Keywords: Mergers, Capitalization
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.
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