The Euroland banking market is undergoing a remarkable transformation. The European Monetary Union's (EMU's) structural agenda is based on the establishment of an efficient and integrated financial market. This thesis studies the recent merger and acquisition (M&A) wave in the banking industry resulting from the introduction and implementation of this single market agenda. The paper establishes the rationale behind the M&As and compares the expected and observed implications of bank M&As for the banking sector, the corporations and the shareholders.
The contribution of this thesis is the development of a formal game-theoretical model for bank M&As. The model explains why banks choose to merge with and acquire another domestic or foreign banking institution. It is shown that the strategic difference in this decision is based entirely on the size of the bank. This theoretical result is consistent with the observation that bank's comparative advantage in different areas of the banking business evolves along the bank's growth path, giving the bank different incentives to merge or acquire at different growth stages. The modeling results are also consistent with the fact that, there are only two main types of mergers at the EU level. They are: (1) strategic mergers in which at least one large player is involved, aimed at repositioning in the EMU markets; and (2) mergers to mop-up excess capacities by smaller banks - the so-called "defensive" M&As. Crossborder M&As were less common and were undertaken mainly by large banking institutions, in contrast to domestic M&As which were mainly undertaken by smaller institutions.
Moreover, most EU countries experienced increasing concentration in their banking markets. The actual M&As effects on efficiency and profitability seem to be negative on average. This is also reflected in the stock market's evaluation of the recent M&As wave. Lastly, it is concluded that small business might experience a "credit crunch" in the short run.