Why Banks Sometimes Seek To Merge Other Banks Or Financial Institutions

3008 words - 12 pages

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 some large
bank mergers abroad, most notably in Japan. Today the U.S. banking
sector is in good function, with record profits and relatively low
amounts of problem loans. For example, the return on average
assets in 2003 for the two merger targets, Bank One and Fleet Boston,
were 1.27% and 1.34%, respectively, while the top 50 bank holding
companies averaged 1.28%. This indicates that the recent mega mergers
are not motivated by economic weakness but rather by other economic
forces.

Major changes in the banking system

One significant phenomenon in the nation’s banking system is
...

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