Calibration of the International Reform of Banking Regulation to Curb Risks Associated with Banking M&A

On April 10–13, 2018, National Research University Higher School of Economics (HSE) hosted the XIX April International Academic Conference on Economic and Social Development.

Since 2000, HSE’s April conferences have been bringing together renowned academics and experts from around the globe. Intense debates at the conference stimulate a plethora of new ideas across a range of academic fields and provide deeper insights into the research process.

Eduard Dzhagityan, Associate Professor, School of World Economy at HSE, spoke at the session on the topic: “Perspectives of macrofinance regulation of banking consolidations in the context of the international reform of banking regulation”. The coherence and integrity of organizational consolidations in the banking sector, including their cross-border segment, depend on a number of micro- and macro-level factors that determine the boundaries of banking M&A and the perspectives of their successful implementation. This includes the increased volatility of global financial markets, information asymmetries, and adverse externalities. Despite numerous discussions around how to achieve financial stability, the M&A processes have so far remained beyond the attention of international regulators. A significant number of failed M&A transactions (according to various sources, they account for 60–90% of all consolidations) pose higher risks to the resilience of the banking sector, which is a key factor of the contemporary regulatory reform.

Dr Dzhagityan continues to search for tools and techniques quantifying the M&A processes using micro- and macroprudential regulatory instruments. However, the lack of fundamentals that would specify completeness of the M&A deals renders it difficult to assess the applicability and soundness of the post-crisis regulatory paradigm for banking consolidations. Systematization of risks associated with the M&A processes could become a foundation not only for a new concept of M&A regulation, but also for the calibration of the banking regulation mechanism at large.

How the concept of M&A regulation will meet the objectives of minimization of systemic risks and financial stability, and the extent to which it will do so, will depend the credibility of contemporary regulatory policy, as well as the perspectives of internationalization of banking regulation, including Basel III as its technological hub.

The author’s search for necessary and valid prerequisites for M&A regulation is conducted via measurement of systemic risks, taking into consideration their variety and the specifics of the mechanism of their minimization. At the same time, due to the shortage of micro- and macroprudential regulatory instruments and the fragility of the M&A processes in the banking sector, banking M&A supervision would require a crucially different understanding of the mechanism of post-crisis recovery. First and foremost, this would be through strengthening risk management priorities and its credibility in achieving financial stability. Filling the regulatory vacuum which surrounds M&A supervision will not only reduce the number of failed deals, but will also encourage a synergetic effect, which is key for any organizational consolidations.