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.