M

1
MAs IN THE BANKING SECTOR LESSONS FROM THE
ITALIAN EXPERIENCE

• Fabio Panetta
• Monetary Policy and Economic Outlook Dept.
• Banca dItalia
• Washington 1 December 2007

2
ORGANIZATION

• Why do we care about bank MAs?
• Why do we care about Italian MAs?
• Impact of MAs on the Italian economy
• Main lessons and open issues

3
WHY DO WE CARE ABOUT MAs?

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

4
ITALY AN INTERESTING CASE STUDY
Financing the corporate sector Italy US

• Bank-based system loans gt50 of funding of the
  corporate sector
• Many mergers
• more than 6oo deals
• No. of banks has decreased by 33

Bank MAs in Italy (1990-2004)
5
BoIs RESEARCH PROJECT ON MAs

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

6
EFFECTS ON BANKS

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

7
EFFECTS ON DEPOSITORS (1)

• Previous evidence in-market MAs increase market
  power harm consumers (Praeger-Hannan, JIE,
  1998).
• But this may be only the SR effect. LR effects
  may differ while mkt power can increase rapidly,
  efficiency gains may only emerge slowly
• ITALY long series of bank-depositor-market-specif
  ic rates allow us to estimate precisely SR LR
  effects
• SR confirm US results in-mkt MAs lead to lower
  dep rates BUT in the LR efficiency prevails
  deposit rates ? (Chart)
• NOTE heterogeneity among deals deposit rates
  increase only for banks successful in cost cutting

8
SR LR EFFECTS ON DEPOSIT RATES
() This graph summarizes the results of
Focarelli-Panetta, AER (2003)
Back
9
EFFECTS ON FIRMS (1)

• Use of bank-firm-market-specific data (Central
  Credit Registrar) to analyze 3 issues
• Do MAs increase or decrease loan rates?
• Do MAs improve use of banks information?
• Do MAs reduce small business lending (SBL)?

10
EFFECTS ON FIRMS (2) LOAN RATES

• Effect on loan rates
• Efficiency gains on average loan rates ? by 83
  b.p.
• Market Power loan rates ? by 13 b.p. for every
  1 of local market share acquired
• Efficiency prevails if market share acquired
  lt6.5
• About 70 of MAs lead to lower loan rates

11
EFFECTS ON FIRMS (3) INFORMATION

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

Merger effect beyond average p change.
Distributional effect relevant each deal has
winners and losers
12
EFFECTS ON FIRMS (4) SBL

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

13
Effects on Competition

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

14
Research project the bottom-line

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

15
CONCLUSIONS

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

16
A NEW WORLD?

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