Banking activities, insolvency risk, and mergers and acquisitions: the case of different bank structures in USA

Ly, Kim Cuong (2017) Banking activities, insolvency risk, and mergers and acquisitions: the case of different bank structures in USA. PhD thesis, University of Glasgow.

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After the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the U.S. banking industry has significantly transformed its organisation structure from banks into bank holding companies (BHCs) as a result of the consolidation process, resulting in larger and more complex BHCs. Under the source-of-strength doctrine and the cross-guarantee authority, a BHC is required to inject capital into the bank subsidiary when it is financially distressed. However, these bank-failed resolutions were introduced before the deregulation; therefore, have not taken into account the increased organisational complexity of BHCs since then. Systemic importance of BHCs has recently attracted attention from policymakers and researchers. Accordingly, the complexity of BHCs will generate concerns about the risk implication of their subsidiaries as compared to the stand-alone structure.

This thesis consists of three interrelated essays on stand-alone commercial banks, single-bank holding company (SBHC) affiliates and multi-bank holding company (MBHC) affiliates in the U.S. banking industry. It investigates the role that these financial intermediaries play in (i) banking business activities, (ii) insolvency risk, and (iii) mergers and acquisitions (M&As).

The first essay is a qualitative analysis about on- and off-balance sheet analysis, asset securitization and derivatives of these banks which provide a thorough understanding of the difference in permissible scopes of banking business activities among stand-alone banks, SBHC affiliates and MBHC affiliates based on Bank’s Uniform Bank Performance Report. The findings show that SBHC affiliates and MBHC affiliates pursue diversification strategies by running a broad range of activities from traditional lending business to off-balance sheet, asset securitization and derivatives whereas stand-alone banks are more specialised. However, SBHC affiliates show more concentration on taking deposits, issuing loans and demonstrate the most important role in financial intermediation in the U.S. banking system as compared to MBHC affiliates and stand-alone banks. In a striking contrast, MBHC affiliates are dominant in off-balance sheet activities, asset securitization, and derivative activities. This suggests that the MBHC group performs the main role of disintermediation in the U.S.

The second essay compares the differences in insolvency risk of stand-alone banks, SBHC affiliates and MBHC affiliates by using U.S. commercial bank data and BHC data from 1994 to 2012. The study’s results show that MBHCs in the U.S. have lower insolvency risk than SBHCs and stand-alone commercial banks at the parent levels, but have significant higher insolvency risk than both at the subsidiary levels. These results suggest that BHC affiliates benefit from an internal capital market and increased diversification from the BHC structure, but face risks of the increased complexity if the number of subsidiaries increases.

The third essay investigates the difference in the likelihood of being targets and acquirers among stand-alone banks, SBHC affiliates and MBHC affiliates by using M&A data on U.S. commercial banks from 1997 to 2012. The reported results show that MBHC affiliates exhibit a greater likelihood of being targets than do stand-alone commercial banks, while stand-alone banks have a greater probability of becoming targets than do SBHC affiliates. The findings show that MBHC affiliates tend to have a greater likelihood of being acquirers than do SBHC affiliates. SBHC affiliates have a greater probability of being acquirers than do stand-alone banks. Those banks that acquire another bank within the same MBHC structure tend to be smaller and more financially constrained than those banks acquiring outside the same MBHC structure, whereas targets that are acquired by another bank within the same MBHC structure tend to be smaller, with higher profitability and capital than targets that are acquired by banks from outside the MBHC structure. The results suggest that the MBHC parent attempts to discipline distressed, poorly performing and smaller affiliates by involving them in M&As.

To sum up, this study provides four policy implications. First, regulators should devote particular effort to regulating banks at the subsidiary levels to restrict their risk-taking behaviour. In this sense, the regulators should revise the source-of-strength doctrine cross-guarantee authority to ensure that MBHC affiliates can receive their parent’s bail-out in the future when in distress. Second, regarding complexity issues inside BHC structure, regulators should consider risk exposure between banks affiliated with SBHC and MBHC separately. Third, understanding the fact that MBHC parent attempts to hinder inherent risks of their subsidiaries by involving them in successive M&A inside the structure, the bank regulators should put more restrictions on their M&A applications and reveal their problems to the financial market. Finally, stand-alone banks should be encouraged to transform into SBHC affiliates in the future. Consequently, the Federal Reserve should make the path easier for banks to transform into SBHCs to increase their stability in the U.S. banking system.

Item Type: Thesis (PhD)
Qualification Level: Doctoral
Keywords: Stand-alone banks, bank holding company affiliates, banking business, insolvency risk, mergers and acquisitions, propensity score matching difference-in-difference, Cox model.
Subjects: H Social Sciences > HG Finance
Colleges/Schools: College of Social Sciences > Adam Smith Business School > Accounting and Finance
Supervisor's Name: Opong, Professor Kwaku and Liu, Dr. Hong
Date of Award: 2017
Embargo Date: 2 June 2021
Depositing User: Dr KIM CUONG LY
Unique ID: glathesis:2017-8239
Copyright: Copyright of this thesis is held by the author.
Date Deposited: 07 Jun 2017 09:15
Last Modified: 15 Mar 2024 13:33

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