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Financial industry megamergers and policy challenges

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  • Thomas M. Hoenig
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    Abstract

    In the past few years, the pace of consolidation in the banking industry has accelerated, and combinations between banks and other financial service providers have become increasingly prevalent. In some countries, consolidation has resulted from the need to eliminate weak or problem institutions. More generally, however, the unprecedented wave of merger activity in financial services is being driven by powerful changes in telecommunications and information technology and by the removal of legal and regulatory barriers to national and international linkages. An important recent development is a change in the scale of financial industry mergers. Indeed, the size of these business combinations has increased to the point that, both in the United States and Europe, "megamergers" are reshaping the structure of the financial services industry.> Financial megamergers raise a number of important public policy issues. Some of these issues are very familiar and apply equally to megamergers and to more traditional mergers between financial service providers. For example, regulatory approval of megamergers may depend on antitrust implications and industry concentration.> However, the rise of banking and financial industry conglomerates brings into sharper focus a long-standing concern not addressed in existing merger guidelines. In a world dominated by mega financial institutions, governments could be reluctant to close those that become troubled for fear of systemic effects on the financial system. To the extent these institutions become "too big to fail," and where uninsured depositors and other creditors are protected by implicit government guarantees, the consequences can be quite serious. Indeed, the result may be a less stable and a less efficient financial system.> In a speech before the European Banking and Financial Forum in Prague, Mr. Hoenig discussed the challenges posed by financial industry megamergers and examined some possible policy options currently under study.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

    Volume (Year): (1999)
    Issue (Month): Q III ()
    Pages: 7-13

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    Handle: RePEc:fip:fedker:y:1999:i:qiii:p:7-13:n:v.84no.3

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    Keywords: Financial institutions ; Consolidation and merger of corporations ; Financial services industry;

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    Cited by:
    1. Carow, Kenneth A. & Heron, Randall A., 2002. "Capital market reactions to the passage of the Financial Services Modernization Act of 1999," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(3), pages 465-485.
    2. Elijah Brewer, III & Julapa Jagtiani, 2007. "How much would banks be willing to pay to become "too-big-to-fail" and to capture other benefits?," Research Working Paper RWP 07-05, Federal Reserve Bank of Kansas City.

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