New concept of banking regulation: The focus on banking M&A

On December 20, 2016 the School of World Economy started a series of academic and research seminars. The first one was opened by a speech of Eduard Dzhagityan, the School’s Associate Professor, on the topic: “Banking regulation of the processes of banking consolidations as a factor of financial stability.”

Risks associated with the merger and acquisition (M&A) processes in the banking sector are among principal factors of the abandoned and failed M&A deals, which in turn exacerbate systemic risks. However, despite the sweeping overhaul of international banking regulation (Basel III) that aim to strengthen financial stability, banking industry consolidations are still out of the focus of international regulators.

To meet the objectives of the post-crisis recovery, Dr Dzhagityan opines that the issue of banking M&A vulnerability can be resolved by extending the principles of traditional (microprudential) and macroprudential banking regulation over consolidation processes and simultaneously applying risk-centered regulatory approach. Nevertheless, the breakthrough regulatory technologies of the 21st century do not fully meet the needs of ‘deriskization’ of the M&A processes, as they are limited by banking regulation only, and do not cover transformation processes in the banking sector. As such, they lack multidisciplinary approach and therefore can not be treated as a reliable and valid instrument for assessing quantitative parameters of the consolidation processes.

Assuming there are no alternative approaches to banking regulation of the M&A processes, we propose a principally new M&A regulatory concept, or ‘mergulation’ (which is the acronym of ‘ merger’ + ‘re gulation’) based on quantification of risks and/or risk matrix integrated into the system of the post-crisis regulatory paradigm and focused on maximization of the post-M&A synergetic effect while minimizing risks of consolidation abandonment and failure. It is strongly believed that ‘mergulation’ alone can become a risk management platform for financial stability.

Some results of the research on this topic were published in The Banker Magazine / Financial Times in April 2014 and also presented at the 4th European Conference on Banking and the Economy organized by the Association for Research in Banking and the Economy in cooperation with University of Southampton in October 2016 inWinchester city, U.K.

During the seminar discussion it was noted that the proposed ‘mergulation’ concept might be of interest to international banking regulators (Financial Stability Board, FSB; Basel Committee on Banking Supervision, BCBS), for which it was recommended to present core aspects of the proposed concept and the research outcome to the authorities that organize the next G-20 summit to be held on July 7–8, 2017 in Hamburg, Germany. Besides, the author was also recommended to prepare an academic article on this subject for further publication in one of the leading Russian or foreign economic editions.