MBF 2025-wl-6927-Is Banking Consolidation at Odds with Financial Stability? The Case of India

This study examines the nexus between consolidation and financial stability in the context of a series of restructuring mergers that have occurred in the Indian banking sector in recent years. Employing a system-GMM two-stage panel regression model and a bias-corrected random effect model for the period from March 2012 to June 2022, the study concludes that mergers increase financial fragility, as measured by banks’ marginal risk contribution (MRC) to systemic risk. The destabilizing effect is also driven by bank-specific risk factors, standalone insolvency risk, and ownership characteristics, but is neutral to bank size. Furthermore, the build-up of good-quality capital for potential loss mitigation can alleviate the adverse impact on systemic risk. The results have important implications for macro-prudential policies.