IS BANKING CONSOLIDATION AT ODDS WITH FINANCIAL STABILITY? THE CASE OF INDIA

Paper Number :WP46/2024
Publication Date :May 29, 2024

This study explores the concentration-stability nexus in the context of a spurt of restructuring mergers that have taken place in the Indian banking sector in the recent past. Using the contingent claims approach (Merton, 1974), we measure the vulnerability of the financial system over time as well as constituent banks’ contributions to systemic risk both before and after the mergers and during different stress periods in financial markets. Through our empirical analysis, we establish that merged entities have contributed more to financial instability. However, the destabilizing effect is primarily due to banks’ standalone risk profiles and ownership characteristics rather than size-based concentration. The results have significant policy implications both in terms of identifying and monitoring systemically important banks and for regulatory oversight on bank consolidations.