Rosemary Jou

Equities of scope as merger incentives under capital regulation: narrow versus synergy banking valuation

ABSTRACT The call options theory of corporate security valuation is applied to narrow-banking contingent claims of one bank, while the cap options theory is applied to synergy-banking contingent claims of another bank. This article investigates efficiency gains specified as equities of scope associated with the likelihood of the two banks involved in merger under capital regulation. We find that merger incentives are encouraged when the narrowing banking is conducted by the consolidated bank, whereas discouraged when the synergy banking is conducted. Raising bank capital requirement leads to an increased interest margin of the consolidated bank with the narrow banking valuation; however, to a decreased margin of the consolidated bank with the synergy banking valuation. An increase in the capital regulation reduces the merger incentives in the narrow banking valuation whereas increases the merger disincentive in the synergy banking valuation. These findings are consistent with the organizational theory that predicts a comparative advantage of narrow banking proposals in bank mergers.

A simple model of retail banking: a liquidity-providing perspective

The banking industry is experiencing a renewed focus on retail banking, a trend often attributed to the stability and profitability of retail activities. This article examines the impact of retail banking on performance by liquidity providing and branch network strategies. Our findings suggest that the bank will use cost-minimizing electronic technology to provide liquidity and external financing, which is linked with high bank interest margins but low default risk in bank equity returns.

Optimal lending under strategic acquisition and capital regulation: an option-based optimization

This paper explores the determinants of the acquirer banks optimal loan rate based on a firm-theoretical option-pricing model under the maximum net gain from strategic acquisition. The model demonstrates how the nature of the loan (substitutes/complements), loan rate strategies (strategic substitutes/strategic complements) and regulation conditions jointly determine the acquirer banks optimal loan rate. We find that the acquirer banks loan rate are negatively related to the proportion of the combined banks owned by the acquirer banks shareholders and also negatively related to the capital regulation under the nature of the loan complements and the loan-rate-setting complement strategy. Our findings provide an alternative explanation for the acquirer banks strategies for operating and competing in the lending market concerning bank acquisition behavior.