| The banking industry, long stifled by a heavy regulatory burden, embarked ten years ago on a restructuring process that is not yet over. The two main strategies pursued are the exploitation of economies of scale and the increase of operational efficiency. In the first chapter, we compare their respective benefits for the Italian banking sector. Cost inefficiencies range from 10 to 20 percent, increasing with their size, and profit inefficiencies are even higher. Scale economies are significant only for small banks; the optimal size seems to be between 1,500 and 5,000 billion lire worth of assets, probably because these are the banks that have achieved economies of scale and are highly integrated in local markets, which are the backbone of the Italian economy. In a perspective of growth through acquisitions, which seems to be the trend in the financial sector, regulation on transfers of control is of fundamental importance in ensuring that such transfers are efficient, especially if private benefits of control are significant. In the second chapter I analyze existing rules, in particular Italian laws, and propose an optimal rule, that asks the buyer to offer to buy all outstanding shares at market value: this ensures that all and only efficient transfers are possible, while still protecting minority shareholders. No conclusive results have yet emerged on the profitability of mergers and acquisitions in the banking industry. In the third chapter we look at the Italian market over a period characterized by intense consolidation. Larger, more sophisticated banks buy less profitable banks, possibly as a way to enter new markets (for incorporations) or to improve the quality of the loan portfolio of the acquired bank. There is no evidence of cost reduction after M&As; however, profitability increases for mergers and incorporations because of a more efficient use of capital, a decrease in the tax burden and an increase in fees-related income; for acquired banks, the improvement is due to a decrease in bad loans as a fraction of total loans; for state-owned banks there is no discernible effect of a merger, except for an increase in labor cost. |