Regulation Can Foster Mergers, Can Mergers Foster Efficiency? The Italian Case

Abstract

In the last decade, due to a new regulatory framework, a wave of mergers has taken place in the Italian banking system, and many more are to come. In this study, a sample of 67 deals was analyzed by means of a DEA methodology; the relative performances of buyers, targets and merged banks were estimated, using a measure of extra efficiency derived from a comparison with a benchmark. Surprisingly, buyers look, on average, less efficient than their targets; such findings seem to indicate that market discipline does not work in Italy, probably because of the low number of listed banks. However, merged banks seem to have increased their efficiency in the years after the merger; this is especially true when the deal occurred between two banks operating on the same local markets, and when the size of the new entity was not too big. This sounds intuitively correct, as it is easier to implement cost savings when the institutions involved are not located too far from each other, and when the overall size of the new bank remains manageable. Moreover, mergers between two equally-sized banks generated better efficiency gains.