On Bank Consolidation in a Currency Union

By Fabio Di Vittorio, Delong Li, Hanlei Yun

April 24, 2018

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Fabio Di Vittorio, Delong Li, and Hanlei Yun. On Bank Consolidation in a Currency Union, (USA: International Monetary Fund, 2018) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The paper focuses on the impact of diversification on bank performance and how consolidation through mergers and acquisitions (M&A) affects the banking sector’s stability in the Eastern Caribbean Currency Union (ECCU). The paper finds that a lower level of loan portfolio diversification explains higher non-performing loans and earnings volatility of indigenous banks, as compared to foreign competitors in the ECCU. We then simulate bank mergers both within and across ECCU countries by combining individual banks’ balance sheets. The simulation shows that a typical indigenous bank could better diversify against its idiosyncratic risk by merging with other banks across the border. In addition, we point out that M&A, leading to a more asymmetric banking sector, may increase systemic risk.

Subject: Bank soundness, Banking, Commercial banks, Financial institutions, Financial sector policy and analysis, Foreign banks, Loans, Nonperforming loans

Keywords: Bank consolidation, Bank soundness, Banking, Banking Regulation, Banks-merger scenario, Caribbean, Commercial banks, Concentration risk, ECCU bank, Financial Stability, Foreign banks, Loans, Nonperforming loans, NPL ratio, ROA volatility, WP

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/092
Stock No:

WPIEA2018092
ISBN:

9781484352755
ISSN:

1018-5941

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