The regulation of the global financial sector should be extended to include intensive monitoring of merger and acquisition deals, which are a key source of instability.

The issue of regulation may appear quite irksome and even daunting amid the tightening regime of the new regulatory paradigm. However, there is a regulation-free area that links the existing regulated environments. This regulatory gap may wipe out corporate value, destroy industry dynamics and destabilise markets. The area in question is merger and acquisition (M&A) deals in the banking industry.

Indeed, strategising, scheduling and maximising M&A value is a troublesome area for many businesses and deal-makers. Despite deep scrutiny of the deals and the focus on change and integration management, M&As are frequently the most damaging corporate reorganisations. More often than many might think, the hidden menace of an M&A has an implicit ripple effect – for the industry, market or economy at large – a process that under certain circumstances may run out of control and thwart the best efforts of all parties.

Post-M&A value creation, or synergy, has always been at higher risk in the banking sector, partly owing to deregulation that was dominating the banking domain for more than 30 years up to the 2008 financial crisis. Now, in the framework of the sweeping overhaul of financial regulation, the existing regulatory gap contrasts ever more sharply with tougher day-to-day requirements imposed on pre- and post-M&A banks. Logically, a new paradigm of banking regulation calls for the alignment of all areas organically linked to it. After all, synergy is one of the key indicators of successful deals and sustainable growth.

Introducing mergulation

Bank consolidations are excessively sensitive to systemic and endogenous risks, as are bank owners and other stakeholders seeking to generate synergy. In other words, the more bumpy the M&A deal, the less its ability to synergise value and the more it is prone to the risk of failure. Moreover, M&A fallouts in cross-border deals inhibit the internationalisation of regulatory reform. The fragility of M&A is exacerbated by its opaque nature: details are withheld from public view. Needless to say, that lack of transparency can intensify the short-termism known for its pivotal role in igniting the 2008 economic meltdown.

To avoid the risks of larger-scale disruptions during implementation and 'post-M&A integration' (PMI), M&A needs a new model of governance based on its regulation, covering the distance from the deal’s launch until its completion, as measured by the completion of PMI. Extreme circumstances need extreme, finer-tuned measures. M&A regulation (or 'mergulation') should be powered by a designated regulatory institution in the form of a government-mandated, not-for-profit and member-funded agency. While it is too early to discuss the conceptual framework of mergulation, it should definitely be focused on raising alarms and managing risks. This work should be supported by advanced tools and techniques for transition modelling, including stress-testing, synergy assessment during PMI, efforts to control the spillover effects from headwinds, and an examination of the link between transition regulation and traditional regulation, to name a few.

Just as a deposit insurance agency is responsible for protecting people’s savings, this authority’s mission will be M&A safety – as opposed to the mission of external consultants and auditors whose responsibility is limited to advising on the deal rather than ensuring the deal’s successful outcome. By addressing the multiple aspects of M&A, mergulation will naturally administer more rigorous disclosure requirements.

Risk management tool

Nevertheless, mergulation will not be a panacea for all M&A headaches. Nor should anyone expect instantaneous benefits for M&A deal-making. Rather, mergulation may become a straightjacket to contain ambitious yet short-sighted deal-makers. To create a safety net, it should aim at a level playing field in risk-taking – a single risk measurement methodology for all M&A deals complemented by a specific, customised risk-sharing mechanism. This will reduce the banking sector’s exposure to the limits of traditional regulation and as such, will minimise the risk of PMI inconsistency and non-compliance.

Furthermore, mergulation could make it possible to quantify risks in a way that facilitates unwrapping the hidden nuances of M&A. By understanding these risks, mergulation will help alleviate PMI flaws and keep them at more or less acceptable levels, as M&A will be better protected against managerial miscalculations. And last but not least, mergulation will ensure equal access for all banks to professional expertise and focused guidance during the deal. In fact, this one-size-fits-all approach will benefit smaller banks by reducing the need for them to pay high fees in the hope of finding the best external consultants.

The smooth running of M&A is one of the key risks to watch. Therefore, mergulation could become the basis for a risk management platform to keep a deal on the road until it is genuinely complete. Although M&A setbacks are virtually inevitable, with mergulation the extent of setbacks is expected to be less dramatic, M&A implementation less erratic, and results more systematic. The effect of mergulation on M&A deal-making could be commensurate with that of traditional regulation on strengthening the resilience of banks and policing rational behaviour in the banking sector. 

Eduard Dzhagityan is a fellow at the Financial University in Moscow, and a member of the standing group on bank regulation in the upper house of the Russian federal assembly.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter