White Papers for Basel II Capital Accord (Basel II)

Will the Proposed Application of Basel II in the United States Encourage Increased Bank Merger Activity? Evidence from Past Merger Activity

This paper presents two tests of the hypothesis that adoption of the internal ratings-based
approach to determining minimum capital requirements, as proposed in applying the Basel II
capital accord in the United States, will cause adopting banking organizations to increase
acquisition activity. The first test estimates the relationship between excess regulatory capital
and subsequent merger activity, including organization and time fixed effects, while the second
test employs a “difference in difference” analysis of the change in merger activity that occurred
the last time regulatory capital standards were changed. Estimated coefficients and observed
differences have signs consistent with the hypothesis, but results are either statistically
insignificant or imply differences that are small in magnitude.

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