Bank consolidation and stability: The Canadian experience, 1867–1935

• A probability model is built and the Canadian merger wave is studied empirically.
• The mergers enhanced systemic stability due to geographic diversification.
• Also mergers were mainly driven by efficiency rather than imminent failures.
• Two mega-mergers raised concentration sharply but promoted stability.
• Overall our results support the concentration stability hypothesis.

Transfer-function estimation results for bank M&As in Canada during 1867–1935 support the concentration-stability hypothesis. The systemic stability is attributed to risk reduction through geographic diversification as 2/3 of the M&As were cross-province acquisitions. Furthermore, our empirical findings together with a probabilistic theoretical model support the efficiency hypothesis rather than the imminent failure hypothesis. They not only shed light on the debate in the literature but also have policy lessons for M&As today. More specifically, two mega-mergers would have been denied according to the concentration ratio or HHI criteria commonly used in merger guidelines today, thus hindering banks’ risk reduction through consolidation.