economy, Schwaiger (2002) uses a sample of 11.610 banks, with revenues between € 1 and € 50 million to calculate the risk weights by using the F-IRB approach. The results demonstrate that the F-IRB approach reduces quite substantially the bank’s capital requirements for the loans to Austrian SMEs. For the Spanish economy, Saurina and Trucharte (2004) compare the capital requirements between the IRB approach and the standardized approach in a number of Spanish banks. The findings suggest that capital requirements for different types of corporate lending are higher under the standardized approach than those under the IRB approach. Contrarily, in some other studies, the authors find that Basel II does not reduce but may lead to even higher capital requirements compared with Basel I. For example, Fisher (2002) reports that “Under

(20)

assumption that Basel II reduces capital requirements and releases bank capital from Basel I.

3.32 The Increase in the Differences of Capital Ratios

Banking organizations may have different levels of regulatory capital ratios due to the fact that they have different loan patterns as well as various amounts of capital. However, under the second Basel Capital Accord, even if banking institutions take the same risk portfolios, the capital ratios could demonstrate substantial variations because of using different approaches to estimate credit risk exposures. According to the report of Wyman Oliver & Mercer (2003), the sophistication of the approach used to calculate capital ratios is negatively related to bank’s capital requirements. The A-IRB approach, compared to the other two approaches, is the most sophisticated method to measure credit risk. For a given risk profile, this implies that the A-IRB adopting banks are the most likely to reduce capital requirements and have the highest capital ratios compared to the F-IRB and the standardized adopting banks, contrarily, standardized adopting banks have the least possibility to reduce capital requirements ,for which they hold lower capital ratios than the IRB adopting banks. In consequence, the implantation of the three approaches may increase the differences in capital ratios under the new capital accord.

The application of the three approaches is different across countries and regions arousing scholars’ special attention when examining the effects of Basel II in different countries. In the US, the banking industry carries out a so-called bifurcated system. This system requires banking organizations either follow the more risk-sensitive method of the A-IRB approach or follow the 1988 Basel Accord - Basel I to decide minimum regulatory capital ratios. The Federal Reserve Board sets strict requirements for the A-IRB adopting banks: “organizations with total banking (and thrift) assets of

(21)

adopt A-IRB. Other banking organizations may also choose to adopt A-IRB, provided that they have developed the necessary infrastructure to measure and manage risk”

(Hannan et al., 2004). For other banking organizations that may voluntarily adopt the A-IRB approach (opt-in banks), they have not only to meet certain qualification requirements above to the satisfaction of its primary Federal supervisors, but also to consult with other relevant supervisors before the bank may use the advanced approach for risk-based capital purposes. Thus, the enforcement of this bifurcated system in the US implies that the new capital accord is partially applied, and impacts on a small number of largest banking institutions which initially have in place the infrastructure required to employ such advanced techniques. However, the new capital accord completely replaces the Basel I in EU countries, where all banking organizations adopt either IRB approach or standardized approach to quantify the risk exposure, but the requirements for IRB adopting banks are decided by local authorities and vary across different member countries implying that there is not a unified requirement for all the member countries. This situation, at least potentially, enlarges the differences in capital ratios especially in the cross-border M&A transactions.

4. Two M&A Consequences Caused by Basel II

Concerning the recent M&A wave in banking industry across the world, Basel II may help explain this due to the fact that it could reduce capital requirements and have banks hold more diversified capital ratios. However, there are very few studies examining how the new capital accord affects banking consolidations.

(22)

requirements stemming from the adoption of new methodologies to calculate credit risk would be a driver for banking M&A activities. In the context of US banking industry, the authors believe that the A-IRB adopting banks which face lower capital requirements may be motivated by the excess regulatory capital to take part in M&A transactions as the potential acquiring banks. The reasons why excess regulatory capital could stimulate bank’s acquisition can be analyzed as follows: Firstly, evidence from former studies suggests that post-merged banks, on average, have weak financial positions or larger risk exposures. For example, they may fail to increase the capital-to-asset ratio, or fail to decrease the volume of non-performing loans (Hosono et al., 2007). Banks with no excess regulatory capital wishing to engage in a certain acquisition may be deterred to do so, because the merger might cause the capital ratios in the combined entity lower than 8%. However, Basel II could make less capital cover the same loans profiles and result in excess regulatory capital with which banking institutions are endowed with more safety to participate in M&A activities enabling the capital ratios of merged organization to remain at least 4% for Tier 1 and 8% for Total capital ratios under the new accord. Secondly, excess regulatory capital is a financial resource for banking institutions, since it can be used to generate profits and enhance firm’s value by increasing the ROE (The increased ROE is achieved by increasing the amount of earning assets against which a given amount of capital is held or reducing capital held against a given amount of earning assets). Banks with excess regulatory capital may free some of this capital and boost returns to shareholders. This may, in turn, increase the valuation of the company and could facilitate acquisition activity. The authors use recent data to test the “excess regulator capital” argument. Based a sample of 15 largest US banks that have the most likelihood to apply the A-IRB approach, they fail to find a significant relationship between excess regulatory capital and subsequent M&A activities.

(23)

should have relatively higher capital ratios than acquiring banks. This is because higher capital ratios make banks face lower risk of going bankrupt, which increase their creditworthiness and consequently reduce the cost of funding. By acquiring those banks, lower capitalized banks could gain better access to financial markets and enjoy lower costs of raising capital, as the combined entity will be considered to be less risky and would probably be able to issue bonds offering a lower interest rate than before. As a matter of fact, there are some other ways to increase bank’s capital ratios, like changing the risk portfolios from higher risky loans to lower risky loans. However, M&A activities aiming to increase bank’s capital ratios seem to be doubted by the associated high costs to do so. With regards to this issue, Harper (2002) discusses that banking institutions have to use their capital efficiently by raising the rate of return on the capital in order to maintain the competitiveness. Otherwise, they might fail to survive and could be driven out of the industry by being acquired. The efficient use of capital can be realized from M&A transactions. This is because M&As can help these banks to increase their capital ratios without deteriorating their competitiveness resulting from the higher capital ratios4, for which the combined banks could increase their return on equity associated with the acquired assets by either increasing income-earning assets without adding capital or holding less capital against the newly acquired assets (Hannan and Pillof, 2004). This indicates that capital is efficiently used in the combined banks. Contrarily, simply changing banks’ risk portfolios to less risky loans can maintain the safety for banking organizations, but the low profitable loans generate fewer revenues, jeopardize organizations’ profitability, and finally drive them out of the industry in the long run. Therefore, this study believes that M&As acts as the more appropriate way to increase capital ratios.

Regarding the “relative capital advantage” argument, a number of former studies pay

4

(24)

attention to it, but most of them focus on the equity capitalization rate5 for which they seem to find a mixed result. For example, Hannan and Rhoades (1987), Moore (1997) and Wheelock and Wilson (2000) identify the characteristics that make individual US banks more likely to become takeover targets. They find that banks with lower capital ratios are relatively more attractive as acquisition targets. The reason can be analyzed as: lower capitalized banks are closer to the point of becoming insolvent and are thus more likely to exit the industry by being acquired. On the contrary, a study conducted by O’Keefe (1996) finds that target bank’s equity capitalization rates (capital to asset ratio) are higher, on average, than those of their acquirers, so lower capitalized banks are more likely to acquire other banks. The possible reason is that banks with insufficient amounts of capital can strength bank capital by acquiring well capitalized banks. The only study applying regulatory capital ratios is carried out by Valkanov et al. (2005) who compare the capital ratios (Tier 1 and Total capital ratios) between acquiring and target banks based on a sample of 84 US and 21 EU merger deals. The findings indicate that targets have higher capital ratios than their acquirers only in the US subsample suggesting “relative capital advantage” argument is partially supported.

However, there are a number of limitations that cause the results of these studies are not of general relevance: In the first place, the main samples in the studies are from US banking industry. The only study that takes EU countries into consideration is performed by Valkanov et al. (2005), in which 21 European M&A transactions are included presenting the small sample size. Secondly, the study of Hannan and Pillof (2004) is limited to the largest banking holding companies in the US (with total assets of at least $15 billion), which leads to a number of 15 US banks. This small sample size results in the failure of examination of “excess regulatory capital” argument.

5

(25)

5. Methodology

This study tries to overcome the limitations of former studies by employing a two-stage examination to test both arguments developed by Hannan and Pillof. The details for both tests are described below.

5.1 First-Stage Test

The first-stage test aims at testing the “excess regulatory capital” argument. This test requires assessing the relationship between bank’s excess regulatory capital resulting from the capital reduction by adopting the new capital accord and subsequent M&A activities. The rationale for this test relies on the assumption that the implementation of the standardized approach and the IRB approach to measure credit risk exposure may reduce banking institution’s capital that needs to be reserved to protect them from the possible loan loss and leads to excess regulatory capital. In Banking organizations that find themselves holding excess regulatory capital would be triggered to act as the potential acquiring banks and take part in M&As in domestic or international market.

5.11 Empirical Model

In this test, the empirical model is investigated based on all acquiring banks who take part in M&A activities from 1999 to 2007, so the empirical examination aims to see if there is such a relationship existing for all acquiring banking institutions. With this in mind, the regression model is developed to estimate this relationship based on all acquiring banks:

A

iN

= β

0

+β

1

(EC)

iN

+β

2

X

iN

+β

3

Y

iN

+ μ

i

(26)

belongs the period 1999-2007 of Basel II), of which the detailed information is described later in Section 5.14;

(EC)

iN denotes ith bank’s excess regulatory capital

ratios in the given year;

X

iN and

Y

iNare other factors that may influence observed

acquisition activity in that year; and

μ

i is the error term of this empirical model. Finding

β

₁> 0 will support the “excess regulatory capital” argument.

5. 12 Dependent Variables

This study applies the same two dependent variables used in the article of Hannan and Pillof (2004) to measure the acquisition activities. The first dependent variable is the annual number of acquisition transactions from 1999 to 2007 in which a banking institution has participates. This variable measures the frequency with which a bank proceeds consolidation during the relevant period. The second dependent variable is a relative magnitude of acquisition activity, which takes size of bank’s asset into consideration. This variable is measured by the aggregate amount of banking assets acquired by a bank in a given year divided by that bank’s total asset at the beginning of that year. The measurement of the dependent variables employs unbalanced sample, because every acquiring bank might not have the acquisition deal in every individual year during the 9-year period (from 1999 to 2007).For example, if an A-IRB adopting bank acquires other banks in 2001, 2003, and 2006, and an F-IRB bank have M&A deals in four years during the given period, like 2000, 2001, 2004, and 2006, the value of dependent variables will be estimated based on those transaction years for both acquiring banks.

5. 13 Independent Variables

(27)

accelerate banking institutions consolidation. From this point of view, excess regulatory capital can be indicated by the differences in a given bank’s capital ratios between Basel I and Basel II. Basel II reduces banks capital requirements and results in higher capital ratios, so the calculation of excess regulatory capital can be expressed by a given bank’s capital ratios under Basel II minus that bank’s capital ratios under Basel I. The formula is presented below:

(EC)

iN =

Where,

(EC)

iNdenotes the ith bank’s excess regulatory capital ratios in the year of N.

Since the excess regulatory capital can only be obtained after the application of Basel II, the year of N belongs to any single year during the period 1999 to 2007.

(R

II

)

iN

denotes the same bank’s actual regulatory capital ratios in the same given year of N, which will be collected at the beginning of the year when acquisition takes place.

(R

I

)

I denotes that bank’s pre-Basel II capital ratios that are anticipated based on

(R

II

)

iN . The reason why the pre-Basel II ratios have to be anticipated relies on the

fact that capital ratios could vary because of the different risk portfolios taken by banks. If a bank takes different risk portfolios between the two accords, Basel II could not be the only reason to explain why capital ratios are different. In order to investigate the differences in the capital ratios that only results from the application of the new accord, the anticipated capital ratios are determined depending on

(R

II

)

iN -

bank’s collected actual capital ratios under Basel II and QIS-5 report (2006) that estimates that the adoption of the A-IRB, the F-IRB and the standardized approach, leads to an average reduction in total risk-weighted assets of 14%, 9%, and 5%, respectively. Based on this report, the reduction in the risk-weighted assets suggest that on average the capital ratios under Basel I should be 88% of the current capital ratios for the A-IRB adopting banks, 92% for the F-IRB adopting banks, and 95% for the standardized adopting banks. Thus, the formula used for calculating the excess

(28)

regulatory capital demonstrates that under the same risk portfolios the differences in the capital ratios between the two capital accords, for which the reason why capital ratios are different for the same portfolio can be explained by the new methods to measure risks in the new accord. However, it should be noted that the anticipation of pre-Basel II capital ratios assumes that every bank in the sample experienced an identical change in risk-weighted assets equal to the average number. As a matter of fact, these changes in the risk-weighted assets should vary across banking institutions. Nevertheless, although not accounting for the variations may affect the estimation of the possible changes in the excess regulatory capital, the results of the empirical investigation should not be influenced significantly, because the coefficient test aims to estimate the likely range of movement in M&A activities, which is much more general. The formula below expresses the estimated pre-Basel II capital ratios for all banks:

(R

I

)

I

=

When estimating the pre-Basel II capital ratios, “r” is placed with 88% to the A-IRB banks, 92% to the F-IRB banks, and 95% to the standardized banks, for which the anticipated ratios indicate a bank’s capital ratios required by Basel I for the same risk portfolio as they take under Basel II. When determining “r” that has to be assigned to banks using different approaches to measure risks, information concerning the approach that every bank adopts needs to be in the year right before the occurrences of M&A activity. Moreover, the ith bank’s capital ratios under Basel I are determined as the average ratio calculated based on nine-year’s Basel II capital ratios that have to be adjusted according to the QIS-5 report.

The calculation of excess regulatory capital employs the unbalanced sample again, which depends on the years in which M&A activities are measured. Because M&As

∑

(R

II

)

iN

. r

_(r

=88%, 92%

,

or, 95%

)

(29)

might not take place in every single during the 9-year period from 1999 to 2007, the collected capital ratios that are in the years for which there is no acquisition deal occurring will be only taken into consideration for computing the average pre-Basel II ratios, but bank’s excess capital ratios in those years will not be calculated. As the same example above, if the anticipated pre-Basel II capital ratio for the same A-IRB adopting banks is 8.9% (this is the average ratio calculated based on nine-year anticipated capital ratios) and the collected capital ratios are 9% in 2001, 10% in 2003, and 10.5 % in 2006 which are in the years when M&A deals occur, the excess regulatory capital for the A-IRB bank is 0.1% in 2001, 1.1% in 2003, and 1.6% in 2006, respectively; If the same F-IRB bank’s anticipated capital ratios is 9.8% (this is also calculated based on nine-year anticipated capital ratios), and actual capital ratios that are in the years when M&As are measured, are10% in 2000, 11% in 2001, 10.3% in 2004, and 11.3% in 2006, the excess regulatory capital is 0.2% in 2000, 1.2% in 2001, 0.5% in 2004, and 1.5% in 2006, respectively. Generally, a bank’s regulatory capital ratios are expressed into two types: Tier 1 and total risk-weighted capital ratios. Tier 1 ratio is not the overall estimation of bank’s capital requirements, because it only stands for the ability of core capital to absorb the possible loan loss. Thus, total capital ratios of acquiring banks are used in the model for the calculation of excess regulatory capital.

5. 14 Explanatory Variables

(30)

ratios, two of which are selected in this study. The first explanatory variable (

X

iN) is

the cost ratio, which is expressed as the non-interest costs (personnel expenses, back office operations and branches, amortization expense of intangible assets) to total operating revenues. This ratio reflects the ability of the bank to generate revenue from its expenditures. It is a widely used measurement of a banking institution’s efficiency in former studies, such as Meek, 1977; Buhner, 1991; Berger et al., 1992; Berger, 1998; Ayadi et al., 2005. The higher the ratio, the more cost they need to generate revenues implying the banks are relatively less efficient. Generally speaking, less efficient banks are more likely to participate in consolidation activities, because synergy theory discusses that M&A activities could make less efficient banks increase their efficiency and enhance their compet itiveness through scale and scope economies. In order to do so, a large number of inefficient banks may take part in the organizational consolidations by purchasing or taking over other institutions. Thus, a positive and significant coefficient on this variable would be expected. The other explanatory variable (

Y

iN) is the risk indicator of liquidity ratio which is defined as

(31)

ROE or ROA.

5.2 Second-Stage Test

The objective to conduct the second-stage test is to examine the other hypothesis developed by Hannan and Pillof (2004) - “relative capital advantage” argument. This argument implies that Basel II would stimulate banking M&A transactions due to the different capital requirements for every banking organization. The authors expect that banks would take over other banks with relatively higher capital ratios, because by taking over them acquiring banks would not only reduce the riskiness of failure, but also have lower cost to raise capital in financial market. According to the discussion of Hannan and Pillof, the “relative capital advantage” hypothesis seems to contradict the results in former studies (Rhoades, 1987; Moore, 1997; Wheelock & Wilson 2000; Houston, James, & Ryngaert, 2001) which suggest that acquiring banks on average hold higher level of capitalization ratios than targets. However, due to the substantial differences in the definitions of the two types of rates, this study still believes that the regulatory capital ratios are lower in acquiring banks than those in the targets. Thus, the second-stage test focuses on every individual M&A transaction and takes the two parties involved in each transactions into consideration, which implies that data on acquiring and target banks are both included in this test. Furthermore, in order to see the differences in acquiring and target banks, regulatory capital ratios for both of them have to be collected in the right before the acquisition occur or at the beginning of the year in which the acquisition is measured. Last but not least, both Tier 1 and Total risk-weighted ratios included to be compared between the parties in the transactions in the second test.

5.3 Sample

(32)

three sources: Zephyr – an electronic database of global mergers and acquisitions from the Thompson Financial Data Company; Bankscope, an electronic database of bank financial statement data; as well as manually searched annual reports of each participating bank. In order to get all needed data, a three-step procedure is carried out:

In the first step, a preliminary list of European, domestic as well as cross-border bank M&As in the period 1999 to 2007 is generated by searching Zephyr. From thousands of matches, the selection is narrowed based on the following criteria:

l Both parties of a M&A transaction – acquirer or target- need to be a bank,

which guarantees that regulatory capital ratios can be found in the next stage.

l Only completed transactions involving an individual acquirer are considered.

l Only banks quoted in stock exchange are included so that the annual report can be searched manually to get access to other needed information.

This procedure yields a list of 475 EU banking acquisition deals involving 156 acquiring banks and 233 target banks. In addition, the information of the size of acquiring and target banks as well as the size of target bank’s acquired assets is generated at the same time, which is necessary for measuring the second dependent variable. Furthermore, this database also provides the data on the annual number of transactions each acquirer and target participating in from 1999 to 2007, thus all the necessary data for dependent variables are collected in this stage.

(33)

Data on explanatory variables has to be collected in the years for which acquisition is measured or at the beginning of the years when M&As take place. Deals for which data are insufficient or are available for neither or just one of the parties are discarded.

Finally, the risk management practices used in each bank to measure credit risk exposure are obtained by searching participating bank’s annual reports in the year immediately prior to the completion of acquisition deal. The capital ratios or explanatory variables that are not available on Bankscope are collected in this procedure as well. Again, transactions which have insufficient information or include neither or one of the parties are discarded.

Consequently, full data is available for 198 deals during 1999 to 2007, in which 55 acquiring banks and 149 target banks are involved. When looking at these transactions over time, it is found that in the final sample only a few M&As are announced before 2000, with only 4 completely deals. The existence of such a feature might reflect selection biases due to data requirements. When considering the preliminary 475 transactions generated in the first stage, the majority of 461 acquisitions occurred after 2000. Thus, among listed banks this seems to be a general feature of bank’s M&As during the period rather than a sample bias. The great number of M&A occurrences after 2000 is generally consistent with the theoretical literature and empirical findings that consolidation activity tends to occur in waves.

6. Result and Analysis

6.1 First-Stage Test

(34)

acquiring banks involved in 198 transactions for the given period. The regression results for are presented in Table 2.

Table 2: Coefficient Test for All Acquiring banks

Number of Acquisitions Ratio of Acquired Assets to Total Assets N Excess Capital 1.55 (1.579) 1.99+ (1.914) 55 Ratios of non-interest cost total operating

revenue 1.67 (1.412) 2.59* (1.971) 55 Liquidity Ratio -2.14 (0.609) -1.91 (1.329) 55

+, * and ** indicate significance level at 10, 5, and 1 percent levels, respectively.

Concerning the coefficients on excess regulatory capital ratios, the result suggests that they have a positive relationship with banks’ subsequent acquisition activities. Although this result is consistent with the assumption that bank’s capital requirements may account for the emerging wave of organizational consolidations, T-statistics (1.914) obtained from the statistical calculation proves that the coefficient is significant when the dependent variable is measured by the ratio of acquired assets to total assets implying that excess regulatory capital plays an important role in banking M&A activities based on the EU banking industry. This finding demonstrates that capital is significant determination for banking M&As because of the risk reduction and value creation generated by using excess regulatory capital to purchase other banks. It also proves the argument in the article written by Harper (2002), in which the author discusses the rational use of capital could promote M&A activities in the industry6.

In the article of Hannan and Pillof’s (2004), the authors investigate the relationship

6

(35)

between “excess regulatory capital” and bank’s merger activities as well. They define “excess regulatory capital” in a different way - “difference between the actual capital

ratios less some critical level based on regulatory requirements or standards”. In their

article, this critical level is given as the 6% and 10% of Tier 1 and Total capital ratios for US banks, and 4% and 8% for European banks7. Bank’s capital ratios above the critical levels are considered to be well capitalized. Based on the definition, they calculate the excess regulatory capital by using the actual capital ratios minus the critical levels. Because the actual ratios they collected are bank’s capital ratios under Basel I (Their sample covers the years from 1993 to 2002 during which the A-IRB approach has not been applied in the US banking industry), the calculated excess regulatory capital are the pre-Basel II excess regulatory capital ratios. Then, they estimate the capital ratios under Basel II based on the QIS-3 report in which they find there is an average decrease of 6% in the risk-weighted assets, so the authors anticipate the average increase of excess regulatory capital ratios is 0.31 percent. Furthermore, they investigate how the increase in excess regulatory capital of 0.31% influences US bank’s M&A activities. From this point view, although my study applies a different definition of excess regulatory capital, the economic meaning of the two does not conflict. Thus, “excess regulatory capital” is supported based on this EU sample.

As for the coefficients on non-interest cost to operating revenue, the results indicate the positive relationship with a bank’s acquisition activities. A significantly positive coefficient (2.59) is found when the measurement for acquisitions incorporates the size of acquired bank’s assets, which is consistent with the above expectation. This significant result can be explained by the cost-based economies of scope and economies of scale. Cost-based economies of scope are “those achieved by offering a

broad range of products or services to a customer based and can originate from fixed costs incurred in gathering an information database or computer equipment” (Amel

7

(36)

et al., 2004). Economies of scale suggest that the combination of two firms is an opportunity to produce lower average costs by spreading fixed costs across a larger volume of output. Both of them suggest that firm’s cost reduction increases with firm size. In addition, the significantly positive coefficient on the cost ratio is also consistent with the finding in the former study (Ismail, 2005) that discusses synergy is an important motive for the M&As in the European financial service industry8. Thus, it can be concluded that less efficient banks are more likely to acquire other banking organizations, but more efficient banking institutions are probably taken over and become targets in M&A transactions in the sample of this study.

For liquidity ratio - a risk indicator to reveal risks faced by a bank, it is found to be negatively related to acquisition activities when acquisitions are measured by either number of acquisitions or ratio of acquired assets to total assets. The negative coefficients imply that more risk is associated with greater tendency for a bank to take over other banking institutions based on the assumption that M&A can reduce the overall level riskiness of acquiring and target banks’, but the results are statistically insignificant.

Moreover, is interesting to see that the two significant coefficients are found when the M&As are measured by the ratio of acquired asset to total asset. This finding suggests that magnitude is a better measurement for M&A activities than frequency in this sample.

Based on the above analysis, although the “excess regulatory capital” argument is supported based on the first test, there are still limitations for which this test might be viewed as the rough estimation. Firstly, this test is static and does not account for the effects of bank’s portfolios changes that would happen during the transition from Basel I to Basel II. Secondly, the data used to anticipate the pre-Basel II capital ratios

(37)

are the average ratios based on the QIS-5 report. The actual changes in the risk-weighted assets in banking institutions are likely differ from it. For example, if a bank’s assets are categorized into the classes that will be assigned with lower risk weights, then the reduction in the risk-weighted assets would be greater than 14%, 9% or 5%, then the anticipated capital ratios could take up less than 88% of current capital ratios for the A-IRB banks, less than 92% for the F-IRB banks, and less than 95% for the standardized banks.

6.2 Second-Stage Test

The empirical examination of “relative capital advantage” argument concentrates on 198 acquisition transactions during the period of 1999 to 2007 and intends to compare acquiring bank’s pre-acquisition capital ratios with those of target banks’.

With regards to the “relative capital advantage” argument, former studies performed in the period of pre-Basel II work on this issue by comparing acquirer’s pre-merger capitalization ratios (capital to asset ratios, which is calculated based on the total capital divided by total assets) with target’s. Since the focus of the study is bank’s regulatory capital ratios, a mean-difference test is performed to compare the pre-acquisition regulatory capital ratios between acquirers and targets that take part in 198 acquisition transactions from 1999 to 2007. The pre-acquisition capital ratios of acquiring and target banks are designated in the years immediately prior to the acquisition of target or at the beginning of the year for which acquisition transactions take place. The results of mean difference tests (unequal variances) for paired samples are reported in Table 3 and Table 4.

Table 3: Regulatory Capital Ratios and Assets of Acquirers and Targets (Pre-Acquisition)

Mean Std. Deviation

(38)

Targets 10,19% 5,11% Acquirers 11,63% 3,31% Total Targets 12,98% 2,88% Acquirers $151 bn 19,59 Size Targets $55 bn 22,46

Table 4: Mean Difference Test in Capital Ratios and Total Assets between Acquirers and Targets

Tier1 Capital Ratios Total Capital Ratios Assets

T-Statistics P-value T-Statistics P-value T-Statistics P-value

Observations

Acquirers-Targets

-2.81 .005 -3.38 .001 3.04 .001 198

At the Significance level of 0.1

The results suggest that: In the first place, target banks have, on average, significantly higher regulatory capital ratios than their acquirers, which is robust for Tier 1 and total risk-weighted ratios. This result is consistent with the findings reported in former studies. For example, Valkanov et al. (2005) who do the same test on 84 US merger transactions and 21 EU merger transactions; Hannan and Pillof (2004) report that “banking organizations that were acquired by the banking holding companies in our sample tended to have larger capital ratios than their acquirers” (p.25); O’Keefe (1996) indicates that the equity capitalization rates of target banks are, on average, higher than those of their acquirers. Consequently, “relative capital advantage” argument is supported.

(39)

more advanced approach could lead to lower capital requirements and higher capital ratios, on the contrary, less sophisticated approach would increase the capital requirements and lead to lower capital ratios. This situation implies that acquiring banks that have lower capital ratios may use less sophisticated approach than the targets that have relatively higher capital ratios and use relatively more sophisticated approach. Accordingly, the differences in the capital ratios between acquiring and target banks might be caused by the application of different approaches between the two parties. In order to see if there is such a relationship between the two, a correlation test is employed. The positive coefficients of 0.17 for Tier 1 and 0.24 for Total ratios are found, but they are not statistically significant. There are some reasons that influence the results of the correlation test. The most important one could be that the use of risk management practices between acquirers and targets may not be different in the number of 198 transactions. In order to investigate if it is true, the non-parametric Sign-test is performed based on the list of 198 transactions during the given period. The results suggest that acquiring banks do not intent to use less advanced approach than targets do (The description of Sign-test is in Appendix), so it is not the possible reason that can explain the differences in the capital ratios.

(40)

A possible reason for this result is that larger banking organizations tend to have lower capital ratios, because they are less risky and need to hold less capital ratios. However, target banks are often with smaller size than acquirers, they may have, on average, higher capital ratios than their acquirers (Hannan and Pillof, 2004). Whether this relationship exists in the sample of 198 acquisition deals in this study, for which a correlation coefficient test for total assets and capital ratios is carried out. The results imply that significantly positive correlation is found between them. Thus, the differences in the capital ratios of banks in the sample are not independent from the size of the firms.

Again, it should be noted that the second test is still a rough test. Besides bank size and the method they use to measure risk exposure, bank’s risk portfolios could potentially account for the differences in the capital ratios between the two parties. However, it is impossible to eliminate this influence from the second study, due to which, the two correlation tests just investigate the possible reasons that could cause the average lower capital ratios in acquiring banks and average higher capital ratios in target banks. The study that analyzes the effects of risk portfolio in depth is way beyond the objective of the second test.

7. Conclusions and Limitations

(41)

considered to motivate banking organization’s consolidation. With regards to this issue, there are two arguments developed in the article of Hannan and Pillof (2004), namely “excess regulatory capital” argument, and “relative capital advantage” argument. The objective of study is to investigate the influences of the second Basel capital accord on M&A activities, so both of these arguments are examined based a list of 198 acquisition transactions among EU banking institutions from 1999 to 2007.

The first-stage test examined the “excess regulatory capital” argument by developing a regression model. This argument suggests that excess regulatory capital is a driver of banking consolidation. Based on 55 acquiring banks involved in all transactions for the given period, the finding proves that there is significant relationship between bank’s excess capital and subsequent M&A activities. Thus, this hypothesis is supported based on the sample of EU banking industry.

The second-stage test investigates the accuracy of the other hypothesis-“relative capital advantage” which argues that there would be disparities in capital ratios between acquiring and target banks. This test focuses on the comparison of pre-acquisition capital ratios between two parties involved in acquisition deals. Based on a list of 198 acquisition transactions from 1999 to 2007, the results suggest when potential acquiring banks decide to participate in M&A activities, they can choose those banks with relatively higher capital ratios suggesting the characteristic of banking M&A transactions based on the sample of EU countries. Therefore, “relative capital advantage” is supported as well.

(42)

(43)

References

Ali-Yrkko, J. 2002. “Mergers and acquisitions – Reasons and Results”. Helsinki: The

Research Institute of Finnish Ecnonomy.

Allen N. Berger and Loretta J. Mester. January 8, 1997. “Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?” The Working Paper Series is made possible by a generous grant from the Alfred P. Sloan Foundation. Forthcoming in Journal of Banking and Finance

Altman, Edward, and Anthony Saunders, 2001 “Credit Ratings and the BIS Reform Agenda”, Stern School of Business. New York University, March 2001.

Andrew Large, March 13, 2003. “Basel II and systematic stability”, British Banker’s Association - Basel II / CAD 3 Conference Barbican Centre.

Barth . J, Capriojr .G, and Leviner, 2001, “The Regulation and Supervision of Banks around the World: A New Database”, Brookings-Wharton Papers on Financial

Service.

Basel Committee on Banking Supervision, “International Convergence of Capital Measurement and Capital Standards”, June 2006.

Berger, A.N., 1998, “The efficiency effects o f bank mergers and acquisitions: A preliminary look at the 1990s data”, Amihud & Miller, eds. 1998, 79-111.

Berger, A.N. and D.B. Humphrey, 1992, “Megamergers in banking and the use of cost efficiency as an antitrust defense”, The Antitrust Bulletin, Fall, 541-600.

Berger, A. N., Demsetz, R. S., and Strathan, P. E. 1999. “The Consolidation of Financial Services Industry: Causes, Consequences, and Implications for the Future”,

Journal of Banking and Finance, 23:135–94

Berkovitch E, Narayanan MP, 1993. “Motives for takeovers: an empirical investigation”. J Financ Quant Anal; 28(3); 347– 79.

Buch, C. and DeLong G., 2004. “Cross Border Bank Merger: What Lures the Rare Animal?” Journal of Banking and Finance 28(9), 2077-2102.

Regulatory Capital: A Catalyst for Bank’s Merger and Acquisition?