Bank consolidation is a process that plays a huge role in the worldwide global economy. It can help to speed up or slow down economic growth and change areas such as interest rates and inflation. But how does it work, and what are the main issues to be aware of?
A general overview of bank consolidation
Bank consolidation is the process where a bank takes control of another bank or financial institution. This can be done through a merger or a takeover. The bank that’s being taken over may continue under its original name after the consolidation, or the name could be lost as it moves forward under the name of the bank taking it over.
There are several reasons why this might occur. A bank may identify a small rival that has a client base that would complement its own. Another possibility is that the smaller entity is based in a location that the bigger bank would like to enter. A takeover gives it a relatively simple way to do this. This not only gives the larger bank access to a wider customer base, but also enables it to expand its operations without needing to physically establish new branches.
As consolidation becomes a growing trend in the global business world, we may see an increasing number of these deals taking place in the banking industry. How do they differ from one another, and what are the risks and advantages to be aware of?
Types of consolidation
There are a few different ways that this consolidation can work. The first is a merger of equal-sized banks. In this case, two banks of similar size merge to form a new financial entity. This could be done for a number of reasons, such as when the executives of both banks decide that it would suit them to share resources such as IT systems, branch network and staff.
The acquisition of one bank by another is the second type of bank consolidation. This happens when a bigger bank buys a smaller one. Both banks will generally carry on operating under their original name, but they may share resources and knowledge behind the scenes that help them both to progress.
The final example is that of a buyout. This is where the purchasing bank takes the other and integrates it into a combined entity. When this happens, the name of the bank that has been bought disappears and the buying bank grows in size immediately by absorbing its operations.
We can see real-life examples such as the Bank of New York Mellon. This company was formed in 2007 when the Mellon Financial Corporation and the Bank of New York merged. Following this transaction, this company became the biggest custodian bank in the world, and it is now traded on the New York Stock Exchange with institutional investors owning the majority of its shares.
Looking at the biggest examples of mergers and acquisitions in American history, we can see that the 1998 merger between Bank of America and NationsBank leads the way at $62bn. This created the second-largest bank in the world, but regulators insisted on the divestiture of some branches in New Mexico, where a single-bank monopoly would have been created.
The advantages and disadvantages of bank consolidation
Consolidation can help the banks involved in any of these deals to grow or overcome financial issues. A smaller bank that has been struggling may find stability in joining forces with a larger company that can provide a clear way forward. The bigger entity may find that this provides the quickest and most risk-free method of growing.
For the public, bank consolidation offers a mixture of advantages and disadvantages. They could find that their bank becomes more efficient, through having a bigger branch network or slicker IT systems. If the product range and financial stability of the bank improve, then this is another positive situation for its customers. It may become easier for customers to plan their first home purchase, as the lending process becomes more accessible and rates improve.
Perhaps the biggest potential disadvantage is that it removes a certain level of competition from the local banking market. If both banks operate in the same region, then residents will find their options restricted if they combine forces. This could eventually lead to a monopoly forming.
The recently announced merger between Busey Bank and CrossFirst Bank is an example of how this can work. The deal should go through early in 2025 and will give Busey Bank the chance to reach into new states including Texas, Arizona and Kansas. After the merger goes through, the Busey Bank name will be used by the combined bank, though it will use the CrossFirst Bank headquarters in the Kansas City area as its new base.
Effect on the overall economy
Bank consolidation should have relatively little impact on the overall economy. This type of transaction is about the internal operations of both banks and the service they provide their customers, rather than the country’s economy.
However, this may not be the case if the transition is carried out poorly and causes one or both banks to struggle. It could also have a negative effect if it creates a monopoly that stifles competition and makes it harder for people to get good interest rates.
A bank that acquires another will have a greater capacity to lend more, which could lead to more money in supply in the country over time. While inflation is a complex concept, it certainly has some links to the amount of money supply circulating in the country, meaning that bank consolidation could play a part in shaping the country’s future inflation rate.
Is this a good or bad thing?
With so many factors to take into account, it’s clear that bank consolidation can’t be viewed in simple terms as either a good or bad thing. Each case is different and the effect it has on the economy and the bank’s customers depends upon how well the consolidation is carried out.
