LIQUIDITY, SIZE, AND REGULATORY DESIGN IN BANKING: CONSOLIDATION DYNAMICS AND PERFORMANCE UNDER BASEL III

THIS DISSERTATION EXAMINES HOW LIQUIDITY AND SIZE SHAPE BANKS’ RESPONSES TO TWO DEFINING POST-CRISIS FORCES: MERGERS AND ACQUISITIONS (M&A) AND REGULATORY FLEXIBILITY UNDER BASEL III. STUDY 1 SHOWS THAT STRONGER LIQUIDITY AND LARGER SIZE RAISE THE LIKELIHOOD OF ACQUISITION, AS EXPECTED. YET PARADOXICALLY, THE WEAKEST LIQUIDITY GROUP—LARGE–RED BANKS—ARE THE MOST ACQUISITIVE. THIS SUGGESTS THAT SCALE CAN OVERRIDE REGULATORY CONSTRAINTS, ENABLING FRAGILE INSTITUTIONS TO EXPAND MOST AGGRESSIVELY. POST-MERGER OUTCOMES CONFIRM THE DIVIDE: STRONG ACQUIRERS CONSOLIDATE THEIR ADVANTAGES, WHILE FRAGILE ONES FAIL TO IMPROVE. THUS, M&A IS NOT INHERENTLY STABILIZING AND MAY INSTEAD REINFORCE TOO-BIG-TO-FAIL RISKS. STUDY 2 ANALYZES HOW ENTRY PRESSURE, CAPITALIZATION THRESHOLDS, ENFORCEMENT, AND INSURANCE RISK AFFECT BANK PROFITABILITY (ROA), STABILITY (LN Z) AND CHANGES IN THE BUSINESS MODEL. THE STABILITY MEASURE, LN Z, CAPTURES THE DISTANCE A BANK FROM DEFAULT BY COMBINING PROFITABILITY, LEVERAGE, AND EARNINGS VOLATILITY, WHERE HIGHER VALUES INDICATE GREATER RESILIENCE. THE RESULTS SHOW THAT COMPETITION INCREASES PROFITABILITY, STRUCTURAL FUNDING SUPPORTS STABILITY, AND ENFORCEMENT MAINLY REFLECTS RISK-TARGETED SUPERVISION. SMALLER BANKS SHIFT BACK TO TRADITIONAL INTERMEDIATION UNDER ENTRY PRESSURE, WHILE LARGER BANKS ABSORB REGULATORY BURDENS MORE EASILY. TAKEN TOGETHER, THE FINDINGS PROVIDE NEW EVIDENCE ON HOW REGULATORY FLEXIBILITY AND BALANCE SHEET CONDITIONS JOINTLY SHAPE BANK PERFORMANCE, STABILITY, AND STRATEGIC ADAPTATION IN THE POST-BASEL III ERA. TOGETHER, THE STUDIES HIGHLIGHT LIQUIDITY AND SIZE AS ORGANIZING PRINCIPLES THAT CONDITION BOTH STRATEGIC CONSOLIDATION AND REGULATORY ADAPTATION. THE CORE CONCLUSION IS THAT RESILIENCE IN MODERN BANKING DOES NOT ARISE FROM MERGERS OR REGULATION IN ISOLATION, BUT FROM THEIR INTERACTION UNDER THE STRUCTURAL REALITIES OF LIQUIDITY AND SCALE.