Bank Consolidation, Internationalization,and Conglomeration:

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IMF Working Paper 2003

The views expressed in this Working Paper are those of the aulhor(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Abstract

This paper documents global trends in bank activity, consolidation, internationalization, and financial firm conglomeration, and explores the extent to which financial firm risk and systemic risk potential in banking are related to consolidation and conglomeration. We find that while there is a substantial upward trend in conglomeration globally, consolidation and internationalization exhibit uneven patterns across world regions. Trends in consolidation and conglomeration indicate increased risk profiles for large, conglomerate financial firms, andhigher levels of systemic risk potential for more concentrated banking systems. We outline research directions aimed at explaining why bank consolidation and conglomeration do notnecessarily yield either safer financial firms or more resilient banking systems


http://www.imf.org/external/pubs/ft/wp/2003/wp03158.pdf

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1. Bank Concentration, Competition, and Crises:

Abstract:

Motivated by public policy debates about bank consolidation and conflicting theoretical predictions about the relationship between bank concentration, bank competition and banking system fragility, this paper studies the impact of national bank concentration, bank regulations, and national institutions on the likelihood of a country suffering a systemic banking crisis. Using data on 69 countries from 1980 to 1997, we find that crises are less likely in economies with more concentrated banking systems even after controlling for differences in commercial bank regulatory policies, national institutions affecting competition, macroeconomic conditions, and shocks to the economy. Furthermore, the data indicate that regulatory policies and institutions that thwart competition are associated with greater banking system fragility.

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Introduction

The consolidation of banks around the globe is fueling an active public policy debate on the impact of consolidation on financial stability. Indeed, economic theory provides conflicting predictions about the relationship between the concentration and the competitiveness of the banking industry and banking system fragility. Motivated by public policy debates and ambiguous theoretical predictions, this paper investigates empirically the impact of bank concentration and bank regulations on banking system stability. Some theoretical arguments and country comparisons suggest that a less concentrated banking sector with many banks is more prone to financial crises than a concentrated banking sector with a few banks (Allen and Gale, 2000, 2004).

First, concentrated banking systems may enhance market power and boost bank profits. High profits provide a “buffer” against adverse shocks and increase the charter or franchise value of the bank, reducing incentives for bank owners and managers to take excessive risk and thus reducing the probability of systemic banking distress (Hellmann, Murdoch, and Stiglitz, 2000; Besanko and Thakor, 1993; Boot and Greenbaum, 1993, Matutes and Vives, 2000).

Second, some hold that it is substantially easier to monitor a few banks in a concentrated banking system than it is to monitor lots of banks in a diffuse banking system. From this perspective, supervision of banks will be more effective and the risks of contagion and thus systemic crisis less pronounced in a concentrated banking system. According to Allen and Gale (2000), the U.S., with its large number of banks, supports this 1See Group of Ten (2001), Bank for International Settlements (2001), International Monetary Fund (2001). See Carletti and Hartmann (2003) and Boyd and De Nicoló (2005) for an overview of the literature. 2Rather than focusing on the links between concentration and the portfolio decisions of banks, Smith (1984) holds banks’ asset allocation decisions constant and examines the liquidity side of the balance sheet. He shows that less competition can lead to more stability if information about the probability distribution of depositors’ liquidity needs
“concentration-stability” view since it has had a history of much greater financial instability than the U.K or Canada, where the banking sector is dominated by fewer larger banks.

An opposing view is that a more concentrated banking structure enhances bank fragility. ...>

http://www.econ.brown.edu/fac/Ross_Levine/Publication/Forthcoming/Forth_JBF_3RL_Concentration.pdf

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2. US Bank Consolidation Not A Given

US Bank Consolidation Not A Given
October 2008 | M&A Analysis

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On October 5th PNC Financial Services, backed by US$7.7bn from the US Treasury Department's US$250bn Troubled Asset Relief Program (TARP), announced that it was acquiring embattled bank National City for US$5.58bn. The deal makes PNC the fifth-largest bank by deposits in the US, but more importantly it also represents the first instance of a bank using capital from the recent government bailout to make an acquisition. Treasury Secretary Hank Paulson has already handed US$125bn to the US's nine largest lenders, stating that the remaining funds should be used for recapitalisation and to fund takeovers. Consequently, to many the PNC deal seemed to offer a blueprint for further industry consolidation going forward. It has been widely predicted that the ongoing turmoil in the financial markets will lead to rapid deal volume at lower valuations, with national banks looking to expand operations and regional banks seeking defensive mergers. Banks in California and the Midwest, for example, with heavy exposure to mortgage debt, would be likely targets.

Reason For Pause
However, there are reasons to doubt that such consolidation will occur at the level or pace that many are expecting. Gerard Cassidy, a banking analyst at RBC Capital Markets, tells CFW that 'I think there's going to be a freeze in deals, we're heading into the teeth of the recession and with that comes credit problems.' He claims that while potential buyers may well 'have seen what Wells Fargo and others were able to accomplish in transactions where the sellers had a gun to their head, this does not guarantee that for TARP-funded would-be-acquirers the target banks will be willing to sell.' Cassidy adds that 'if you're Keycorp or Capital One, if you've received these TARP equity funds and now you want a deal like PNC or Wells just completed - good luck - because there aren't going to be many of them out here. The only reason they would sell is if they were forced too as Wachovia and National City were.'


The key point is that the same regulation and legislation that has produced the TARP package, and therefore increased the ability of some banks to buy, has also taken the pressure of other companies to sell. For in addition to TARP, the US treasury has also guaranteed all checking account deposits in the US. The key area where National City and Wachovia had been losing money was in commercial deposits. Businesses around the US that were running through their payroll through the banks could not take the risk that the bank may fail and pulled the funds out. By guaranteeing deposits, the Treasury has removed the possibility of a run on any regional bank, and in so doing even weaker banks will be in less of a rush to sell.

Catch 22
This is not to say takeovers won't happen. Cassidy adds that 'the treasury has identified 22 companies - and if you are not on that list of approvals, you've got a problem, the scarlet letter has been put on you and the question becomes do you have enough capital to make it through the downturn?' ...cont'd

http://www.corporatefinancingweek.com/file/70429/us-bank-consolidation-not-a-given.html
(free temporary 2/day registration)

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3. Economic Scene; Few see bank consolidation as a harbinger of doomsday.

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April 16, 1998
Economic Scene; Few see bank consolidation as a harbinger of doomsday.
By PETER PASSELL
WHILE the timing was dramatic, the news this week of two gigantic bank mergers shocked few economists who specialize in financial markets.

''This is the beginning of the catch-up game,'' explained Bert Ely, a banking consultant in Alexandria, Va. Legislation has prevented the creation of a dozen megabanks, he says, which would exist alongside hundreds or thousands of smaller independent ones.

Nor were economists wringing their hands last week over the competitive effect of what promises to be a rapid consolidation of the banking industry as Nationsbank seeks to merge with BankAmerica and Banc One seeks a union with First Chicago NBD. ''There's just no way a bank can carve out a dominant position in the national market,'' argued George Benston, an economist at the Goizueta Business School at Emory University in Atlanta.

What qualms they had concerned the ability of the monster banks with one-size-fits-all lending policies to serve small businesses efficiently. But even the skeptics are hard pressed to come up with scary situations. ''So long as entry into banking is relatively easy,'' said Lawrence White at New York University's Stern School of Business, ''the niche players should sustain the small-loan market''.

There is a sense of historical inevitability about bank consolidation. Every other developed economy has nationwide banking, with brand names and branches as ubiquitous as, say, Exxon gas stations in America. And while it is possible to find economists with serious worries about the integration of financial services as diverse as deposit-taking and the underwriting of casualty insurance a la Citcorp-Travelers, prohibitions against interstate branch banking have long been viewed by economists as a crude form of protectionism. ''If the Supreme Court had simply ruled in the 19th century that the interstate commerce clause applied to banking, we would have gone the way of the rest of the world,'' Mr. Ely argues.

That said, there is still disagreement over the potential efficiencies in moving from a world of $30 billion regional banks to one of $300 billion national banks. The merged entities may get some mileage from closing branches, integrating computer systems and combining specialized services -- for example, financing trade with Latin America. But there is ''extreme skepticism'' among researchers that the cost saving will offset the inherent inefficiencies of running larger corporations, said Alan Blinder, a former vice chairman of the Federal Reserve who teaches at Princeton University.

By the same token, it is only natural to worry that consolidation will lead to less competition and higher prices for banking services. Mr. Bentson flatly dismisses the notion, arguing that the effective level of competition will rise in most areas as banks buy into new markets through mergers.

Mr. White is a bit more circumspect. Large commercial customers, he agrees, have nothing to fear.

..snip..

But it is not the job of regulators to second-guess the motives in this latest round of merger mania, Mr. Blinder suggests. As long as industry consolidation threatens neither the competitiveness nor the stability of banking -- which they apparently don't -- this is a matter for the stockholders.

http://query.nytimes.com/gst/fullpage.html?res=9904E2DA173CF935A25757C0A96E958260&sec=&spon=&pagewanted=print


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Monopoly-Creating Bank Consolidation? The Merger of Fleet and BankBoston


Abstract:
The merger of Fleet and BankBoston in September 1999 resulted in a regional New England lending market in which only one large, universal bank remained. We explore the extent to which that merger resulted in monopoly rents for the combined entity in some niches within the regional loan market. For small- and medium-sized middle-market borrowers, prior to the merger, Fleet and BankBoston charged unusually low loan interest rates, reflecting their ability to realize economies of scope and scale. After the merger, those cost savings were no longer passed on to medium-sized middle-market borrowers, which resulted in an increase in the average interest rate credit spreads to those borrowers of roughly one percent. Small-sized middle-market borrowers (which continued to enjoy the advantage of loan market competition from remaining small banks) maintained their low spreads. Our results suggest that it may be desirable for regulators to consider the concentration in lending markets in addition to deposit markets when evaluating mergers and structuring appropriate divestiture requirements.


http://www.corporatefinancingweek.com/file/70474/global-top-ten-ma-record.html


AntiTrust Laws/Bank Consolidation debate (1998):

....The cost of failing to maintain competition can be very great. Only partisan rancor and the idiosyncratic opposition of a single conservative Senator prevented the 105th Congress from passing this month a financial consolidation bill that would have allowed banks, insurance companies and stockbrokers to merge into conglomerates for the first time since the Great Depression. Americans who, during the S&L crisis of the 1980s, deplored the large number of American banks and praised the highly anticompetitive concentration of the Japanese banking industry are now aware of their mistake, though I haven't noticed many of them actually confessing error. As the Japanese financial system collapses, threatening to take the world economy with it, the political influence of Japanese bankers continues to delay implementation of the necessary measures. If a global depression occurs, it will be largely the result of inadequate competition in the Japanese financial sector. Yet the 106th Congress will no doubt commence in January with the reintroduction by legislators gorged on "campaign contributions" from the banks and brokerages of legislation to permit similar levels of concentration in our system.

What antitrust does for us cannot be discussed intelligently if "the economy" is perceived as a domain separate from "politics." The American Century has been about explosive technical innovation transforming human life. It has also been about maintaining a balance between economic liberty and democratic control over our destiny as a society. The underlying message of the antitrust philosophy is that democratic government defends itself by encouraging economic competition and destroying private power before it grows too large for the electorate to control. The alternative is government of the oligarchs, by the oligarchs and for the oligarchs. If that occurs, democratic self-government will indeed perish from the earth.


http://moglen.law.columbia.edu/publications/antitrust-democracy.html

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4. The name "World Bank" will have a new meaning.

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5. Just 3 ‘superbanks’ now dominate industry

http://www.msnbc.msn.com/id/27441147

[Phred42]

6. And OF Course - THEY are too large to be allowed to fail.

Time to break these bastards up