The year 1998 saw an unprecedented number of mega-mergers in the banking industr
ID: 1242772 • Letter: T
Question
The year 1998 saw an unprecedented number of mega-mergers in the banking industry: NationsBank with BankAmerica, Bank One with First Chicago NBD, and Citicorp with Travelers Group, to name the three largest mergers. These merged entities are hoping to offer one-stop shopping for financial services: everything from savings to home mortgages, investments, and insurance. a.) In the short run, what are the potential cost advantages of these mergers? Explain. b.) Is a $300 billion national bank likely to be more efficient than a $30 billion regional bank or a $3 billion state-based bank? What economic evidence is needed to determine whether there are long-run increasing returns to scale in banking? c.) Do you think the mergers are predicated on economies of scope?Explanation / Answer
It is an understatement to say that this is a period of dramatic change in the banking industry in the United States. Since 1980, according to Federal Reserve statistics, there have been about 7,000 mergers of financial institutions in the country that have occurred, and the number of individual banks has dropped from a peak of 14,400 in 1980 to 9,064 today. At the same time, however, the number of bank offices has actually increased by nearly 40 percent to some 71,000 banking offices today, and in fact today there are more bank branches per capita than there were 20 years ago. For some consumers, this has been a difficult period of adjustment to new locations, personnel and accounts, while for others it has brought opportunities for more convenience and greater services. This hearing is designed, in part, to review questions about the consumer impact of these mergers, and inform the public of what may or may not be involved. In addition, we will explore whether the management and regulators are equipped to prudently administer and supervise institutions of such dimension, as well as the issue of the competitiveness of smaller banks and financial services firms with these newly created financial conglomerates. Each of the recent merger announcements needs to be looked at on an individual basis as well as on an industry-wide basis. The Citicorp-Travelers merger involves the integration of a money center commercial bank with a major insurance and securities firm.
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