1. M&As IN THE BANKING SECTOR: LESSONS FROM THE ITALIAN EXPERIENCE Fabio Panetta Monetary Policy and Economic Outlook Dept. Banca d’Italia Washington – 1 December 2007

2. ORGANIZATION Why do we care about bank M&As? Why do we care about Italian M&As? Impact of M&As on the Italian economy Main lessons and open issues

3. WHY DO WE CARE ABOUT M&As? M&As can improve efficiency of the industry: –for the parties involved: scale and scope economies, transfer of superior managerial skills; –competitors might be forced to become more efficient too; M&As can impose social costs: –price increases due to higher market power, especially in local markets; –higher risk due to the creation of large and complex institutions; –diversion of credit from small to large business lending.

4. ITALY: AN INTERESTING CASE STUDY Bank-based system: loans >50% of funding of the corporate sector Many mergers: more than 6oo deals No. of banks has decreased by 33% Bank M&As in Italy (1990-2004) Financing the corporate sector: Italy & US

5. BoI’s RESEARCH PROJECT ON M&As Effects on Banks (costs, profitability, risk): – Amel-Barnes-Panetta-Salleo J. of Banking & Finance (2004) – Focarelli-Panetta-Salleo J. of Money Credit and Banking (2003) Effects on Depositors (remuneration of deposits): – Focarelli-Panetta American Economic Review (2003) Effects on Firms: – Loan rates: Sapienza Journal of Finance, 2003 – Information: Panetta-Schivardi-Shum (2005) (WP, CEPR) – SBL: Bonaccorsi-Gobbi Journal of Finance, 2006 Interaction between Consolidation and Competition – Angelini-Cetorelli Journal of Money Credit and Banking (2003) Great data base: info on individual banks, firms, bank- firm-specific relationships (quantities and prices)

6. EFFECTS ON BANKS Previous evidence: on average no large gains from M&As –Berger-Demsetz-Strahan, JBF 1999; Pillof-Santomero, 1998 Previous studies in general do not distinguish between different types of deals & do not link results & ex ante motives. Italy: detailed info on (i) type of deal (ii) ex-ante motives Result: some deals improve efficiency, others do not. Better insight on why some deals fail to improve efficiency –Mergers: increase fee-based income; gains offset by higher costs –Acquisitions: improve efficiency (labor costs) and the risk-return profile of the loan portfolio. Profitability improves –Differences between ST & LT results

7. EFFECTS ON DEPOSITORS (1) Previous evidence: in-market M&As increase market power & harm consumers (Praeger-Hannan, JIE, 1998). But this may be only the SR effect. LR effects may differ: while mkt power can increase rapidly, efficiency gains may only emerge slowly ITALY: long series of bank-depositor-market-specific rates allow us to estimate precisely SR & LR effects –SR confirm US results: in-mkt M&As lead to lower dep rates BUT in the LR efficiency prevails: deposit rates ↑ (Chart)Chart –NOTE: heterogeneity among deals: deposit rates increase only for banks successful in cost cutting

8. SR & LR EFFECTS ON DEPOSIT RATES (*) This graph summarizes the results of Focarelli-Panetta, AER (2003) Back

9. EFFECTS ON FIRMS (1) Use of bank-firm-market-specific data (Central Credit Registrar) to analyze 3 issues: –Do M&As increase or decrease loan rates? –Do M&As improve use of banks’ information? –Do M&As reduce small business lending (SBL)?

10. EFFECTS ON FIRMS (2): LOAN RATES Effect on loan rates: –Efficiency gains: on average loan rates  by 83 b.p. –Market Power: loan rates  by 13 b.p. for every 1% of local market share acquired –Efficiency prevails if market share acquired <6.5% About 70% of M&As lead to lower loan rates

11. EFFECTS ON FIRMS (3): INFORMATION M&As lead to steeper loan rate profile (r-risk) Effect consistent with better information pro- cessing & better pricing of default risk Merger effect beyond average p change. Distributional effect relevant: each deal has winners and losers

12. EFFECTS ON FIRMS (4) : SBL In the SR firms borrowing from a merging bank experience a credit reduction, but after 3 years this is completely absorbed Bank M&As do not seem to affect borrowing firms’ overall investment strategies. Even though small firms are more dependent on tight relationships with banks, they don’t do worse than average There is no evidence of a reduction in overall credit supply to small firms after consolidation

13. Effects on Competition Previous evidence: mergers reduce competition. But: what is the interplay with other market dynamics, such as deregulation and financial innovation? Italy: use local market data (better approximation of relevant market) and dynamic approach. Results: –Consolidation a reaction to deregulation; the net effect seems to be an increase in competition –Consolidation generated efficiency gains that were passed on at least in part to consumers

14. Research project: the bottom-line Efficiency: Italian bank mergers seem to have generated gains for a subset of banks Welfare effects: the gains have been shared with firms and depositors. No significant reduction in SBL Consolidation mainly a reaction to deregulation. Net effect: higher competition BUT: distributional effects. Not all banks gained, some customers lost out, sometimes because of market power, sometimes because of bank dynamics

15. CONCLUSIONS Mergers: complex events; effects depend on many dimensions: –type of deal (merger vs. acquisition) –type of merger (in-market vs out-of-market) –type of customers (large vs small firms) –time (SR effect differ from LR effects) Even within the same deal there are winners and losers The lack of results on average may hide significant heterogeneities. Need for highly disaggregated data M&As are a dynamic process: for welfare analysis they cannot be analyzed in isolation from industry’s response Topics for further research: x-border deals, conglo- meration, M&As & individual and systemic risk

16. A NEW WORLD? Previous research has been done within the “tradi- tional” intermediation framework. But as banks shift towards the OTD model, results could change. Possible examples: –Efficiency: economies of scale and scope more relevant? (distribution networks & diversification of funding more relevant?) –Lending relationships: does securitization reduce their importance for banks? –Market power: less relevant even for very small firms and households?