Bank Profitability and Mergers in the German Cooperative Banking Sector

Abstract

This paper evaluates bank performance as a determinant of mergers in the German cooperative banking sector. Based on annual time series data since 1990, a bivariate Vector Error Correction (VEC) model is specified and estimated. The results identify return on equity (ROE) as a driver of mergers. The higher ROE, the higher the merger intensity, defined as the ratio of mergers by the number of last years’ banks. A reverse causality cannot be found as mergers do not significantly affect ROE. The results confirm some literature findings that were obtained from cross-section data. Our findings do not confirm the hypothesis that mergers are induced by worse economic performance. JEL classification numbers: G21, G34, L25, P13. Keywords: Bank mergers, cooperative banks, bank profitability, VEC model.