M&As in the financial industry: A matter of concern for bank supervisors?

Journal of Financial Regulation and Compliance

Volumn 9, Issue 3, 2001, Pages 225-236

  Wolgast, Michael ^a  

^a Abteilung Verbraucherpolitik   (Germany)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 84881848927     PISSN: 13581988     EISSN: 17400279     Source Type: Journal    
DOI: 10.1108/eb025077     Document Type: Article

References (23)

1. Bancassurance has recently come back to the focus of public interest in Germany as a result of the surprise announcement of a merger between Allianz AG (the world’s third largest insurer) and Dresdner Bank (ranked 22nd worldwide in terms of total assets).
2. Source: Thomson Financial Securities Data.
3. Source: Thomson Financial Securities Data.
4. In January, 2001 the ‘Ferguson Report’-a major study on the possible effects of financial consolidation on matters of policy concern commissioned by the finance ministers and central bank governors of the G-10 nations, which adopts a critical attitude towards financial sector M&As-was released to the public (Group of Ten, ‘Report on Consolidation in the Financial Sector’, also available at www.bis.org, www.imf.org and www.oecd.org). The scepticism of bank supervisors both in Germany and at the BIS level was also expressed in various speeches and publications.
5. Due to the complexity of the studies, and the variety of techniques used, it is difficult to give concrete numbers backing this result. Some consultants claim to have found that two-thirds of all mergers fail to achieve the proclaimed strategic goals, others say that only one transaction out of four is advantageous, or that only 30 per cent have added value, as measured against a benchmark.
6. For example, the International Labour Organisation argued that the high failure rate of M&As in the financial services sector could be significantly reduced if top management paid more attention to the views and welfare of employees (International Labour Organisation (2001) ‘The employment impact of mergers and acquisitions in the banking and financial services sector’, Geneva, February, also available at www.ilo.org). A study by KPMG, the accounting consultancy, suggests that, for M&A transactions, the chances of success would rise by a quarter if satisfactory attention were paid to cultural issues.
7. One exception to this is that bank mergers or, more generally, mergers among financial firms usually need approval from the competition authorities, so these authorities might have to weigh the (prospective) efficiency gains against issues of market power. Under a clear division of tasks, this should not, however, be a concern for supervisory institutions.
8. Another concern of bank supervisors is that current shareholder demands might be excessive and that this could induce too much risk-taking by some international banks. However, this concern is more of a general nature, and goes far beyond the issue of M&As in the financial industry.
9. If a big institution is facing adverse repu-tational or operational events, the degree of systemic risk will normally be higher. Moreover, in the case that a large and complex financial institution becomes seriously distressed-which can never be ruled out entirely-consolidation may have increased the likelihood that the winding down of the institution will prove difficult and could be disorderly, especially if supervisors from different sectors and the central banks of more than one country are involved. The authorities would therefore be well advised to step up current efforts in cooperation and to provide some contingency planning for such an event, possibly in cooperation with the private sector.
10. One might also argue, however, that the risk that such events could actually endanger the stability of the respective institution as a whole is much smaller in the context of sufficiently large firms, since, given a certain negative event, a small institution might very soon not be able to handle the impact of this event anymore, whereas large institutions could more easily digest adverse events up to a certain size.
11. The issue of ‘too big to fail’ is dissussed in more depth in Wolgast, M. (2001) '“Too big to fail”-effects on competition and implications for banking supervision’, Deutsche Bank Research Frankfurt Voice, 31st May (www.dbresearch.com).
12. Usually, ‘market liquidity’ is discussed in terms of ‘tightness’ of bid-ask spreads, ‘depth’ (as measured by the impact of large orders on prices) and ‘resilience’ (ie how quickly prices are brought back to ‘equilibrium’ after temporary deviations). Often, the trading volume is used as a proxy for market depth. Strictly speaking, however, high trading volumes do not necessarily imply a high degree of ‘liquidity’ since prices may still be very volatile even if market turnover is high.
13. In a more sophisticated model which includes the operational costs of market making, one might even argue that a consolidation among markets makers might reduce fixed costs and therefore-ceteris paribus-increase market liquidity.
14. Most of these recommendations are also put forward in the G-10‘s Ferguson report.
15. The issue of financial disclosure is discussed in various publications by the Basel Committee on Banking Supervision. In January, 2001 the recommendations of a private sector working party on public disclosure, set up at the initiative of the major US regulatory agencies and chaired by Walter Shipley, retired chairman of Chase Manhattan, were released to the public (available at www.frb.gov).
16. The ‘third pillar’ of the new capital adequacy framework consists of a series of disclosure requirements concerning risk exposure. Linking the use of the internal-ratings-based approach for credit risk to disclosure will give these recommendations some force.
17. In the USA, the Federal Reserve in its capacity as supervisory authority started as early as the mid-1990s to develop a special programme to monitor large, complex banks, which it formally implemented in 1999 (see ‘Supervision of large complex banking organizations’, Federal Reserve Bulletin, Febrary 2001, pp. 47-57). Part of its approach is increased cross-sector cooperation with other US supervisory bodies and improved international cooperation, such as in the Basel Committee for Banking Supervision. Another example of current efforts in this domain is the ‘task force on the winding down of large and complex financial groups’ under the aegis of the Basel committee, set up at the request of the Financial Stability Forum (FSF).
18. This proposal has recently been put forward in an article by Stephen Lumpkin, Senior Economist at the OECD (in Lumpkin, S. (2000) Financial Market Trends, No. 75, March, pp. 138-139).
19. The institutional design of private sector involvement in this realm is discussed in more depth in Wolgast (2001) Financial Market Trends, No. 75, March, pp. (138-139).
20. This point has also been emphasised by the BIS (70th Annual Report (1999-2000), pp. 140-141): in certain situations, the current allocation of responsibility to national authorities might create incentives not fully in line with the stability needs of the area as a whole. In the absence of appropriate burden-sharing mechanisms, such situations could-according to the BIS-complicate the timely elaboration of a policy response and might even lead to a ‘bias towards inaction’.
21. Apart from the OECD and the BIS publications cited above, concerns about whether the current supervisory structures are keeping pace with the changing financial landscape in Euroland are also raised in an IMF Working Paper (WP/01/28 ‘Euro-Area Banking at the Cross-roads’, pp. 56-66). With respect to the EU single financial market, the opposite view that the stability of the financial system was not negatively affected by the current structures of supervision was maintained in the ‘Brouwer Report’ produced by a working party of central bank representatives and other high level European officials (Report on Financial Stability, EU Economic Paper No. 143, May 2000).
22. In the financial sector, even the framework and conditions for obtaining approval for an M&A transaction from the competent authorities differ widely across countries and are subject to considerable uncertainty.
23. Other examples include Finland, Sweden, Denmark and Ireland, or-outside the EU, and primarily in reaction to recent episodes of financial crisis-Korea and Japan. The integration of national regulators is also being discussed in France and in Switzerland.