Bank mergers: Integration and profitability

Abstract

The Treasury Department's 1991 recommendations for financial service reform would have allowed interstate branching by banks, eliminating the requirement that banking companies form a separate subsidiary for each state in which they do business. Supporters of the proposal argue that allowing bank holding companies to merge their subsidiary banks would improve performance. We tested this proposition by studying the before- and-after performance of all bank mergers in the New England states between 1982 and 1987. In the aggregate, merging banks did not achieve significant improvements in operating profits relative to other banks during the first two years after a merger. It is important to distinguish, however, between mergers of newly acquired banks and mergers of banks acquired earlier by the holding company. Mergers of previously acquired banks performed significantly better than mergers of newly acquired banks and, measured by operating return on assets, achieved significant performance improvements relative to the industry.