Bank Mergers in a Deregulated Environment: Promise and Peril

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Greenwood Publishing Group, 2001 - Business & Economics - 217 pages
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Deregulation in banking and finance may hold promise for consumers, but what actually seems to be developing is trouble. Large banks are combining into small clusters of mega-banks with national and global reach, supported by government safety nets premised on fears they are too big to be allowed to fail. One result, among several, is that retail banking suffers. Shull and Hanweck evaluate existing bank merger policy and offer workable proposals for new legislative actions that would enhance the benefits of bank mergers without exacerbating the weaknesses. They review the historical role of governments in protecting banks from competition, then the modern policy that promotes competition, and present a model to explain and highlight the problems that today's policies are causing. In the end they turn to their own research and conclude that while a special bank merger policy is still warranted, it needs to be adapted in ways that would rein in the trend toward bigness and soften the impact this has domestically and internationally. A far reaching study essential for executives in all corners of the banking and financial services industry, academic and government researchers, and teachers of business, finance, and public policy.

Many argue that deregulation and technological change have so intensified competition among banks that bank mega-mergers should cause little concern. Shull and Hanweck conclude, however, that a special bank merger policy is still warranted but it needs to be adapted to the way things are today, mainly, the impact that larger banks are having domestically and on the international scene as well. They provide a history of how governments in the U.S. and elsewhere sought to suppress bank competition; then, the unique procompetitive policies that developed in the second half of the Twentieth Century, including the introduction of antitrust standards and deregulation. From their theoretical and empirical evidence they show that the newly combined banks are competitively suspect. From other evidence they find that pricing of retail banking services in local markets does not reflect the improvements that deregulation and rapid technological change have led us to expect. They also describe how current bank merger policy, implemented by the Federal Reserve, other Federal banking agencies and the Justice Department, facilitates the growth of large banks and augments the new structural configuration. Can these problems be solved? Shull and Hanweck believe they can be and propose detailed, workable changes in public policy to do so.

 

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Contents

Introduction
1
A Near Death Experience?
3
The Merger Movement and Structural Change
7
Promise and Peril
9
Notes
11
Banking and Government in the Early Days of Banking
13
A Brief History of Banking in Western Europe
14
Sovereign Loans Public Finance and Bank Failure
17
Why Banks Merge
119
Economic Conditions
122
Enabling Factors
123
Motivations
132
Empirical Analysis of Merger Motives
137
Summary and Conclusions
140
Notes
143
References
144

The Search for Stability
21
Symbiosis and Competition Policy
26
Conclusions
34
Notes
35
References
39
Early Competition Policies in the United States
43
The Colonial Perspective
44
First Policies and Competitive Restraints
45
Benefits Costs and Perennial Issues
48
Competitive Issues in Changing Regimes
55
Banking Structure and Competitive in the MidTwentieth Century
70
Conclusions
72
References
75
Banking and Antitrust
79
Beginnings of Antitrust Enforcement in Banking
80
The Bank Holding Company and Merger Acts
82
Integration of Banking Policy and Antitrust
88
Early Enforcement and the Evolution of Policy
91
Other Elements of Competition Policy
100
Conclusions
109
HerfindahlHirshchman Index HHI Illustrative Computations
110
Notes
112
References
115
The Economics of Structural Reorganization
147
Mergers and Structural Change
148
Mergers and Bank Efficiency
151
Mergers Diversification and Risk
154
Price Effects of Mergers
155
Analysis of the Anomaly
161
Preliminary Implications for Merger Policy
170
Conclusions
171
Bank Structure Projections
172
Notes
173
References
175
Toward a New Competition Policy for Banking
181
A Recapitulation of Current Bank Merger Policy
182
The Deficiencies of Bank Merger Policy
184
A Framework for Analysis
186
Proposals for Change
190
Conclusions
197
Notes
198
References
199
Summary and Conclusions
201
Selected Bibliography
209
Index
211
Copyright

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About the author (2001)

BERNARD SHULL is Professor Emeritus in the Department of Economics Hunter College, and a special consultant for National Economic Research Associates (NERA). He has held various positions in the Federal Reserve System, including Associate Advisor to the Board of Governors, he was also Senior Economist in the Office of the Comptroller of the Currency. He has published widely in professional and academic journals on issues of monetary, banking, and financial policy, and is the co-author of two books, Interest Rate Volatility and Bank Mergers in a Deregulated Environment (Quorum, 2001).

GERALD A. HANWECK is Professor of Finance in the School of Management, George Mason University. Dr. Hanweck has been a consultant to government agencies, an expert witness in litigation involving financial institutions and government agencies, and a visiting scholar with the Division of Insurance at the FDIC. He publishes extensively in the journals of his field and has co-authored one book, with Bernard Shull, on interest rate volatility.

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