Reasons and implications of commercial banks’ decisions to acquire non-bank financial service firms

What is it about?

The choice to acquire non-banks is driven by both external forces such as deregulation and regulatory capital requirements and by internal forces such as a diversification strategy and efforts to enhance revenue and return to equity holders. This study finds that acquiring non-banks increases their non-interest income, it also increases their non-interest expense. The net effect of choosing non-bank acquisitions lowers their subsequent return on assets, market value, and stock returns, as well as increasing their risk. However, the non-bank acquisitions do significantly increase the acquiring banks top executives’ subsequent compensation. We conclude that non-bank acquisitions are driven by both regulatory and strategic forces within the banking industry. However, such acquisitions manifest into an agency problem.

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Why is it important?

Increasing number of commercial banks that acquire non-commercial bank financial services has raised regulatory concerns regarding the safety of commercial banks as a depository institution. This study shows that at least initially, the decision to acquire non-commercial banks is driven by external forces such as deregulation and regulatory capital requirements and by internal forces such as a diversification strategy and efforts to enhance revenue and return to equity holders. However, at the end, we find that such acquisitions manifest into an agency problem, measured by top executives’ subsequent compensation.