Acquiring Failed Banks
Speaker(s) Mr. Siddharth Vij, PhD Candidate, NYU Stern School of Business Publication Reserve Bank of India, CAFRAL, Mezzanine floor, Main Building, Shahid Bhagat Singh road, Fort, Mumbai 400001

Banks create value by issuing deposits and making loans, yet little is known about the relative importance of these two functions. I study this question in the setting of failed bank auctions. This allows me to obtain causal estimates by comparing outcomes for the winning bank to those of the second highest bidder. Consistent with a positive value effect from the acquisition, the winning bank experiences a large positive abnormal return upon announcement of the auction result. I show that this increased value is mainly due to deposits, not loans. After the acquisition, the winning bank sharply cuts lending to the failed bank's borrowers, including those who were not responsible for the bank's failure. However, the winning bank retains almost all of the failed bank's deposits, despite shutting down some of its branches. It does not channel these deposits into lending in other areas, indicating that the value of deposits is separate from their role in financing loans. Rather, it lowers deposit rates throughout its network, reflecting increased deposit market power. Overall, my results show that the deposit franchise is the main source of value in these acquisitions, and hence likely a principal source of bank value more broadly.

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