Colombia has witnessed a renewed interest in merging and acquiring financial institutions during 2003-05. These have been "complementary mergers" that seek to exploit economies scale and scope. This process contrasts favorably with those mergers and acquisitions that occurred during the mid-1990s, which involved mainly "twin institutions" that lacked the potential for gaining multiproduct efficiency. This paper analyzes the need to remove some of the regulatory constraints that obstruct further exploitation of such economies of scale-scope and quantifies the "cost efficiencies" shown by the Colombian banking sector (1994-2005). At the aggregate level, (absolute) banking efficiency was found to be around 63%, a similar value to those found in related post-crisis studies. This implies that banks operating in Colombia have been able to recover their efficiency levels during the post-crisis 2003-05, except for mortgage institutions. The study highlights regulatory barriers that could be removed to help the banking system move closer to the optimal production frontier.

The Colombian financial sector has suffered from high volatility during 1990-2005, fulfilling a complete cycle of recovery-expansion-overgrowth-crisisrecovery. The phases can be delineated as: redesign of the financial system and recovery (1990-93); credit expansion and merger and acquisition frenzy (1994-95); overgrowth and asset bubble, especially real estate (1996-97); crisis (1998-2002); and financial recovery, except for the mortgage banking sector (2003-05).

In terms of consolidation, there is a renewed interest in merging and acquiring institutions that provide new synergies through diversified financial markets. This process of consolidation contrasts favorably with what happened during the
1994-97 period, when the sector witnessed “twin mergers.” These mergers helped to diversify the loan book primarily in terms of region and population strata, but not by economic sector activity. Therefore, these mergers extended the prevailing activity, while the “complementary mergers” of 2003-05 were able to expand and diversify the sources of the asset side of the balance sheet.

Mergers and Acquisitions in the Colombian Financial Sector: Impact on Efficiency (1990-2005), financial institutions, complementary mergers, exploit economies, mergers and acquisitions, twin institutions, multiproduct efficiency, regulatory constraints, cost efficiencies, banking sector, banking efficiency,post-crisis studies.