In the 1990s and early 2000s, a number of US banks engaged in mergers that resulted in their combined sizes’ surpassing $100bn in assets, the perceived threshold for being considered by regulators as ‘too big to fail’ and thus eligible for special subsidies and treatment in case of crisis. The mergers were expensive: To make the deals happen, acquiring banks paid a combined total of at least $15bn in ‘premiums’ over and above the underlying value of the acquired companies’ stock, say Elijah Brewer III of DePaul University and Julapa Jagtiani of the Federal Reserve Bank of Philadelphia. But the banks felt the premiums were worth all the benefits of being considered too big to fail, and indeed the stock market returns to these mergers have been significantly positive, suggesting that the market agreed that the deals enhanced the banks’ value.

(Source: Journal of Financial Services Research)

Published in Dawn, Economic & Business, May 25th, 2015

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