15 May 2024

The real gains of distressed bank takeovers

A SAFE research team reassesses acquisition gains after the spring 2023 banking turmoil, emphasizing that resolution authorities need to prepare for efficient auctions

In an in-depth analysis, a team of economists and lawyers at the Leibniz Institute for Financial Research SAFE at the request of the European Parliament’s Committee on Economic and Monetary Affairs (ECON) challenges the widely reported 44 billion US dollars accounting gain for acquirers in bank acquisitions in 2023: Their study’s market-based valuation reveals significantly lower gains for acquiring banks and highlights the need for transparent auctions to accurately assess the true value of failed banks.

The SAFE White Paper employs a rigorous analysis that estimates market-based Cumulative Abnormal Returns (CAR) to provide a more nuanced understanding of the gains made by the acquiring banks. Contrary to the reported accounting-based figures, the market-based figures, when quantified, reveal positive abnormal returns that amount to approximately half of the reported 44 billion dollars. “Our analysis of the abnormal stock returns of the acquiring banks and the other bidding banks provides evidence that the winning bidders indeed made a 'good deal' and paid a price that was below market value,” says Florian Heider, SAFE’s Scientific Director and co- author of the study.

Only accounting figures for valuation can be misleading 

The researchers examined specific cases of bank acquisitions during the crisis in early 2023 – namely, UBS’s acquisition of Credit Suisse, New York Community Bank’s acquisition of Signature Bank, First Citizens’ acquisition of SVB, and JPMorgan Chase’s acquisition of First Republic – and highlight the challenges regulators faced in dealing with illiquidity-driven failures. The hasty sale of these banks resulted in massive losses for bank shareholders, bondholders, and the Federal Deposit Insurance Corporation (FDIC). “However, relying solely on accounting figures for valuation can be misleading, as they may not accurately represent the economic value of acquiring a failed bank,” Heider continues.

The analysis suggests that transparent auctions with a sufficient number of bidders should be preferred to negotiated bank sales to reduce the likelihood of windfall gains for acquiring banks. The researchers propose better and earlier preparation for auctions as part of resolution planning. They also suggest that both significant and non-significant banks should be prepared for potential sales by bank resolution authorities.

“To address the challenges posed by illiquidity and unexpected bank runs, we advocate adjustments to capital requirements for banks to account for unrealized losses. This would contribute to more accurate pricing and lower resolution costs,” says Tobias Tröger, Director of the SAFE Research Cluster Law and Finance.

Download the SAFE White Paper No. 98 here

Scientific Contact

Prof. Dr. Tobias Tröger

Director Research Cluster "Law and Finance"

Prof. Dr. Florian Heider

Scientific Director