Mergers and Acquisitions in the Context of Global Credit Crisis

Introduction

Financial crisis is a bubble created by excessive investor inclination
towards a particular market. It shadows the valuations and when the bubble
bursts, the investors want to exit and therefore rapidly start selling their
stake.

Too much of capital led to lower interest rates and this in return
forced the investors to look for creative investment platforms where the yield
was high. This requirement led to an unprecedented growth in the securitization
market as the inclination towards such derivative instruments was high.
Investors were willing to take higher risks as compared to the returns they
would receive for their investments. Greed for higher returns, excessive
leverage and low volatility led to the financial crisis of 2008. This low
volatility which was a result of shadowed valuations led the borrowers to
borrow over and above what their asset base allowed notwithstanding the
criteria of credibility.

However, prior to the crisis there was a strong merger wave that took over the world financial markets. In the wake of the strong and sustained economic growth, high corporate profits and competition; the M&A activity thrived. But soon this wave came to an end due to the skepticism of the corporate managers about the instruments of structured finance. This wave was classified by a cash sub set and excessive cash reserves of the bidder destroyed the value for the target. During this period the valuation diversity between the target and the bidder was less. In the backdrop of relaxed regulatory regime the decisions that were taken were more rational.[1]

The desire to seek higher returns while diversifying risks had led to
the crisis which further led to consolidation in the banking sector as a means
to combat the effects of negative synergies that the crisis had entailed. Merger
seemed a viable option[2] as
the government players and the robust banks with better credit and equity
positions directed their efforts towards smaller deals with acquisitive
advantages. This included targets with weak credit and equity standing. Though
effect of the crisis that originated in the US housing market did not reach the
banking sector till 2009.

Despite high leverage in the market, there was fear looming over the
Europe which held back the buyout activity. There was freezing of credit and
banking panic that slammed leverage loans. The wall of refinancing was knocked
down as there was a dearth of new buyers for these collateralized loans. [3]

There is a vicious cycle that engulfs the global financial markets. It
constitutes deleveraging of the assets, price decline and investor redemption
that makes the financial markets uncertain and volatile. Crisis of 2008 saw a
decline in the commodity, oil and equity price. Simultaneously, a collapse of
the housing mortgage market made things worse. The residential mortgages were
bundled and sold off as securities in the form of bonds and collateralized debt
obligations. A lot of foreign banks bought these securities.

So when the payers in the US housing mortgage market defaulted, these buyers were affected in their respective home markets. US banks lost money and this gave rise to a liquidity crunch; the receivables from the mortgage loans were stopped as a result of which the return on securities and CDOs were affected. [4]

In response to the prevailing conditions there were regulatory reforms
that the financial markets were resorting to. US introduced Dodd-Frank Wall
Street Act and Consumer Protection Act. A G20 summit called for Basel III
reforms which were however, introduced in 2010 but member states were given
time to incorporate these in their domestic system. In UK about 80 new
legislations were made in order to incorporate preventive measures into the
existing regulatory framework as well as to remove the inadequacies of the
same. [5]

In this essay, we shall be evaluating the regulatory reforms that were
introduced post crisis and its contribution towards the recovery of the financial
markets. We shall also analyze the following thesis question: “Are the risks
inherent in the financial markets or is it possible to regulate these risks and
provide for safer financial markets?”. The first section of this essay shall
enumerate the reasons behind the financial crisis and its impact on the global
financial markets. In the second section we shall study EU’s regulatory and
supervisory response to the crisis and its internationally cooperative
contribution in the G20 meetings. Also in this section we shall focus on the
banking & financial sector in UK. We shall highlight similar changes that
were made to the US regulatory framework. However, section 3 of this essay
shall talk about consolidation of the banking sector as a measure to reduce the
effect of crisis and the role of the government in this post crisis merger wave.
Section 4 shall be attributed to the findings and analysis.

Reasons behind the Financial Crisis of 2008

1. Low Volatility and High Leverage:

Low volatility means that the risk is low as the value of the security
does not fluctuate dramatically but, changes at a steady pace. And thereby
there is more capital available at a lower asset base. This leverage fueled the
rising housing market in the US. A lot of savings turned into investments as
lower risks were reflected at the existing volatility rates.  Thus, the lower interest rates remained low
for a considerably longer duration due to the inability of the Federal reserve
to raise the interest rate amidst such financial conditions. [6]

Tracing the beginning of the problem, let us study the role of Fannie
Mae and Freddie Mac in the US Housing sector.

“Fannie
Mae’s and Freddie Mac’s public purpose is to facilitate the steady flow of
low-cost mortgage funds[7].
Their primary focus is on residential mortgage market and they won’t abandon it
or change lines. Their charter states that the mortgages that they purchase and guarantee
must be below an amount specified by the Office of Federal Housing
Enterprise Oversight (OFHEO). Also, they are barred from entering the business of
other housing finance companies e.g. mortgage origination. They must meet
annual goals established by the Department of Housing and Urban Development
(HUD). These goals center around low and moderate income housing and housing
for minorities. They are subject to risk-based and minimum capital requirements
and annual examinations by OFHEO. Fannie Mae and Freddie Mac
are driven by profits, as their shareholders demand. While fulfilling their
public mission, they make their profit in two primary ways: guarantee
fee income and retained portfolios.”[8]

“Fannie
Mae and Freddie Mac are regulated by the OFHEO (Office of Federal Housing
Enterprise Oversight) and the HUD (Department of Housing and Urban Development (HUD). OFHEO regulates the financial safety and soundness of Fannie Mae and
Freddie Mac, including implementing, enforcing and monitoring their capital
standards and limiting the size of their retained portfolios. OFHEO also sets
the annual confirming loan limits. HUD has responsibility for the
housing mission of Fannie Mae and Freddie Mac.”[9]

“There is no doubt that Fannie Mae and
Freddie Mac played a critical role in US housing finance system. However, there
was a danger in having so much risk concentrated in only two companies. They
managed an immense amount of credit and interest rate risk. Many
critics feel that, due to their size and the complexity of managing mortgage
risk, they posed too large of a systematic risk to the US economy.
Put simply, there was a danger that the two companies have been allowed to take
on too much risk at the potential expense of the American tax payer. To put
things in perspective, according to Treasury Secretary Steel, at the end of
2006, Fannie Mae and Freddie Mac had about $4.3 trillion of mortgage credit
exposure, which was about 40% of total outstanding mortgage debt in the U.S. In the summer of 2007, the
market for all mortgages except those guaranteed by Fannie Mae and Freddie Mac
came to a complete standstill, emphasizing the importance of the roles played
by the two companies. In the fall of 2007, Freddie Mac shocked the market by
announcing large credit-related loses, fueling the fire for the argument that
the two companies pose a tremendous risk to the entire financial system the
impact of which could be seen worldwide.”[10]

2. Financial innovation
during the period in question:

This housing bubble of the mortgage market became
a part of a more attractive system of securitization.[11]
The mortgages tendered to the consumers purchasing houses were pooled together
and sold off as tradeable assets. Due to low volatility the underlying risk was
ignored. After reaching the peak, the market saw a decline and this affected
the securities backed by these mortgages. Due to consumer default and excessive
mortgage, the mortgage market faced a slump and house prices fell. This raised
investor panic.

Although, the conditions preceding the crisis
which are characterized by high risk appetite, high leverage and low volatility
significantly contributed towards the development of structured finance[12]
within the capital markets, it was also one of the main reasons behind the
crisis. The global interconnectedness and the wrongful risk assessment of these
innovative financial structures led to the disruption in the financial markets.

“The assignment of receivables has
traditionally represented a means for trading companies and finance houses to
raise funds readily and to predict the cash-flow with some degree of certainty
and independently from debtors’ defaults.[13]
This was conventionally achieved through factoring agreements whereby a factor
would purchase receivables for a discounted sum or for a periodic commission,
providing thereby necessary funds for the assignor to continue trading without
having to rely on receivables to be serviced.[14]
In its essence securitization developed as a more sophisticated form of
factoring, one of the main developments being that assets are sold to a special
purpose vehicle (SPV) that funds the operation by issuing bonds on the capital
market, secured on the receivables.” This fairly linear process started to be
more extensively employed in the US housing market in the 1970s, when two
government-sponsored agencies—”Fannie Mae” and “Freddie
Mac” began acquiring home mortgages from lending institutions and issuing
securities backed by pools of those mortgages. Subsequently investment banks as
well embraced this financing model, and set up trading departments to
specifically handle these securities. When banks then entered the securitization
market for their home loans new frontiers opened up, with wider classes of
assets being involved in the transaction and a broader category of originators
participating in the market.[15]
Although the vehicle is sponsored by the originating company, it qualifies for
the purpose of the transaction as an independent company and not as
originator’s subsidiary.[16]
The SPV is anyway likely to be an almost non-substantive shell entity, whose
only function is to raise money through the bond issue; complementary
functions, in particular the servicing one, are mostly still carried out by the
originator that will maintain existing relationships with borrowers.[17]
This risk mainly affects US courts, where assets and liabilities of an entity
affiliated to the insolvent one can be merged to create a single common estate
for the benefit of creditors.[18] “If
the sale was to be legally characterized as a security the assets would remain
on the originator’s balance sheet, as well as their underlying liabilities,
hampering therefore the function of the transaction. [19]
Securities issued by the SPV are then rated by credit rating agencies, and at
this stage of the transaction bonds receive a higher rating than would
otherwise be obtained by the originator directly through a bond issue, chiefly
because of the insulation of the former from the originator’s assets and
business.”[20]

Over the last two decades securitization has
blossomed, both among financial institutions that could obviate the maturity
mismatch intrinsic to the lending business (especially in the context of
mortgages) and also bypass capital adequacy requirements, and among
corporations and government agencies wanting to get most of the profits of a
certain cash-flow up front. To fully appreciate the advantages of securitization,
however, an initial examination needs to look at the regulatory incentives
provided by the first enactment of the Basel Accord of 1988.[21]
The Accord and the ensuing harmonized capital regulation provided the major
incentive for the development of the “originate-and-distribute” model.[22]

The way in which loans and other assets
weighted on balance sheets became critical in the way banks started to manage
risk accumulation by separating this process from that of credit origination,
and by intensifying balance sheet management. This new model allowed banks to
lend to a wider pool of borrowers without necessarily having to hold those
loans to term on their balance sheets. Loans became the subject of negotiations
among banks and other financial institutions, such as investment funds, which
were all keen to get involved in the debt finance market where they could
originate loans, sell the relating risks to a wide range of investors and thus
remain insulated from potential defaults. The legal mechanisms through which
this twofold purpose could be achieved—namely the compliance with capital
requirements and the risk-shifting off-balance sheet—can be identified with securitization
technique.[23]
While improving its financial ratio, originators can also improve the return on
capital because they have removed assets and liabilities from their balance
sheet while still retaining relating profits.[24]
From a strategic perspective, securitization provides originators with a
corporate finance tool that liberates them from the tight terms of general loan
agreements employed by most banks. This is for the simple reason that the
bargaining power of investors purchasing bonds is much less constraining than that
of a dominant bank that is in a position to negotiate and enforce restrictive
covenants. [25]

The off-balance sheet structure can
potentially lead to the more problematic issue of the originator’s disincentive
to monitor the quality of the receivables it originates, since they become the
property—as well as the burden—of some other entity further down the
transaction chain. It is worth observing that during the years prior to the
crisis this became particularly evident as demand for securitized products increased
dramatically, leading originators and CRAs to conduct little due diligence on
underlying assets, and overall the exuberance that permeated the economic
environment led to a decline in the level of transparency of transactions, as
well as in their supervision.[26]

“Moving to collateralized securities, such
as, for instance, residential mortgage-backed securities, which are subject of
a securitization, so representing in essence a securitization of securitization.
CDSs can be more closely associated with derivatives and can be defined as a
type of protection against default, whereby the seller of a CDS agrees to pay
the buyer if a credit event occurs, and the buyer agrees to pay a stream of
payments equivalent to the payments that would be made by the borrower. Since
the seller of the CDS receives payments that resemble a loan, the CDS can be
regarded as a form of synthetic loan, and a mechanism to acquire credit risk of
an unrelated party. Arguably, the over-exposure to these products in the broad
context of the global crisis is what triggered the downfall of the insurance
giant AIG.” [27]

3. Role of Credit Rating
Agencies (CRAs):

Credit rating agencies rate not only
institutions but also credit instruments and securities. It is mainly about the
concept of investment grade[28] –
a rating given by these agencies keeping in mind a certain threshold. The CRAs
hold the view that these ratings are not for the purpose of triggering the
decision whether or not to invest in a security but they give relative
information about the credit worthiness of an institution. CRAs are exempt from
civil liability for their core activity and their financial duty of care as
such does not exist. [29]

In US there was a system of nationally
recognized CRAs called NRSRO[30] i.e.
Nationally Recognized Statistical Rating Organizations. This status gave CRAs
an unparalleled reputation and investor confidence. There was a privileged
market position for CRAs with this status. Apart from rating institutions and
securities CRAs were also caught in a web of ancillary services[31] where
the anticipatory expectations of the enterprises affected the quality of
information that reached these CRAs which inhibited the ratings. Official
recognition has more cons than pros. For instance, the status of NRSRO given to
CRAs in US led to over – reliance on their assessments as they were implicitly
taken to be backed by government that would indemnify any losses generated from
wrong credit ratings. It also inhibits new entries in the field and thereby
hampers innovation of assessment methodologies and new technology from coming
in .[32]

CRAs were insufficiently equipped in both
qualitative and quantitative terms. They had no rules of procedure to follow
for assessment of RMBS and CDOs.[33]
The activities of the CRAs were non- transparent and their credit ratings were
heavily relied upon by the investors specially with regards to investments in
securitized instruments and collateral debt obligations. Also, CRAs did not do
significant research about the underlying assets in RMBS and CDOs. For
instance, certain loans underlying RMBS had no documentation. [34]

Considering the Enron scandal that raised
concerns, let us understand what exactly happened. Enron was a company in the
energy sector that generally received good ratings from CRAs. However,
eventually it ended up filing for insolvency. Prior to this step the company
was in talks with Dynegy Inc. regarding a merger. Enron wrote down assets worth
US $ 2.2 billion and though there was a further write down of USD 500 million,
the CRAs ignored this at the behest of Enron that talks of merger are in
process and improvement in the financial condition of Enron was assured. As
things unfolded it became clear that Enron could not survive without a merger
and a balanced merger agreement seemed a far-fetched idea as Dynegy had backed
off. Seeing this the CRAs were adamant at reducing the ratings of Enron from
investment grade to a notch above junk. Post filing of insolvency by Enron
these ratings went into negative. [35]This
shows that credit rating agencies were lax in dealing with the information
available to them. They had detailed information about the financial position
of the companies but they just restricted its use. Like in the case of Enron
off balance sheet inquiries were ignored and only cash flow was assessed.[36]

Regulatory Reforms Post Crisis

In EU the crisis was able to takeover mainly
due to the inherent regulatory and supervisory flaws in its system. However, the
crisis that originated in US had spread its terror in EU as well. The
interconnection of global financial markets had played its role. It was evident
from the need for nationalization of Northern bank.

Northern bank had to be nationalized to stop the upsurge on
the road. In the wee hours of the morning people lined up at various branches
of the bank. The investors and depositors wanted to withdraw their money from
the bank. The bank was based on the warehousing model and was heavily relying
on securitization as a means of generating liquidity for its loan generation.
It was under a compulsion to issue bonds every three months and in September
2007 when the crisis began to show its colors, an installment of bonds had to
be issued by Northern bank. This was because most of its lending was financed
by mortgages that it bundled into such securities. So, once the US housing
mortgage market failed, the international buyers of these bonds grew skeptical
and ran to withdraw support. They were not ready to finance the model on which
Northern bank was generating capital for its loans. Northern bank had no
alternate source of funding. Hence, government was left with no other option
than plumbing liquid into the financial markets and guaranteeing the deposits
of Northern bank. This provided short term relief but could not stop the
collapse of the banking sector in UK.[37] The
banks failed to assess the underlying risks associated with the
inter-relationship of the markets and did not imagine the derivative
instruments suffering at the hands of the skeptical investors.

Need was felt for a coordinated action to the crisis and
thus, certain short term and long term measures were taken by EU. One such
measure was introduction of European Economic Recovery Plan (EERP). The
objective of EERP is to limit the negative consequences of the crisis by
injecting capital to stimulate demand and purchasing power in the short term
while increasing the competitiveness in the long run. [38]
This fiscal stimulus accounts for 5% of the EU GDP.[39]
Long term measure included the establishment of European System of Financial
Supervision (ESFS). This was mainly established in 2010 to bridge the gap in
institutional framework. It comprises of European Systemic Risk Board (ESRB)
and European Supervisory Authority ( ESA).[40]
The former would focus on macro prudential supervision while the latter on the
micro prudential supervision. The primary role of ESA is to codify the EU rule
book and draft technical standards that can be adopted as EU law.[41]
The decision of the ESA would be legally binding on the national supervisory
authorities and firms.[42]

Another important step that was taken was revision of the
Capital requirement directive (CRD) to incorporate Basel II in EU law.[43]
Basel II increased the capital adequacy requirements. Basel accords are a
series of recommendations on banking laws and regulations issued by Basel
Committee on Banking Supervision.[44]
However, the financial crisis intervened and Basel III was adopted. “The G20
Leaders at the Seoul Summit endorsed the Basel III framework and the Financial
Stability Board’s (FSB) policy framework for reducing the moral hazard of
systemically important financial institutions (SIFIs), including the work
processes and timelines set out in the report submitted to the Summit.”[45] “The
framework includes an internationally harmonized leverage ratio to serve as a
backstop to the risk-based capital measures. The new framework will be translated
into the EU national laws and regulations, and will be implemented starting on
January 1, 2013 and fully phased in by January 1, 2019.” “In response to
this call, in 2012 the Committee initiated what has become known as the Regulatory
Consistency Assessment Programme (RCAP). The RCAP process will be fundamental
to ensuring confidence in regulatory ratios and promoting a level playing field
for internationally-operating banks.”[46] Basel
III requires a 4.5% common equity ratio to risk weighted assets. It has
strengthened capital requirements for complex securitization transactions and
requires banks to conduct rigorous credit analysis. Under Basel III the minimum
capital adequacy ratio is 8%. [47]

Also EU targeted other important flaws in the system with
respect to Alternative Investment Funds (AIFs), in particular hedge funds[48].
A directive on AIF was made which regulated funds instead of managers. AIF
managers who have European passport can only provide services[49]

CRAs were also heavily regulated. Third country ratings were
acceptable if governing regulation were similar. The idea of European Credit
rating agency took birth.[50] “
In the European Union, apart from the annual monitoring by the Committee of
European Securities Regulators (CESR) of compliance with the Code of Conduct
Fundamentals for CRAs of the International Organization of Securities
Commissions (IOSCO), there is no supervision yet on the ins and outs of CRAs.”[51]
“CRAs are out of reach of Directive 2003/125 as regards the fair presentation
of investment recommendations. However, the European Commission is of the view
that CRAs are obliged to disclose conflicts of interest as a result of art.1(8)
in conjunction with point 10 of Directive 2003/125.”[52] “There is a CRA regulation of 2009 in place in the European
union to deal with the supervising of CRAs. It establishes a centre point for
registration of CRAs which makes their administration and governance by the EU
norms easy. This way it becomes easier for the supervisors at national level to
deal with CRAs efficiently. This happens by way of single registering body that
has information about all the CRAs in the zone. National supervisors operate on
site and job of supervisors is not related to scrutinization of method by which
ratings are assessed by the CRAs.”[53] It
is further stated that no one CRA shall be associated with a client for more
than four years. Also, CRAs shall not indulge in any other function than credit
rating. “The idea of the Commission is to achieve increased transparency and
integrity by, respectively: (1) keeping data and making them public; and (2)
adopting procedures to prevent abuse of relevant non-public information,
unpermitted conflicts of interest, forms of abuse of market position, and
practices deviating from established methodologies within the CRA.”[54] “The
Commission also proposes that the body or part of the board of a CRA that
supervises the board must at least have three independent non-executive
directors, in accordance with item 13 s.3 of Recommendation 2005/162.”[55]

Post crisis banking sector in UK also saw some worthy reforms
in its regulatory regime. A lot of changes were introduced in the banking
sector. In Dec,2011 tougher restrictions were imposed on payment of bonuses.
About 20-30% banks were advised to defer the payment of such bonuses for the next
three to five years. Also, the banks were encouraged to claw back the
compensation in case employee proves to be a non-satisfactory contributor.
Further, banks were levied with a temporary annual tax on their balance sheets
at the rate of 0.04% in January 2011 which was made permanent in 2012 at the
rate of 0.088%. [56]
The Financial Services Act replaced the Tripartite structure. [57]The Bank of England is responsible for looking after the money markets
while FSA administers bank and consumer interest. The treasury provides funds
for this. The financial policy committee ( FCP ) watches the Prudential
Regulation Authority (PRA) and the Financial Conduct Authority ( FCA). The
former  ensures sound financial health of
the firms, whereas the latter ensures compliance with rules and consumer
protection.[58]  Ring fencing is another thing; where the
Investment banking arm is separated from the other functions that a bank has to
perform. The banks in UK can write down the interest of certain loss facing
credits and convert it into capital. Bonuses are paid partially in shares and
not entirely in cash. The Senior Manager and Certification Regime clarifies the
responsibility of the top management of banks and allows the regulator to hold
senior personnel liable. Banks have to now disclose the material risks they
take. Also under these guidelines new criminal sanction to punish failure of
banks are established.[59] “Under
the Financial Services Compensation Scheme up to £85,000 of each customer’s
deposits are now 100% protected – up from £2,000 in 2007. This scheme, which is
funded by the banks, covers 98% of customers.”[60]

Internationally, EU has been very cooperative
in G20 meetings and negotiations. It agreed with regards to principles of
accountability, transparency, stringent regulatory framework, integrity of
financial markets. EU states also agreed to act for economic growth post
crisis. [61]

Consolidation in the Banking Sector

Mergers come in waves. The sound base for a
wave is a more over-valued firm acquiring a less over-valued firm. [62] There
are reasons for M&A activity to take place. The force behind it ranges from
financial performance to technological innovation to market trends. Improvement
in the financial performance is expected by lowering the costs within the same
revenue stream. These costs are reduced by economies of scale, financial and
operational synergies and better management. The ultimate goal is of course
profit maximization. Then, there are tax benefits and expansion of market
share. Further, risk diversification, flourishing regulatory shifts etc. also
contribute to the rise in M&A activity.[63]

Effects of M&A could be both positive or
negative. There could be value creation or value destruction. There could be
abnormal returns in the long run and the short run with of course varying
affects. It could be that the initial over-valuation of the acquirer leads to
the future underperformance of the target. However, success of a merger depends
upon how well are the organizations integrated.[64]  

The financial crisis that began in the US and
trickled down to the global banking sector brought the inherent weakness of the
EU’s banking regulations out. Fortis and Dexia became first EU banks to be
rescued.[65]
The impact of the crisis was seen more in developed markets than in emerging
markets. That is concentration was taking place more in developed countries than
in emerging markets. Consolidation in the banking sector was highest in US and
UK. This affected the competition in long run as due to high market share banks
would charge arbitrary interest and fees or increase these charges. On the
contrary there could be lack of competition due to monopolization.[66]
“In the long run, evidence from extant literature suggests that the
consolidation process and increase in bank concentration driven by a financial
crisis will reduce after some time. Indeed, concentrated banking systems may
reduce fragility by boosting bank profits, which might strengthen the banking
system and create incentives for new banks to enter the market. Thus, we
anticipate that bank concentration in markets that experienced crisis-driven
consolidation will eventually decrease.”[67]

During the period of crisis community banks
were the main targets. Cross border consolidation not only increase the asset
base of the distressed banks but also diversified its risks. [68]

The mergers during this period can be termed
as “Shotgun M&A”. [69] The
banks with the weaker position could merge with the ones that were in a better
financial position. The resources from these banks could help the banks in
trouble to bail out from it. These deals need not necessarily be large deals.

As the crisis of 2008 caused the Bear and
Stearns and Lehman Brothers to surrender, the US government encouraged mergers
amongst the investment and commercial banks. They set aside anti-trust
regulations in practice. The government supported these “shotgun” mergers by
either funding them or guaranteeing them.[70]
This was done by bringing the FDIC[71] (
Federal Deposit Insurance Corporation) and TARP ( Troubled asset relief
programme) guarantee.

This stabilized the condition in the short
run but posed problems in the long run. Three main US banks[72]
held about 45% of the assets of all US banks. [73]
These kinds of consolidation tend to pose regulatory problems as the regulators
tend to be co-opted by the industries they are regulating.[74]
These consolidated giant entities would want big investments and clients. They
may force smaller borrowers to use non-bank funding which is restrictive in the
terms of banking functions that they have to offer. They charge higher interest
and pose a risk of lopsided market conditions flaring up. If there has to be
consolidation in the banking sector, we cannot neglect the need for regulation
on transparency. The tax payers are entitled to know how the government is
using their money in the time of crisis to bail out distressed entities. This
helps eliminate systemic risks and also render confidence to the investor which
are essentials if a merger has to be successful. Deregulation contributed to
the crisis by opening the gates of global financial markets. [75]
Basel II, Pillar 3 deals with the matters of transparency. In US the
Sarbane-Oxley Act in section 401 deals with the standards required for
reporting of off balance sheet assets. [76]

Then the question arises how do we fund these
transactions amidst the crisis. We can use bank lines of credit. It is a short
term solution where unsecured credit is given for a specific period at a rate
above LIBOR or standard market rate. This also helps generate commercial papers
from credit worthy companies without any collaterals. [77]

There are certain problems with the “shotgun”
mergers. Century old anti-trust regulations were set aside so that mergers
could take place that would prevent the collapse of the financial markets. As a
result, large banks got excessive powers to the extent that it became difficult
for them to be regulated. Bank transparency shoud be the norm. Banks do not
generate enough capital from basic lending activities and therefore the complex
structures call for adequate pricing.”[78] “Although
the pricing discussion should focus on the cost of and returns from lines of credit,
banks have traditionally underpriced specific products to meet competitive
pressures. This is a highly debatable process in the context of the prospect of
bank failure and the requirements of Basel 2. Taxpayers should not be
subsidizing underpriced lending facilities to large corporations, when similar
relief is not available to medium sized and small business or to individuals.”[79] The
struggle to earn cost of capital led the bank to adopt risky strategies like
employment of CDOs, sub-prime lending and faulty risk assessment. Cost of
raising capital and means of credit lines shall be understood with regard to
both the cases where the lines are secured as well as unsecured. The banks
should strive to generate enough capital to meet the adequacy requirements, and
hence, avoiding the possibility of any shotgun merger. ”[80]  Banks were accepting high
risk for mediocre returns. There was a a lot of over-valuation and underpricing
in the market due to the role CRAs had to play in credit rating. CRAs deal with
similar kind of information that is required for M&A transactions. The
right way to go about it is to know in detail about each bank’s organization.
It also helps to direct the efforts in meaningful market and to have asset data
related to different product lines in a particular market. [81]

Strategic buyers appear to be more bullish on
the outlook for the mergers and acquisitions market than their private equity
counterparts. ”The three-month long survey, conducted in the fourth quarter of
2007 and the first quarter of 2008, examined merger and acquisition activity
during the ongoing credit crunch. Strategic buyers are more optimistic than
private equity buyers: 51 percent of strategic respondents said worsening
market conditions will serve as a catalyst for an increase in M&A deals. Mid-market
deals less than $500 million are expected to dominate M&A activity in the
next year, with technology and financial services likely to be the most active
sectors for deal making, according to the survey. Reflecting the apparent
pullback by private equity, 78 percent of executives predicted the number of
strategic deals will surpass private equity deals as a result of the tightening
credit markets. More than three quarters of executives also expected private
equity bid premiums to fall between 10to 25 percent, while half expected the
premiums on bids by strategic buyers to fall by that amount. Falling equity bid
premiums open the door for strategic buyers to win bids, Green said.”[82] “The
survey clearly indicates a more challenging and uncertain M&A environment,
with deal sizes expected to drop and disagreement over whether more attractive
valuations can offset the effect of tighter credit in terms of deal
volume,” the credit crunch appears to have shifted the playing field, at
least temporarily, toward strategic buyers are expecting smaller and perhaps
fewer deals and seeking more assurances.”[83]

Another thing is regarding the good bank and
bad bank model. Bad banks are a useful and important strategy for dealing with the
problems of failing banks. A bad bank is an entity created to hold the
defaulting assets of the good bank and thereby helping the good bank get rid of
its financial difficulties.[84] “
The key concept is that the difference between the market value and the current
value of the bad assets is the loss that the shareholders bear. The government
indemnifies these distressed shareholders by purchasing an equity stake in
these bad banks. The concept is viable independent of whether a government
decides to have one centralized “bad bank” or to establish a separate “bad
bank” for each systemically relevant banking institute.”[85]

Bad banks are a third entity created to keep
the non-performing assets from the balance sheet of good banks. It is like
third party creation in a triangular merger but very different in its basis.
This bad bank could be a corporation or a bank. Thus, non-performing assets are
managed by bad banks and the other entity retains and manages the performing
assets. The bad banks are given the tedious task of turning these bad debts
into receivable and generate value. Once the banks are freed from troubled
assets and the need to constantly write down asset values, the negative effects
associated with the threat of bankruptcy, a reduction in lending due to a lack
of capital, and the readiness to take risks at the expense of creditors and the
general public, can be minimized or eliminated.”[86]

In this kind of a structure the assets are
dealt separately and hence, it gives good banks a comparative advantage because
it keeps their cost of generating capital and cost of lending low because they
are not burdened by the need to turn the bad debts into good. However, one
major drawback with the system of bad banks is that, in the end they might need
government bail-out ”[87]

“The purpose of bad bank approach is not to
diminish the existence of these firms but their resurrection. It is a
restructuring mechanism where life is brought back to the bad banks in a 3-5
years span. The bad assets are dealt with in a way that it generates returns
but for this no new investment is made. But the old investment is recreated and
dealt in such a way so as to minimize the loss to the shareholders. The
creation of the “bad bank” should also entail a special legal and taxation
framework which will stimulate the participation of banks and other investors.”[88]

“The European commission has come up with
asset sale or asset insurance schemes and tried to regulate its framework
procedurally as well as substantially. It explains the budgetary implications
of such programmes and the basis on which state aid shall be given for the
same. The guidance for the application of the state aid rules is based on a
number of principles like there shall be proper disclosure of the impairment
before the government intervenes. It is expected that there should be a
coordinated action to assess the asset categories that need bail out and their
valuation. This should be done by independent entities and persons. There shall
be a uniform assessment criteria on the basis of which the EU commission shall
grant acceptance to the valuation of bad assets. The burden shared by the
government has to be adequate with relation to the shareholders and the
creditors. Also, state shall be given adequate remuneration for the help that
it provides.“ [89]

Conclusion and Analysis

The crisis generated in US and tricked down
to other industrial economies. This became possible due to the
interconnectedness of these markets with US securitization market. However, the
gravity of impact depended on the extent of the relationship. In UK there was
not much growth of securitization and its models until after the crisis.
Northern bank failed because of the inherent model of its operation and loop
holes in the regulatory framework. In Europe the advent of the financial crisis
was largely motivated by domestic issues of weak supervisory and regulatory
frameworks.[90]

The regulatory reform that can be seen taking
place after the crisis is more complex and more difficult in its enforcement.
It can be seen as a measure that would have reverse impact. It shall reduce the
availability of credit and affect the economic growth. However, the structured
finance market declined in value but not in structure. There are certain
problematic features of the market that need to be catered and those require
more structural reforms and less of regulatory reforms. [91]

“To begin with Basel reforms have ensured
that their new versions are ever more complicated than the previous ones. The
Basel accord aims to make the banking system safe by ensuring levelled playing
field for the banks and being responsible for risk management at individual
bank level. In its attempt to level the playing field, it has ended up
increasing covariance of bank exposure and there is nothing in the accord to
combat this. In the situation where there is inconsistency with respect to
institutional environment of different countries and the endogeneity of risks,
there are certain changes that Basel accord needs to incorporate. May be
removing the focus from risk weighted capital adequacy to formulating better
norms for use of leverage or unweighted capital come of some use.  While some variation in risk weightings
should be expected with internal model-based approaches, the considerable
variation observed warrants further attention.”[92] “The
banking firms became so large and interdependent that any systemic failure
would lead to collapse of the entire system. It was mainly due to the cross
trading of risks. The overall objective is the application of merger control in
a manner that takes into account the requirements of financial stability for
the banking system whilst preventing the creation of anticompetitive market
structures.”[93]

“By trying to put all banks in the same line
by trying to deal with the risk in a similar way is absurd. By encouraging
banks to increase the number of low risk assets in their portfolio serves no
purpose as soon the supply of capital for these assets increases and the
excessive liquidity directed towards these assets makes them risky. Basel’s
approach to risk weighting, along with the US approach to sanctioning certain
ratings agencies and the passive acceptance of these ratings by regulators
generally, led to an explosion in the revenues of these firms and a fundamental
change in their internal incentive systems.”[94]

Regulations encouraging or requiring other
financial intermediaries (insurance companies, pension funds, etc.) to hold
highly rated instruments also contributed to the increase in demand for these
assets and the rewards for those who could create what appeared to be safer
assets. Ignoring the endogeneity of risk is innocuous in normal times but
deadly in a crisis, because it encourages a simultaneous run for the exit, that
is a simultaneous dumping of assets and drying up of markets for these assets
as only sellers are to be found.[95]

A lot of time of the regulators went in
interpreting the complex regulatory norms rather than exercise the powers that
they had. Like the FSA did not supervise Northern Rock properly. “It did not
allocate sufficient resources of time to monitoring a bank whose business model
was so clearly an outlier; its procedures were inadequate to supervise a bank
whose business grew so rapidly. The failure of Northern Rock, while a failure
of its own Board, was also a failure of its regulator. the FSA appears to have
systematically failed in its duty as a regulator to ensure Northern Rock would
not pose such a systemic risk, and this failure contributed significantly to
the difficulties, and risks to the public purse, that have followed.”[96]

As mergers take off a lot of banks tend to
focus on their individual growth and also their executives tend to be biased
toward personal gains. (Not to ignore the role of market for corporate control
and agency costs) So, basing the executive remuneration on the rate of return
can lead to enlarged risks. Mergers also converted the investments banks into
commercial bank holding companies because initially these banks worked on a
partnership model but after financial globalization they tend to be more
focused on the shareholder benefit, thereby stripping the need to work for the
gain of the firm.[97]

“Cross-border banking integration is not a
uniform development within the euro area. A division exists between the larger
countries’ banking sectors and the smaller ones. Larger banking sectors’
transactions are more domestically focused and the majority of acquisitions are
by domestic banks. For the smaller banking sectors, the nature of transactions was
predominantly international, including the euro area. But, with the exception
of Spain, there do not seem to be diverging trends between the ‘pre–crisis’ and
‘post-crisis’ period in terms of geographic integration patterns, other than
the clear fall in the number of M&A deals. Secondly, data on the most
active acquirers and sellers tentatively confirm that distressed banks have
used both divestments and capital injections to strengthen their balance
sheets, whereas stronger banks seem to have used the capital they raised during
the crisis to expand. Often these large banks have divested more on their
domestic markets and expanded throughout the rest of the euro area. Therefore,
given their size, these banks are a crucial element in cross-border banking. The
impact on the various different banking activities, such as retail and
wholesale activities, is not yet visible. Furthermore, the effect on other indicators
of banking integration such as  mortgage
and deposit rates across countries is yet to be ascertained. Further
investigation will have to reveal the impact of the financial crisis on these specific
aspects. Although a more cautious pace of expansion may have been expected in
the light of the crisis, some banks have clearly seized the opportunity offered
by the crisis in terms of cross-border expansion. Yet, most institutes have
slowed their venturing into further cross-border integration for the moment. If
this trend were continued it could herald an important change in the landscape
of the euro-area’s banking sector.”[98]

Also we shall note here that generally the
information on which CRAs rely are the same that the MnA investors look at. So,
indirectly the CRA ratings help the bidders accurately price targets and hence
decide upon the premium to be paid to the target. CRAs are often in the
possession of information that is non-public and confidential. This reduces
information asymmetry. Thus, credit rating fluctuations affect diversification.
[99]
It is generally seen that bidders with higher cash ratio have better rankings.[100]
The firms with credit ratings generally have been seen to have had less price
revisions during the book building process, in comparision to those that do not
have a rating. This reduces uncertainity about the value of the firm.[101]
“The CRAs can downgrade the credit ratings of the bidder if he misuses his
investment policy and raise cost of his capital. However, in low interest
environment the interest rate difference between the different ratings is less.
Hence, leverage buy-outs take precedence. Therefore, during the period of
crisis when the CRAs were responsible for incorrect ratings that affected true
risk assessment and the merger drive based on these ratings would be affected
in the following way :

1. Bidders with higher ratings would give low
   premiums and vice versa.
2. Targets with ratings are appropriately
   priced. Hence, no risks associated with underpricing and over valuation. It
   shall be reflected at true value, hence, premiums are low in case of rated
   targets as opposed to non-rated ones.”[102]

“The interpretation of the crisis with the supervisory community that it demonstrated that market monitoring does not work, and therefore that they must step up their efforts, is ill founded. more rules, with little attention to information and enforcement. Instead, the conclusion might be that supervisors should be spending less time on risk management and more time mastering – and disclosing – information that is in the market. Thus two further key changes then are suggested. First, whatever regulators and supervisors do, they must face some credible accountability. Finance is dynamic; so too must be its regulation. Most static rules are possible to evade, implying that regulators must be given some discretion to respond. However discretion demands close accountability, otherwise regulators could be become (even more) direct agents for banks, and the poor performance of regulators in crises requires effective monitoring as well.”[103]

As a result of boundary issues (the
ability of regulated entities to shift prohibited activities to unregulated
domains, whether in another part of the financial system or another location),
it is better to think of controls as continuous variables rather than on/off
switches, to lessen these concerns.[104]

“European law comes in two forms.
First, there are regulations. These are directly applicable in all EU countries
and provide a truly level playing field for banks. Second, there are
directives. These still need to be transposed into national law. This is not a
problem in itself as long as the differences are rooted in country-specific
risks. But there are still some unjustified differences; there are some uneven
patches on the playing field. Such patches run counter to the idea of a
European banking union. They prevent the European banking sector from growing
together, and they make European banking supervision less efficient.

Still, rules must not be carved in stone, of course. Driven by innovation, the banking sector constantly evolves – new instruments are devised, new risks emerge. The rules must reflect such change. After all, the financial crisis was partly caused by financial innovations that took place outside the regulatory wall.”[105]

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---

[1] George Alexandridis, Christos F. Mavrovitis and Nickolaos G.
Travlos, ‘How Have M&As Changed? Evidence from The Sixth Merger Wave’
(2012) 18 The European Journal of Finance.

[2] Dr. Krishnamurthy Ravichandran, ‘Effect Of Financial Crisis Over
Mergers And Acquisitions In GCC Countries’ [2009] SSRN Electronic Journal.

[3] Denning Liam, ‘Leveraged Loan Market Haunted By Ghost Of The Past
Crisis’ (2011) Wall Street Journal, c.16, Eastern edition, New York.

[4] www.investopedia.com
accessed on 3 September,2017.

[5] Ibid

[6] ibid

[7] Barry Nielsen, ‘Fannie Mae And Freddie Mac, Boon Or Boom?’
(Investopedia, 2017)
<http://www.investopedia.com/articles/07/fannie-freddie.asp> accessed 1
September 2017.

[8] Barry Nielsen, ‘Fannie Mae And Freddie Mac, Boon Or Boom?’
(Investopedia, 2017)
<http://www.investopedia.com/articles/07/fannie-freddie.asp> accessed 1
September 2017.

[9] Ibid:7

[10] Ibid :8

[11]  It is a process by which the
financial assets are pooled and traded further. This make illiquid assets
liquid.

[12] It is a branch that deals in complex financial products to serve
the financial needs of big institutional investors that can’t be served by
conventional financial instruments. It involves derivative and collateralized
instruments.

[13] G. McCormack, Secured Credit under English and American Law
(Cambridge University Press, 2004), p.224.

[14] R. Goode, Commercial Law (London; Penguin Books, 2004), p.749 as
cited in Vincenzo Bavoso, ‘Financial Innovation, Structured Finance And Off
Balance Sheet Financing: The Case Of Securitisation’ [2010] SSRN Electronic
Journal.

[15] P.R. Wood, Project Finance, Securitisation, Subordinated Debt
(Sweet and Maxwell, 2007), Ch.6.

[16] P.L. Davies, Gower and Davies Principles of Modern Company Law
(London: Sweet and Maxwell, 2008), p.234 as cited in Vincenzo Bavoso,
‘Financial Innovation, Structured Finance and Off Balance Sheet Financing: The
Case Of Securitisation’ [2010] SSRN Electronic Journal.

[17] Fabozzi and Kotari,
“Securitization” (2007), p.4 as cited in Vincenzo Bavoso, ‘Financial
Innovation, Structured Finance And Off Balance Sheet Financing: The Case Of
Securitisation’ [2010] SSRN Electronic Journal

[18] K.C. Kettering, “Securitization and its Discontents: The
Dynamics of Financial Product Development” (2008) 29(4) Cardozo Law Review
1553, 1622.

[19] Wood, Project Finance, Securitisation, Subordinated Debt (2007),
Ch.8

[20] Vincenzo Bavoso, ‘Financial Innovation, Structured Finance and Off
Balance Sheet Financing: The Case Of Securitisation’ [2010] SSRN Electronic
Journal.

[21] D.W. Arner, “The
Global Credit Crisis of 2008: Causes and Consequences” (2009) 43(1)
International Lawyer 117.

[22] S. Criado and A. Van Rixtel, “Structured Finance and the
Financial Turmoil of 2007–2008: An Introductory Overview”, Banco De
Espana, No.0808 (2008), p.11.;  

[23] Arner, “The Global
Credit Crisis  of 2008” (2009) 43(1) International Lawyer 117,
120,121.

[24] Wood, Project Finance, Securitisation, Subordinated Debt (2007),
Ch.6

[25] P.R. Wood, International Loans, Bonds, Guarantees, Legal Opinions
(London: Sweet and Maxwell, 2007), p.193

[26] Hudson, The Law of Finance (2009), p.1199; Caprio et al., “The
2007 Meltdown in Structured Securitization” (2008), p.12.

[27] www.clasf.org

[28] Deniz Coskun, ‘Supervision Of Credit Rating Agencies: The Role Of
Credit Rating Agencies in Finance Decisions’ J.I.B.L.R. 2009, 24(5), 252-261

[29] Deniz Coskun, ‘Supervision Of Credit Rating Agencies: The Role Of
Credit Rating Agencies in Finance Decisions’ J.I.B.L.R. 2009, 24(5), 252-261

[30] Ibid ;28

[31] Ibid;29

[32] European Commission, “Tackling the problem of excessive reliance on
ratings” (DG Market Services Document, August 2008), available at
http://www.ec.europa.eu.

[33] RMBS means Resident mortgage backed securities and CDO means
Collateralized Debt Obligations.

[34] European commission, “Proposal for a Regulation of the European
Parliament and of the European Council on Credit rating agencies”, COM (2008)
704 final available at www.ec.europa.eu

[35] Deniz Coskun, ‘Supervision Of Credit Rating Agencies: The Role Of
Credit Rating Agencies In Finance Decisions’ J.I.B.L.R. 2009, 24(5), 252-261

[36] Deniz Coskun, ‘Supervision Of Credit Rating Agencies: The Role Of
Credit Rating Agencies In Finance Decisions’ J.I.B.L.R. 2009, 24(5), 252-261.

[37] Larry Elliott and Jill Treanor, ‘The Day the Credit Crunch Began,
10 Years On: ‘The World Changed’ (the Guardian, 2017)
<http://www.theguardian.com/business/2017/aug/02/day-credit-crunch-began-10-years-on-world-changed>
accessed 6 September 2017.

[38] Communication from the Commission to the Council: A European
Economic Recovery Plan, COM/2008/800 (O.J. 2010 C76/30) as cited in Jan Wouters
and Sven Van Kerckhoven, ‘The EU’S Internal And External Regulatory Actions
After The Outbreak Of The 2008 Financial Crisis’ [2011] SSRN Electronic
Journal.

[39] Jan Wouters and Sven Van Kerckhoven, ‘The EU’S Internal And
External Regulatory Actions After The Outbreak Of The 2008 Financial Crisis’
[2011] SSRN Electronic Journal.

[40] They
replace the following committees: Committee of European Banking Supervisors
(CEBS), Committee of European Securities Regulators (CESR) and Committee of
European Insurance and Occupational Pensions Supervisors (CEIOPS

[41] “The regulations and directives adopted by
the European Parliament and the Council on 24 November 2010 were: Regulation
(EU) No 1092/2010 on European Union macro-prudential oversight of the financial
system and establishing a European Systemic Risk Board (O.J. 2010 L331/1);
Regulation (EU) No 1093/2010 establishing a European Supervisory Authority
(European Banking Authority) (O.J. 2010 L331/12); Regulation (EU) No 1094/2010
establishing a European Supervisory Authority (European Insurance and
Occupational Pensions Authority) (O.J. 2010 L331/48); Regulation No 1095/2010
establishing a European Supervisory Authority (European Securities and Markets
Authority) (O.J. 2010 L331/84); Directive 2010/78/EU amending Directives
98/26/EC, 2002/87/EC, 2003/6/EC, 2003/41/EC, 2003/71/EC, 2004/39/EC, 2004/109/EC,
2005/60/EC, 2006/48/EC, 2006/49/EC and 2009/65/EC in respect of the powers of
the European Supervisory Authority (European Banking Authority), the European
Supervisory Authority (European Insurance and Occupational Pensions Authority)
and the European Supervisory Authority (European Securities and Markets
Authority) (O.J. 2010 L 331/120). See also Council Regulation (EU) No 1096/2010
of 17 November 2010 conferring specific tasks upon the European Central Bank
concerning the functioning of the European Systemic Risk Board (O.J. 2010
L331/162)” as cited in THE EU’S INTERNAL AND EXTERNAL REGULATORY ACTIONS AFTER
THE OUTBREAK OF THE 2008 FINANCIAL CRISIS Prof. Dr. Jan Wouters Sven Van
Kerckhoven

[42] European System of Financial Supervision
ESFS/Memo/09/405 as cited in THE EU’S INTERNAL AND EXTERNAL REGULATORY ACTIONS
AFTER THE OUTBREAK OF THE 2008 FINANCIAL CRISIS Prof. Dr. Jan Wouters Sven Van
Kerckhoven

[43] Directive 2006/49/EC of the European
Parliament and of the Council of 14 June 2006 relating to the taking up and
pursuit of the business of credit institutions and Directive 2006/49/EC of the
European Parliament and of the Council of 14 June 2006 on the capital adequacy
of investment firms and credit institutions (O.J. 2006 L177/201).

[44] THE EU’S INTERNAL
AND EXTERNAL REGULATORY ACTIONS AFTER THE OUTBREAK OF THE 2008 FINANCIAL CRISIS
Prof. Dr. Jan Wouters Sven Van Kerckhoven

[45]www.basel-iii-accord.com
as accessed on 4^th September, 2017.

[46] www.basel-iii-accord.com
as accessed on 10^h September, 2017.

[47] Ibid

[48] Hedge fund is a private investment fund which invests in a wide
variety of assets to maintain a diversified portfolio in order to spread risks
and hedge against downturns.

[49] THE EU’S INTERNAL AND EXTERNAL REGULATORY ACTIONS AFTER THE
OUTBREAK OF THE 2008 FINANCIAL CRISIS Prof. Dr. Jan Wouters Sven Van Kerckhoven

[50] Statement of the heads of the State or
Government of the Euro area, PCE 86/10, 07/05/2011 as cited in THE EU’S
INTERNAL AND EXTERNAL REGULATORY ACTIONS AFTER THE OUTBREAK OF THE 2008
FINANCIAL CRISIS Prof. Dr. Jan Wouters Sven Van Kerckhoven

[51] Deniz Coskun, ‘Supervision Of Credit
Rating Agencies: The Role Of Credit Rating Agencies in Finance Decisions’
J.I.B.L.R. 2009, 24(5), 252-261

[52] European Commission, “Communication from
the Commission on Credit Rating Agencies”, (March 11, 2006, 2006/C59/02),
available at http://eur-lex.europa.eu.

[53] European Commission, “Consultation on a draft Directive/Regulation
with respect to the authorization, operation and supervision of credit rating
agencies (CRAs)”; European Commission. Proposal for a Regulation of the
European Parliament and of the Council on Credit Rating Agencies. COM
(2008) 704 final; as cited in Deniz Coskun, ‘Supervision Of Credit Rating Agencies: The Role Of Credit Rating Agencies in
Finance Decisions’ J.I.B.L.R. 2009, 24(5), 252-261

[54] Deniz Coskun, ‘Supervision Of Credit Rating Agencies: The Role Of
Credit Rating Agencies in Finance Decisions’ J.I.B.L.R. 2009, 24(5), 252-261

[55] Recommendation 2005/162 on the role of non-executive or supervisory
directors of listed companies and on the committees of the (supervisory) board
[2005] OJ L52/51.

[56] ‘Banking Reform: What Has Changed Since The Crisis? – BBC News’
(BBC News, 2013) <http://www.bbc.co.uk/news/business-20811289> accessed 8
September 2017.

[57] The Tripartite structure is made up of Financial Services
Authority(FSA), The treasury and the Bank of England.

[58] Ibid; 54

[59] http://BBA-Briefing-Reforms-since-the-Financial-Crisis.pdf>
accessed 2 September 2017.

[60] Ibid;54

[61] THE EU’S INTERNAL AND EXTERNAL REGULATORY
ACTIONS AFTER THE OUTBREAK OF THE 2008 FINANCIAL CRISIS Prof. Dr. Jan Wouters
Sven Van Kerckhoven

[62] George Alexandridis, Christos F.
Mavrovitis and Nickolaos G. Travlos, ‘How Have M&As Changed? Evidence From
The Sixth Merger Wave’ (2012) 18 The European Journal of Finance.

[63] Erel, I., Jang, Y.
and Weisbach, M.S. (2012), “Financing‐Motivated
Acquisitions”, National Bureau of Economic Research Working Paper Series
No. 17867; Bradley, M., Desai, A. and Kim, E.H. (1988), “Synergistic gains
from corporate acquisitions and their division between the stockholders of
target and acquiring firms”, Journal of Financial Economics 21 (1):3‐40; Manne, H.G.
(1965), “Mergers and the Market for Corporate Control”, Journal of
Political Economy 73 (2):110‐120.

[64] Mergers and acquisitions and the Valuation of firms, May 2014; Sudi
Sudarsanam, ‘Creating Value From Mergers And Acquisitions: The Challenges : An
Integrated Approach And International Perspective’ [2003] Pearson education.

[65] Rao-Nicholson, R. and Salaber, J. (2016), Impact of the Financial
Crisis on Cross-Border Mergers and Acquisitions and Concentration in the Global
Banking Industry. Thunderbird International Business Review, 58: 161–173.

[66] Beck, T., Demirgüç-Kunt, A., & Levine, R. (2003). Bank
concentration and crises: National Bureau of Economic Research; Beck, T.,
Demirgüç-Kunt, A., & Levine, R. (2006). Bank concentration, competition,
and crises: First results. Journal of Banking & Finance, 30, 1581–1603.

[67] Ibid;64

[68] Kowalik, M., Davig, T., Morris, C. S., & Regehr, K. (2015),
Bank consolidation and merger activity following the crisis. Federal Reserve
Bank of Kansas City Economic Review, 31. Retrieved from
https://search.proquest.com/docview/1748858575?accountid=14511

[69] The term “shotgun” of course refers to a marriage that is
necessitated because of a pregnancy. In the case of banking, acquirers were
essentially forced to participate in the rescue of failing institutions. The
major exception was Lehman Brothers, which had so many problems that no partner
could be found as cited in James S. Sagner, ‘“Shotgun” Bank M&As’ (2010) 22
Journal of Corporate Accounting & Finance.

[70]  Zora, R. P. (2009). The bank
failure crisis: Challenges in enforcing antitrust regulation. Wayne Law Review,
55, 1175–1195 as cited in James S. Sagner, ‘“Shotgun” Bank M&As’ (2010) 22
Journal of Corporate Accounting & Finance.

[71] The FDIC resolves bank failures through purchase and assumption
transactions, under which an operating bank assumes the insured deposits of the
failed bank, or by deposit payoffs, with the FDIC paying the depositor directly
up to the insured balance in each account. In either situation, the FDIC will
guarantee the losses of the acquiring bank or will make payments directly to
depositors.

[72] These include Bank of America, Wells Fargo and JP Morgan Chase.

[73] Derived from the balance sheet data for three banks and from the
Federal reserve system, “ Assets and Liabilities of Commercial banks in the
US”, H.8 , at www. federal reserve.gov)

[74] Sorkin, A.R. ( 2008 , Nov.11) “ Why Obama may assent to deals”

[75] Basel Committee on Banking Supervision, Enhancing Bank
Transparency, p. 8; at www.bis.org.publ/index.htm;
Dash, E., & Schwartz, N. D. (2010, July 27); Central bankers reach initial
accord on global standards. New York Times, p. B3. 11 as cited in James S.
Sagner, ‘“Shotgun” Bank M&As’ (2010) 22 Journal of Corporate Accounting
& Finance.

[76] “The Basel 2 accords describe three pillars of required actions: 1)
discusses the amount of regulatory capital for credit risk, operational risk
and market risk; 2) deals with the approach of regulators to the first pillar
and provides a framework for dealing with other risks a bank may face,
including systemic risk, pension risk, concentration risk, strategic risk,
reputation risk, liquidity risk and legal risk; and 3) addresses market
discipline or transparency, to allow markets to have an accurate picture of the
risk position of the bank and to allow the counterparties of the bank to price
risk.” See Bank for International Settlements, Basel 2: The International
Capital Framework at www.bis.org/publ/bcbsca.htm

[77] Ng, S. (2009, May 4). Banks get
tougher on credit line provisions. Wall Street Journal, pp. A1, A6.

[78] James S. Sagner, ‘“Shotgun” Bank M&As’ (2010) 22 Journal of
Corporate Accounting & Finance.

[79] Ibid

[80] Ibid

[81] James S. Sagner, ‘“Shotgun” Bank M&As’ (2010) 22 Journal of
Corporate Accounting & Finance.

[82] Survey says: Mergers and acquisitions planned despite credit
crunch”

Stull, Elizabeth. Daily Record;
Rochester, NY [Rochester, NY]24 Apr 2008

[83] “Survey says: Mergers and acquisitions planned despite credit
crunch”

Stull, Elizabeth. Daily Record;
Rochester, NY [Rochester, NY]24 Apr 2008

[84] “Bad Banks” for Beginners”,
http://baselinescenario.com/2009/01/26/sweden-banking-crisis-for-beginners.

[85] Schaeffer and Zimmermann, “Bad Banks And Recapitalization Of The
Banking Sector”, Discussion Paper 897, D.I.W., May 2009

[86] “U.S. Banking: Making the Good Bank/Bad Bank Structure Work”, Int’l
Fin. L. Rev., April 1992, 34; C. Calomiris, “Harmful Bailouts”, January 1998,
On the Issues, 1-43, 7-8; Schaeffer and Zimmermann, “Bad Banks And
Recapitalization Of The Banking Sector”, Discussion Paper 897, D.I.W., May 2009
; Kyriaki Noussia, ‘The “Good Bank-Bad Bank” Concept: A Model
Solution?’ (2010) 401 J.I.B.L.R. as cited in Kyriaki Noussia, ‘The “Good
Bank-Bad Bank” Concept: A Model Solution?’ (2010) 401 J.I.B.L.R.

[87] Schaeffer and Zimmermann, “Bad Banks And Recapitalization Of The
Banking Sector”, Discussion Paper 897, D.I.W., May 2009; C. Calomiris, “Harmful
Bailouts”, January 1998, On the Issues, 1-43, 9 as cited in Kyriaki Noussia,
‘The “Good Bank-Bad Bank” Concept: A Model Solution?’ (2010) 401
J.I.B.L.R.

[88] P. Berton, “Benchmarking & Restructuring Claims Services”,
http://www.uniset.ca/lloydata/grmcna.htm as cited in Kyriaki Noussia, ‘The
“Good Bank-Bad Bank” Concept: A Model Solution?’ (2010) 401
J.I.B.L.R.

[89] Kyriaki Noussia, ‘The “Good Bank-Bad Bank”
Concept: A Model Solution?’ (2010) 401 J.I.B.L.R.

[90] Report on the regulatory consistency of risk-weighted assets in the
banking book issued by the Basel Committee (July 25 2013)

[91] Report on the regulatory consistency of risk-weighted assets in the
banking book issued by the Basel Committee (July 25 2013); www.investopedia.com

[92] Report on the regulatory consistency of risk-weighted assets in the
banking book issued by the Basel Committee (July 25 2013)

[93] Juergen Foecking, Peter Ohrlander and Ernst Ferdinandusse, “Competition
and the financial markets: The role of competition policy in financial sector
rescue and restructuring”

[94] BCL, Chapter 3

[95] Danielsson, Jon, Paul Embrechts, Charles Goodhart, Con Keating,
Felix Muennich, Olivier Renault and Hyun Song Shin, 2001. “An Academic Response
to Basel II,” LSE Financial Markets Group, Special Paper No. 130

[96] UK Report, Financial Services
Authority, 2008, page 34

[97] Financial Regulation After the Crisis: How Did We Get Here, and How
Do We Get Out? By Gerard Caprio, Jr. SPECIAL PAPER 226, LSE FINANCIAL MARKETS
GROUP SPECIAL PAPER SERIES, November 2013 as on www. Lse.ac.uk.

[98]http://ec.europa.eu/economy_finance/publications/qr_euro_area/2010/pdf/qrea4_section_1_en.pdf
as accessed on 7th September, 2017.

[99] T.-K. Chou, J.-C. ChengCredit ratings and excess value of
diversification J. Empirical. Finance., 19 (2012), pp. 266-281.

[100] N. Karampatsas, D. Petmezas, N.G. Travlos, “Credit ratings and the
choice of payment method in mergers and acquisitions”, J.Corp. Financ., 25
(2014), pp. 474-493

[101] H.H. An, K.C. Chan, “Credit ratings and IPO pricing”, J. Corp.
Financ., 14 (2008), pp. 584-595

[102] Surendranath R. Jory, Thanh N. Ngo and Daphne Wang, ‘Credit Ratings
And The Premiums Paid In Mergers And Acquisitions’ (2016) 39 Journal of Empirical
Finance.

[103] Ibid

[104] Goodhart, Charles, 2010. “How Should We Regulate Bank Capital and
Financial Products? What Role for Living Wills?” in Adair Turner and others,
The Future of Finance: The LSE Report, London School of Economics,
http://harr123et.wordpress.com.

[105] Speech by Sabine Lautenschläger, Member of the Executive Board of
the ECB and Vice-Chair of the Supervisory Board of the ECB, at the Institute of
International and European Affairs, Dublin, 13 March 2017)