The early 1980s marks a watershed era in the evolution of commercial banking in the U.S. Even though banks have never been characterized as natural monopolies, public policy regarding banks historically has pressed heavily into the regulated model as a necessary means of avoiding financial panics on the grounds that depositors lack full-information regarding the prospects of the institution that holds their money and may resort to mass withdrawals of assets. As a result, commercial banks faced regulations across a spectrum of business parameters including interest rate ceilings, prohibitions on inter-state activities, limitations on branching and chartering, and the creation of holding companies. But, the deregulation-era that took full effect in the '80s clearly had dramatic effects in the banking industry.
By virtually all measures, the banking industry grew dramatically since the era of the Great Depression. FDIC-insured banking operations grew from fourteen thousand to over eighty thousand, with average assets increasing from $3 million per institution to greater than $2.5 billion. The historic constraints placed on banks were man-made; it seems, at a minimum, counter-intuitive that the same regulations produced optimally-sized firms. Such regulations were designed for control rather than growth. As barriers to competition and expansion began to fall, the advent of mergers and acquisition was certain to occur.
Ashmore (2004) explored the question of whether bank mergers were the products of hubris or were outcomes of the rational pursuit of synergies, underpriced assets, and exploitation of financial opportunities. The roles played by potential value-building variables (i.e. target ROE or non-performing assets) were significant and consistent with financial theory and clearly outweighed indicators that managers were engaging in empire-building or other deleterious actions.
But, did mergers add value? The gains from successful bank mergers was examined by Becher (1999), who observed that the number of mergers in the 1990s jumped by 215% over the level in the '80s, and that banks' share of all merger activity grew from 8% to 15%. Prior research pointed towards lower operating costs and higher income and output among merged banking firms. Through the use of an event study methodology, Becher confirmed that value was enhanced for both the target bank and the combined entity, but hovered near zero for the acquirer. On balance, the results suggest that the pursuit of synergies was more significant the exercise of hubris.