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The Motives, Risk, and Performance of Bank Merger in Crisis

Author: PengFuMin
Tutor: LiuXiLiang
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: bank merger financial crisis government-oriented merger market-driven merger nationalization
CLC: F831.2
Type: PhD thesis
Year: 2010
Downloads: 232
Quote: 0
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Abstract


During the last two decades, the wrold has suffered from financial crisis. From the ERM crisis of 1992, Mexico’s financial crisis in 1994, the Asian financial crisis in 1997, Russian financial crisis in 1998, the Argentina financial crisis in 2002,to the global financial crisis which begun in 2007, the world has burst out six severe financial crisis in less than 20 years. Although bank merger and acquisitions (M&As) is a major approach for bank to extend operations, it is often accused of a source of financial crisis. However, we often see the government encourages,even forces ailing banks to merge in financial crisis. How to explain this?M&As of bank in crisis is a special sort of bank merger, it occurs in an extreme circumstance, with many features that the traditional bank M&As do not have. The traditional theory of bank merger focuses on the development of the bank, including searching for economy of scale or scope, improving efficiency, risk diversification, and the promotion of the shareholder value, etc. This cauld not explain these mergers occured in financial crisis. For these banks seriously affected by the financial crisis, the primary objective is to survive, and then develop. Moreover, the government tends to interfere in the bank merger, the motive of the government sometimes will held a dominant position. However, the government always has several targets when it interfere the bank merger, and these targets sometimes are conflicted.Bank mergers are widely accepted by policymakers as one strategy to resolve banking problems. Whether it helps to reduce the risk of bankruptcy and strengthen the banking sector is a question of common concern. When there’s no other capital injection and effect of merger sygnery is zero, merging failing bank is likely to create banks more likely to fail than predecessor banks. Michael S. H. Shih (2003) has proved this in a model. But if the government provide capital injection for the merged bank, the result will be quite different. During the 1997-1998 Asian financial crisis, some policy makers encouraged even forced ailing banks to merge, meanwhile, provided capital injection for the merged bank or stripped the non-performing loans, and stabilized the financial system finally. But the stabilization of financial system through bank merger may be ephemeral. Some bank mergers in banking crisis lead to an another financial crisis unfortunately, such as Argentina.Some developing countries attempt to improve the efficiency of it’s banking sector through bank merger in financial crisis. Malaysia’s banking sector reform in 1999 provided us an extreme example of government-oriented bank merger. In 1999, the central bank of Malaysia decided to consolidate all 54 domestic deposit taking institutions into ten large-capitalized banks. Malaysia’s banking sector reform has gained magnitude achievement in spite of its extreme approach. In contrast to the banking sector reform of Malaysia, some developing countries which accepted the IMF’s prescription, did not achieve their goals. This tells us, how to interfere effectively is really a question.While financial crisis deteriorates many financial institutions, it also provides opportunities for these banks which less influenced by crisis to extend operations. These banks will find cheaper targets to acquire easily, and the regulator will always support the merger during the financial crisis. Of course, bank merger is not always welcome because of fear for "too-big-to-fail", and the negative effects leaded by monopoly followed by merger. Moreover, using this market-driving mergers to resolve bank problems has a premise, that is we must have banks with ability to implement merger. When the global financial crisis bursted out in 2007, there are few banks have the ability to acquire other bank. For Chinese banking industry which is less influenced by the crisis, it may be an opportunity to extend its operation globally through cross-border mergers.In this article, I studied bank merger in a creative way by focusing on the merger in a stress circunstance. Our major results are follwed. Firstly, unlike the bank mergers in the normal circumstances which have a lot of paradoxes, the mergers in a financial crisis have less arguments. Secondly, bank merger is a main approach to resolve financial crisis for government. Thirdly, the motives of the government always play an importment role in bank merger in financial crisis. Forthly, bank merger itself could not create a super bank, the most important thing is how to integrate the merged bank.

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CLC: > Economic > Fiscal, monetary > Finance, banking > World of finance, banking > Financial organizations and business
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