The general conclusion of the empirical literature is that in-market consolidation generates adverse price changes, harming consumers. Previous studies, however, look only at the short-run pricing impact of consolidation, ignoring all effects that take longer to materialize. Using a database that includes detailed information on the deposit rates of individual banks in local markets for different categories of depositors, we investigate the long-run price effects of M&As for the first time. We find strong evidence that, although consolidation does generate adverse price changes, these are temporary. In the long run efficiency gains dominate over the market power effect, leading to more favorable prices for consumers.

the editor (Allen Berger), and two anonymous referees for their suggestions and comments. Roberto Felici provided outstanding research assistance. The opinions expressed do not necessarily reflect those of the Bank of Italy. DARIO FOCARELLI FABIO PANETTA CARMELO SALLEOWhy Do Banks Merge?The banking industry is consolidating at an accelerating pace, yet no conclusive results have emerged on the benefits of mergers and acquisitions. In order to investigate the motives and results of each type of deal we consider separately acquisitions (that is, the purchase of the majority of voting shares) and mergers, using Italian data. Mergers seek to improve income from services, but the increase is offset by higher staff costs; return on equity improves because of a decrease in capital. Acquisitions aim to restructure the loan portfolio of the acquired bank; improved lending policies result in higher profits. THE FINANCIAL INDUSTRY is consolidating at an accelerating pace: the integration of financial markets has blurred distinctions between activities such as lending, investment banking, asset management, and insurance. Firms have reacted to the sharper competition by cutting costs and expanding in size, often by merging with competitors or taking them over. Long isolated by protective regulations, banks are among the most active players. Technological innovations and a thorough-going deregulation have prompted a wave of mergers in the banking industry throughout the world, starting in the United States in the eighties and reaching Europe in the nineties.

This paper investigates the determinants of the pattern of banks' foreign investment. We extended previous analyses in three directions. First, we use a unique database that includes information on 260 large banks from OECD countries and all their foreign branches and subsidiaries in each one of the other OECD countries. Second, we consider explicitly the role of institutional and regulatory characteristics. Third, we considered within a unified framework a wide set of variables that are likely to influence the pattern of bank internationalization. Consistent with previous research, we find that a high degree of integration between the home and the destination countries has an effect on the location choice of multinational banks. However, we also find that the marginal effect of integration is much lower than that of other explanatory variables. Profit opportunities resulting from a high expected economic growth and the prospect of competing with relatively less efficient banks appear to be a key factor affecting the expansion abroad, especially in the case of subsidiaries. Institutional characteristics of the destination country also play a crucial role. For example, financial centers attract branches of foreign banks, but not subsidiaries, while lower regulatory restrictions on banking activities are associated with a stronger presence of foreign subsidiaries, but not of branches.

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