Mergers

The last decade has witnessed an unprecedented number of mega-mergers in the banking industry: Bank of America’s acquisitions of Fleet Bank, MBNA, and U.S. Trust; Bank of New York’s acquisition of Mellon Financial; and Wells Fargo’s acquisition of Wachovia, to name several of the largest consolidations. Besides growth for its own sake, these superbanks are able to offer one-stop shopping for financial services: everything from savings accounts to home mortgages, investment account, insurance vehicles, and financial planning. 
a. In the short run, what are the potential cost advantages of these mergers? Explain.Mergers

Mergers give the institution more muscle for a bank to deliver to its consumers. The merging institutions also get a chance to offer more services than they previously offered. The bank is able to provide more products for its consumers without having to train or recruit its employees (Layne, 2006). This appears to be a cost advantage to the company. Moreover, the company saves the cost of creating a framework of banks and acquiring new consumers. By merging with another bank, each of the banks is able to use the framework of the other institution without undergoing the cost of expansion.

Is a $300 billion national bank likely to be more efficient than a $30 billion regional bank or a $3 billion state-based bank?

The $300 billion national bank had more capacity to meet the needs of its consumers. It is also likely to acquire a bigger customer base since it is available on a larger scale. The bigger institution also benefits from a more diverse population and hence its risk factors are relatively eased (Layne, 2006). To its shareholders, such a bank is likely to be a better investment than the smaller state based bank. To its customers, it is likely to provide more efficient services which are available at every place in the country. Consequently, it will be more like to command a bigger market share.

What economic evidence is needed to determine whether there are long-run increasing returns to scale in banking?

Increasing profits especially if the increase is steady is an important indicator of an increasing return to scale. If after a merger the company notes that it has not been able to acquire a reasonable amount of profits compared to its former profits, the company should consider a change of strategy (Samuelson & Marks, 2012). The merger should also be reconsidered if it does not bring more profits for either or bring bigger profits for both or either of the companies.

c. Do you think these mergers are predicated on economies of scope?

Since mergers give the company a chance to produce more products without incurring extra costs, they are predicated on economies of scope (Samuelson & Marks, 2012). They give the company a bigger scope to produce products for its consumers than it previously had.

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