Too big to succeed? Banking sector consolidation and efficiency

This study examines the effect of banking sector consolidation on bank profit and cost efficiency using data from Japan. Our analysis shows that bank merger events have little impact on profit efficiency, but significantly lower cost efficiency. This suggests that government-coordinated consolidation of banks, especially in a post-crisis environment, results in less cost efficient entities, although the bottom line of profit efficiency is maintained. Our analysis of changes in banking sector competitiveness over the same period suggests that these merged banks are able to maintain their “bottom line” due to increased market power.