AAA Spark Meeting of Regions

Interest Rate Sensitivity as Motivation for Acquisitions: Evidence from Bank Holding Companies

• In Event: Credit Risk

Abstract

We examine the role of interest rate sensitivity for bank acquisitions. We expect that the interest rate sensitivity of a bank impacts the likelihood that it is acquired, as knowledgeable bank acquirers may seek fixed-rate assets, which are not adjusted for fair values in financial statements. We test this by examining the relation between bank acquisitions and targets’ fixed rate loan portfolios in periods of changing rates. When interest rates decrease (increase), the fair value of fixed rate loans increase (decrease) while book values remain unchanged, making loan values more difficult to determine for outsiders. We find that bank acquisitions are more likely in decreasing rate environments for targets with a greater percentage of fixed rate loans. Further, we find this is stronger for banks with weaker information environments and less profitability. This study sheds light on how bank acquisitions are impacted by interest rate sensitivity in low-rate environments.

Authors

• Joe Lopez, University of Arkansas

• Caleb Rawson, University of Arkansas

• Stephen Rowe, University of Arkansas