| RELATED
ARTICLES |
 |
| "Bank
Mergers: Creating Value or Destroying Competition?"
Financial Industry Issues, Third Quarter
1998 (PDF) |
|
| "Finding
Meaning in Mergers," In Depth, July
1998 (PDF) |
|
| "Banking's
Merger Fervor: Survival of the Fittest?" Financial
Industry Studies, Dec. 1996 (Text
or PDF) |
|
|
|
Money and Banking
What's
Driving Bank Mergers?
Financial
Industry Studies economists Robert Moore and Thomas Siems look at
the forces behind bank mergers.
The recent flurry
of big mergers is attracting much attention, partly because of heightened
interest in what motivates firms to merge and how mergers affect
competition and the economy. Analysts have offered many reasons
why companies are merging today. However, we see two primary factors
affecting the need for firms to remain competitive: deregulation
and technology.
Deregulation
has significantly changed how and where banks do business. The relaxation
of restrictions on banks' securities activities was a move toward
expanded powers, blurring the traditional distinction with investment
banking. And the elimination of branching restrictions created vast
geographic expansion possibilities.
 Removal
of branching restrictions alone would be expected to spur consolidation
in the U.S. banking industry. Given California's long-standing permission
of branching within its borders, examination of the banking industry
in California provides a way to project the effect of eliminating
branching restrictions on the U.S. banking industry as a whole.
If the structure of the U.S. banking industry were to mimic California's,
continued consolidation would eventually result in about 3,000 banking
organizations (Chart 1),
with a handful of gargantuan superbanks competing simultaneously
with many smaller community banks. In fact, the result might be
analogous to retailing, in which we have giant outlet stores and
department stores on the one hand and specialized, single-location
boutiques on the other, all surviving in the marketplace.
Beyond deregulation,
advancements in technology are also creating incentives to merge.
Improvements in communication technology and the resulting decline
in costs allow dissemination of information throughout a geographically
widespread organization, making it practical to operate far-flung
operations created through mergers. At the same time, lower communication
costs are strengthening the role of competitive forces, as physically
distant financial service providers become increasingly relevant
as competitors; mergers provide one avenue to respond to the heightened
level of competition.
 Technology
has also blurred the lines of specialization among financial intermediaries.
Computing power has promoted asset securitization, resulting in
intermediation of similar assets across different types of intermediaries.
Computing power also allows investment banks to offer accounts with
characteristics similar to bank accounts. As technology creates
overlap in financial products, some merger partners are seeking
to provide an even broader spectrum of products by creating financial
supermarkets, where customers can receive one-stop financial services.
These players envision greater efficiencies through better information
flows and lower transaction costs.
 The
two forces of technology and deregulation, working together, have
fueled change that increasingly blurs accepted boundaries of time,
geography, language, industries, enterprises, economies and regulations.
The Chrysler deal with German-based Daimler-Benz highlights the
trend toward globalization. In Europe, the recently launched euro
and the move toward a common market have already brought on a wave
of cross-border mergers among European banks. As market-oriented
economies continue to break down trade barriers and adopt policies
that attract investors, more firms will seek opportunities to expand
by partnering and aligning themselves with established companies.
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