Why banks perform consolidation: to avoid failure or to expand? Evidence from Indonesian Banking Industry

In this study, we examine whether bank consolidation using merger & acquisition is an exit strategy to avoid failure or as an expansion strategy by examining the determinants of bank failure and bank merger & acquisition (M&A) in the Indonesian banking sector. We employ quarterly data from 131 commercial banks in Indonesia over the period 2002-2014. We perform competing-risk using Cox Proportional Hazard Model for estimating the parameters. Our findings show that troubled banks maintain a higher level of capital reserves to comply with risk-weighted capital adequacy regulation eventhough action still could not prevent banks to fail. We also find that a bank with poor asset quality and low profitability is more likely to fail. On the other hand, we find that a bank with lower efficiency and lower profitability has a higher probability to be merged or acquired. Our findings suggest that there is no strong evidence for the voluntary merger and acquisition activities in the banking sector is performed to avoid bank failure.