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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Will the Proposed Application of Basel II in the United States Encourage Increased Bank Merger Activity? Evidence from Past Merger Activity
Timothy H. Hannan and Steven J. Pilloff

Abstract: This paper presents two tests of the hypothesis that adoption of the internal ratings-based approach to determining minimum capital requirements, as proposed in applying the Basel II capital accord in the United States, will cause adopting banking organizations to increase acquisition activity. The first test estimates the relationship between excess regulatory capital and subsequent merger activity, including organization and time fixed effects, while the second test employs a "difference in difference" analysis of the change in merger activity that occurred the last time regulatory capital standards were changed. Estimated coefficients and observed differences have signs consistent with the hypothesis, but results are either statistically insignificant or imply differences that are small in magnitude.

Keywords: Mergers, Capitalization

Full paper (247 KB PDF)
This paper is also available as a Basel II White Paper

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Last update: March 15, 2004