Canadian bank mergers, rescues and failures

This thesis consists of three essays. The first essay (thesis chapter two) investigates the 29 bank combinations between 1900 and 1931 that reduced the Canadian banking sector from 35 to 11 banks. The concentration of the Canadian banking industry is examined using the four-firm and the Hirshman-Herfindahl (HHI) indexes using monthly data on bank branches per institution and region, and nationally. Most of the substantial increase and variation in bank concentration in the national and regional HHIs based on bank branches are explained by merger activity. The second essay (thesis chapter three) examines the merger of La Banque Nationale (LBN) with La Banque d'Hochelaga (LBdH). This merger was facilitated by a generous financial arrangement with the Quebec government, and continuing federal government loans. As Bennett and Loucks (1996) conclude, political connections ensured a long period of forbearance for LBN and facilitated LBN's rescue. Accounting and reporting window dressing also assisted the rescue of the economically insolvent and too-important-to-fail LBN. These findings support the conclusions of Kryzanowski and Roberts (1993, 1999) that forbearance and window dressing played an important role in preventing the failure of many Canadian banks during the 1920s and 1930s. The third essay (thesis chapter four) examines the failure costs of the 29 Canadian bank failures since Confederation for various stakeholder groups over four sub periods with different safety net regimes. The determinants (including safety net regime) of four total loss measurement metrics are estimated. With the introduction of explicit deposit insurance and the abolition of double liability, the proportion of total losses directly borne by banks and the government increased significantly, and the proportion borne directly by shareholders of the failed bank decreased significantly. This finding supports the conclusion of Kane (1985) that deposit insurance creates moral hazard among bank stakeholders. These results also extend the work of Kryzanowski and Roberts (1993, 1998, 1999) by suggesting that forbearance heightened bank-specific losses and lessened bank industry-specific losses during the two most recent sub periods due to careful monitoring and control of bank failure and closure by the government and the CBA (Canadian Bankers Association