Define the wave of mergers in the banking industry, Financial Management

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What is behind the wave of mergers in the banking industry?

A: Various economic factors have caused banking institutions to merge over the past various years. These factors include:

• Greater efficiency. Banks frequently are able to operate more cost efficiently by increasing their size. The costs of so many functions don't double while the scale of operation doubles. The result of it is mergers are one way to keep costs and prices down.

• Leveraging technology. Banks and their customers have become more and more accustomed to the advantages of new and expensive technologies. So many of these technologies are very much expensive unless costs can be spread over a large number of customers. Mergers are frequently necessary to permit banks to introduce and maintain the technologies customers increasingly demand.

• Changing laws. Laws which had prevented several banks from operating in much more than one state recently have been removed or overridden. The advent of interstate banking and branching means several opportunities for banks operating in different states to merge with each other.

• Diversification. One efficient method of controlling risks inherent in bank lending is to diversify operations across diverse geographic regions and different types of customers. Mergers can help diversify such type of risks.

• Broader array of products. Mergers may provide banking institutions an opportunity to offer a broader array of services. A merger of two banks along with different expertise can result in a combination much more to the liking of customers looking for one-stop shopping.


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