6 Key excerpts on "Bank Consolidation"

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  eBook - ePub

  SME Finance and the Economic Crisis

  The Case of Greece

  • Alina Hyz(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  On the other hand, the concentration may increase the market power of merged institutions. The process of consolidation can also cause a reduction in the credit supplied to some categories of borrowers, particularly small firms, new firms, and those with a small number of lenders (Strahan and Weston, 1996; Walraven, 1997; Zardkoohi and Kolari, 1997; Strahan and Weston, 1998; Neviana, 2003). Financial consolidation has implications for competition and also for financial stability, monetary policy, and efficiency of financial institutions (Bikker and Bos, 2004; Prasad and Ghosh, 2005; Cartwright and Schoenberg, 2006; DePamphilis, 2008). Due to the diverse nature of financial institutions, different levels of financial development, and different legal frameworks, the causes and impact of financial consolidation vary across the countries. The relationships between competition, banking system performance, and stability have been extensively analysed in the theoretical literature. The impact of consolidation through M&As on competition operates through a number of channels and depends mainly on the market structure, the nature of competition, and the regulatory and supervisory framework. A good deal of debate on competition effects of Bank Consolidation has been phrased regarding two competing hypotheses. The structure–conduct–performance paradigm argues that concentration will intensify market power and thereby stymie competition and efficiency. In contrast, the efficiency paradigm argues that economies of scale drive bank M&As, so that increased concentration goes hand in hand with efficiency improvements.

  The empirical research on the issue of competition, particularly cross-country research, is still in an early stage. Most of these studies find that M&As may have influenced market prices. In the US, a reduction in the interest rate on deposits is detected in markets that have been affected by consolidation (Prager and Hannan, 1998). Financial consolidation led to higher concentration in countries such as the US and Japan, though they continue to have much more competitive banking systems as compared with other countries (Kenneth and Critchfield, 2005). However, in several other countries, the process of consolidation led to a decline in banking concentration, reflecting an increase in competition (Prasad and Ghosh, 2005). Estimates of the impact of mergers on prices for the Swiss retail banking market indicate that concentration may have a negative effect on prices (Egli and Rime, 1999). In the M&As in Italy, loan rates increase when the market share of the acquired bank is large (Sapienza, 2002). The indirect approach using European data generally finds that higher concentration leads to less favourable conditions for bank customers (Hempell, 2002; Gutiérrez de Rozas, 2007). Market power in connection with prices for small business loans and retail deposits is found to exist in both the US and Europe (Berger and Hannan, 1989). For the Latin American banking system, it was found that (i) concentration in banking markets did not necessarily lead to a lower level of competition and higher bank performance, and (ii) bank returns were negatively linked to the degree of competition and, to a lower extent, to foreign bank participation (Yildirim and Philippatos, 2007; Hyz, 2011).

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  The Bank Merger Wave: The Economic Causes and Social Consequences of Financial Consolidation

  The Economic Causes and Social Consequences of Financial Consolidation

  • Gary Dymski(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  Rhoades (1996) goes on to argue that because market power remains important in local banking markets, small markets and small depositors are especially at risk from bank mergers. Since these markets and depositors constitute a large fraction of all banking assets, these effects should be weighted heavily in the formulation of merger policy.

  More centralized banking markets may also be riskier. A report by Moore (1996) indicates that consumer credit, especially delivered through credit cards, has grown markedly at commercial banks; further, this trend is linked to a deepening level of household debt relative to income flows. Moore argues that this trend provides little reason to worry, since consumer debt is small relative to overall bank assets; but he admits that “Going forward, consumers’ financial position may be somewhat vulnerable” (6). This is especially true because the aggregate statistics used in Moore’s analysis mask the concentration of consumer credit-card debt in the hands of a relatively small number of banks, these in turn being linked increasingly to secondary markets for consumer-credit-backed securities. When bank profits depend on the volume of credit transactions alone, rather than on carrying any given volume through to maturity, and when third parties end up holding the debts so generated, lenders may fail to adequately consider the longer-term viability of the credits they authorize. This effect is offset by the reduction in risk that large banks enjoy when they make loans in different regions. This risk reduction follows from Nobel Laureate James Tobin’s theoretical admonition not to “put all your eggs in one basket.” When a loan portfolio includes loans reflecting different sets of regional economic conditions, a downturn in one bank lending market will have a smaller impact on the bank’s entire loan portfolio than if the bank were undiversified.

  Bank Consolidation and Lending Patterns

  Some studies have directly or indirectly examined the impact of Bank Consolidation on lending patterns. One study, by Dunham (1986), examines overall patterns in credit flows. The author examines whether credit flows change after small independent banks are absorbed by larger out-of-state bank holding companies. She finds that small independent banks gather deposits and lend locally, with the funds raised exceeding their deposit base—resulting in fund outflows. This pattern becomes more pronounced when the small bank affiliates with a larger bank holding company—so mergers and acquisitions do decrease credit flows in some communities. An analysis of loan growth by Furlong (1994) found that loan growth at banks owned out-of-state were not significantly different from that at other banks.

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  The Political Economy of Financial Development in Malaysia

  From the Asian Crisis to 1MDB

  • Lena Rethel(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  The next section will discuss financial reforms in the banking sector. The section thereafter will examine some of the implications of these changes, with an emphasis on financialisation dynamics. The third section will then shift the focus a little bit and highlight regulatory efforts to nurture so-called ‘value-based intermediation’. In this chapter, I focus on changes in the banking system. I will discuss closely related efforts to expand the role of capital markets in the next chapter. Consolidating the banking sector Since the late 1980s, and especially so against the background of the Uruguay Round of trade negotiations of the early 1990s, Bank Negara had been keen to strengthen the competitiveness of the domestic banking sector. In 1994, it introduced a two-tiered approach to bank regulation, to encourage the merger of smaller banks with bigger multi-purpose banks (Chin 2005, 125). However, with the heating up of the stock market, there was little market pressure for Bank Consolidation. In the aftermath of the Asian crisis, Bank Negara pushed more forcefully for local Bank Consolidation, starting with the finance companies in January 1998. In July 1999, it announced that the country’s existing 21 banks were to be submerged within six anchor banks. Cook (2008, 87–93) details significant discontent with these bank merger plans. Ultimately, the backlash resulted in the announcement of a new merger plan in October 1999 that allowed for ten anchor banks (see also Chin 2005, 129). Table 4.1 illustrates changes in the number and types of financial institutions, including both local and foreign banks. It clearly demonstrates a significant transformation, including the reduction of the overall numbers of financial institutions. Moreover, the Bank Consolidation plan clearly signalled the power of the ethnically stratified state over the financial sector

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  Financial Liberalization and Economic Performance

  Brazil at the Crossroads

  • Luiz Fernando de Paula(Author)
  • 2012(Publication Date)
  • Routledge

    (Publisher)

  9 Banking consolidation after the Real Plan

  Determinants and impacts Luiz Fernando de Paula

  DOI: 10.4324/9780203835210-11

  9.1 Introduction

  As we have seen in Chapter 7 , banking consolidation – understood as a process that results from a bank merger and acquisition (M&A) that in general have reduced the number of financial institutions (and their average size) and increased the degree of market concentration – is a worldwide phenomenon. Bank Consolidation in Brazil has accelerated after the implementation of the Real Plan in 1994, the adoption of government's banking restructuring programs after the 1995 banking distress, and the greater flexibility in the norms related to the entry of foreign banks understood as necessary to strengthen the financial system.

  The objective of the chapter is to analyze the determinants and impacts of banking consolidation in Brazil. For this purpose, we focus on the period after the Real Plan, that was a structural break not only for the Brazilian economy but also (and mainly) for the banking sector, as domestic banks were used (and adapted) to work in an environment of high inflation.

  The chapter is divided as follows. Section 9.2 analyzes the “forces of changes” of banking consolidation in Brazil: price stabilization and the end of inflationary revenues; privatization of state banks, the banking distress of 1995 and the implementation of a program of banking restructuring (PROER), foreign banks' entry and domestic banks' reaction; the Basel Accord. Section 9.3 focuses on some impacts of banking consolidation in Brazil in terms of size and market share, banking concentration, and performance of the banking sector. Finally, Section 9.4 summarizes the chapter.

  9.2 Forces of change of banking consolidation in Brazil

  9.2.1 High inflation, inflationary revenues, and the Real Plan

  Before 1995, the Brazilian banking sector adapted very well to the environment of high inflation, taking advantage of the inflationary revenues to make profits. It did this by applying non-remunerative deposits (sight deposits) in Selic-indexed government securities, which combined liquidity with high rates of interest. This was only possible due to the existence of a broader domestically denominated indexed money and also the early development of a modern clearing system to support clients' demands for immediate information and the clearing of checks. Inflation made the Brazilian banking sector dynamic and technologically sophisticated. As a result, the decrease in M1 (cash plus sight deposits) – that is the conventional definition of the means of payment in an economy – did not result in a loss of funds in the Brazilian financial system as happened in the Argentine high inflation experience. In the latter case, an extensive process of dollarization was followed by an enormous decrease in financial deepening.1

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  EU Competition Law and the Financial Services Sector

  • Andrea Lista(Author)
  • 2013(Publication Date)
  • Informa Law from Routledge

    (Publisher)

  http://www.union-network.org .

  Especially the technological changes affecting the market in the last few years have been considered of paramount importance: new information and communication technologies are gradually changing the way insurance and banking undertakings operate in the market allegedly enhancing the level of competition.937

  937 See Tina Weber, Andrew Leyshon, and Hans Schenk, The Impact of Mergers and Acquisitions in the Banking and Insurance Sector, above, at p. 3.

  What is the real impact of these factors on competition then? And, more important, ought all this to be taken into account in the quest for an ideal regulatory framework for mergers and acquisition in the banking sector?

  Economic studies have emphasized that, by virtue of the World Wide Web, insurers and banks would be now in a position to reduce operating costs by operating mainly online and through a network comprising fewer branches compared to the past,938 and this is indeed true. Technological changes would appear to function, accordingly, as a counteracting element for the negative impact of mergers and acquisitions, the argument being that the high level of consolidation in the financial services sector is somehow mitigated by the possibility for insurance and banking undertakings to provide their services online across the internal market.

  938 Ibid.

  If, for instance, a high level of consolidation is present in the U.K. financial services sector, the negative impact of this scenario on consumers would be, according to these theories, lessened by the possibility for French insurers and banks to provide their services in the United Kingdom via the World Wide Web.

  While this is theoretically perfectly possible, the economic theories in question fail to acknowledge the legal complexities of this scenario. The provision of online cross-border financial services is, at least in the line of general insurance and credit banking services aimed at consumers, unlikely to represent a viable means for banks or insurers since insurance contracts, mortgages, and banking services are usually governed by the contract law of the Member State in which they are provided. Due to legal barriers that are extremely difficult to circumvent, it is thus highly unlikely that banking undertakings should be able to provide services across the internal borders of the European Union without the establishment of branches in individual Member States.939

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  Retail and Digital Banking

  Principles and Practice

  • John Henderson(Author)
  • 2018(Publication Date)
  • Kogan Page

    (Publisher)

  During the last half of the 20th century and the first decade of the 2000s, there was a major period of consolidation and rationalization within the retail banking sector in the UK. Of the 32 banks and building societies that were in existence in 1960, 26 were absorbed into just six major organizations by 2010 (Barclays, HSBC, Lloyds, RBS, Santander and Nationwide).

  The number of building societies fell from its peak of 700 institutions in 1960, to only 52 by 2010 (Davies et al , 2010). By the end of the 20th century many of the large UK banks had become major global financial institutions; however, the financial crisis of 2008 led to retrenchment of the banks, with many consolidating their businesses into their traditional core markets. The financial crisis also led to the actual reduction in the number of banks in the UK when many of the failing banks were taken over. The reduction in the number of banks led to a concentration of market share, as highlighted by the Competition and Markets Authority in July 2014: the largest four banks accounted for 77 per cent of the UK personal current account market and 85 per cent of small and medium-sized enterprise accounts (CMA, 2014). Observations from the review identified that the marketplace had effectively become stagnant, with minimal fluctuations in market share amongst the main players. There appears to be a very high degree of consumer apathy, perhaps due to the lack of product differentiation and perceived complications with switching bank accounts. Either way, customers seem to be making do with their existing bank as they can’t see a compelling alternative that would serve as a stimulus for moving.

  With the number of banks and financial institutions reducing, whilst simultaneously growing their balance sheets through acquisitions and mergers, the new enlarged players actively sought new non-interest-earning sources of income, moving away from their traditional intermediary form of interest earnings for deposits and advances. This led to the super-sized banks participating on the global stage, participating in more complex international market trading in securities, funds and derivatives. This form of activity now accounts for 60 per cent of banks’ earnings (Davies et al

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