Why Banks Sometimes Seek to Merge other Banks or Financial Institutions

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Recommended: Mergers and acquisition of banks research paper

Explain why banks sometimes seek to merge with with

Explain why banks sometimes seek to merge with with or acquire other

banks or financial institutions.

Great changes have been experiences in banking industry for the past

decades. The most apparent alter is a mass of bank mergers, which have

expanded both the average size of banks and their territories. Other

dramatic changes including the development of Internet banking and the

combination of banking with other financial services, for example,

insurance and securities underwriting are also encountered.

(Number of banks declining despite overall growth in the banking

sector.)

Consolidation in banking is distinct from "convergence."

Consolidation refers to mergers and acquisitions of banks by banks.

Convergence refers to the mixing of banking and other types of

financial services like securities and insurance, through acquisitions

or other means. Consolidation will provide banks with new capabilities

technologies and products, help to overcome entry barriers, ensure

immediate entry into new markets and lower operating costs through

consolidation of resources.

Background on recent consolidation

Large Bank Mergers (Both targets and acquirers have more than one

billion dollars in total assets The Riegle-Neal Act granted interstate

branch banking beginning in 1997.

Since then, the number of large bank mergers has risen dramatically.

sketch this trend along with another remarkable trend,

i.e., that most of the large bank mergers in recent years involved

institutions headquartered in different states; the latter point

advises that these are market-expansion mergers, even though the

acquirer and the target have few overlapping operations in their

respective banking markets. Although the markets they serve are much

bigger, until now none of these three mega banks has achieved the goal

in having a banking franchise that spans all 50 states, which is

feasible in law.

Another noticeable fact about the recently announced mega mergers is

that the target banking companies are positive institutions that are

likely to survive as independent organizations. This is in stark

contrast both to the late 1980s and early 1990s in the U.S., when many

bank mergers involved relatively feeble banking companies being

acquired by somewhat stronger organizations, as well as to s...

... middle of paper ...

...rgers of Publicly Traded

Banking Organizations Revisited." Federal Reserve Bank of Atlanta

Economic Review 84(4), pp. 26-37.

Kwan, S.H., and E. Laderman. 1999. "On the Portfolio Effects of

Financial Convergence: A Review of the Literature." FRBSF Economic

Review 2, pp. 18-31

Stiroh, K J and J P Poole (2000): i2Explaining the rising

concentration of banking assets in the 1990slt, Current issues in

economics and finance, Federal Reserve Bank of New York, vol 6, no 9,

August,pp 1-6.

Santomero, A 'Bank Mergers: What's a Policy Maker to do?, Journal of

Banking and Finance, 1999.

Dermine, J.'Banks Mergers in Europe: Public Policy Issues', Journal of

Common Market Studies, September, 2000.

Berger, A. et al. 'Consolidation of the Financial Services

Industry: Causes, Consequences and Implications', Journal of Banking

and Finance, December 1991

Akhavein, J.D., A.N. Berger, and D.B. Humphrey. 1997. "The Effects of

Megamergers on Efficiency and Prices: Evidence from a Bank Profit

Function." Review of Industrial Organization 12, pp. 95-139.

.Rhoades, S.A. 2000. "Bank Mergers and Banking Structure in the United

States, 1980-98." Federal Reserve Staff Study 174.

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