Effects of Bank Mergers on Risk Leading Up to the 2007-2008 Mortgage Crisis

Recent highly-publicized bank mergers following the home mortgage crisis of 2007-2008, often the result of bank failure or insolvency, brought attention to the issue of consolidation within the banking industry. The banking system has seen increases in consolidation at national levels, with the largest banks gaining increasingly greater proportions of market share. This merger activity and the existence of such “too big to fail” institutions has attracted concern about potential moral hazard due to perceptions about government bailouts and dangers posed by under-capitalized banks. Literature on the topic has found connections between merger activity and increased leverage, as well as a positive association between risk-taking and leverage, exacerbated in larger banks; together, this suggests that mergers may indirectly have an effect on risk-taking behavior in financial firms. This paper explores a possible link between M&A and risk in the context of the financial crisis of 2007-2008.