Consolidations and Involuntary Huge Equity Alteration Duress: Exposing their Contemporaneous Dynamic Influence on Small Risk Asset Creating Propensity of Merged Banking firms

Abstract

We investigated how bank consolidations, and sudden involuntary capital variations organically influenced small risk asset creation abilities of Nigerian banking firms based on the framework of Monti-Klein Theory for making effective lending policies. Within the past decade, banks in Nigeria have in many occasions been mandated to change their capital base within a limited time too short for such exercise. As a survival strategy, they resort to involuntary consolidations. We fear that this sudden mergers and involuntary alteration in equity level could blow banks to focus abnormally away from small risk asset creation thereby resulting in small business loans’ disequilibrium. The information regarding this likely effect has remained substantially asymmetrical constituting a real gap. In near future, if the gap remains, policy capable of pulling down the entire economy could emerge. While previous papers had attempted to solve this problem, data limitations must have made them derail from the target especially by engaging insufficient bank data, which can only capture the pre-merger implication. In this present paper, we surmounted this bottleneck by using up to 6 years post merger data. Unique to this paper, we selected 24 banks that involuntarily emerged and/or recapitalized after N25billion bank recapitalization-mandate for study using an Ex-Post Facto as a research design. Using data from Central Bank of Nigeria Bulletin and databases of banks we sampled for study, we found that bank consolidations under duress negatively and significantly influenced fully restructured banks’ propensity to create small risk assets. Moreover, we found that when change in equity was sudden, unplanned and involuntary, the effect on fully restructured banks propensity to make small loans was organically negative. Specifically, banks whose equity condition positively alters overnight due to involuntary consolidations break a significant proportion of their lending relationship with small business borrowers in the long-run. This means that involuntary consolidations and sudden equity change limit significantly the consolidated banks’ ability to create small risk assets. Based on these results, we recommendation that regulatory authority should not seek to increase lending to small businesses by encouraging sudden and involuntary bank capital adequacy through bank consolidations.

Keywords: Mergers, Acquisitions, Consolidation, Small Businesses, Equity Condition, and consolidation duress