Consolidation in Banking Essay

1.Introduction In our daily life , we can receive banking service from banks and branches whose headquarters may from different city, region or nation . This is because banking consolidation has improved banking expansion in the past decades. It is a fact that many banks regard consolidation as a strategy for their growth and development in new market . Consolidation usually consist of mergers and acquisitions. The former one means two independent companies combine as a new one ,the latter one means a bank has a controlling interest in other firms but they still remain independently. (Heffernan, 2005 ) The following part of the article will be divided in third parts. The first part will focus the reasons , trends and effects of consolidation in banking industry. The second part is mainly about the benefits and disadvantages of consolidations for the industry and society. The last part is evaluation about challenges consolidation bring to the regulators. 2.Consolidation in Banking Sector 2.1. Reasons for Consolidation in the Financial Sector There are lots of issues concerning about banking consolidation. The basic one is the motivation. Why banks want to mergers and acquisitions? DeYoung, Evanoff and Molyneux think the primary reason for banking consolidation is financial and technological innovations in the industry ( DeYoung, Evanoff and Molyneux,2009) . This is concerned to be a significant factor because after a wave of new technology, the structure in the industry will change since all banks make changes to fit to innovations. Thus many small banks struggle to survive or go bankruptcy after innovations, finally they decide to consolidation to get better development. To the larger banks, they are stronger in competition, they are willing to consolidate with those smaller banks to be more competitive in the market . However, Researches show that technologies spread to small banks rapidly because of third-party technology vendors and decreasing costing of technology delivery in recent years. (Frame and White ,2004; cited in DeYoung ,2007 ). Therefore this cannot be regard as an significant reason now. Some researchers argue that the better explanation for banking consolidation is the relationship paradigm between market power and profitability (market-power theory). (Shepherd ,1982 and Berger ,1995. Cited in Santillà ¡n-Salgado ,2005 ). They address that in banking industry, â€Å" firms with large market shares can reach the minimum economic scale of operations to develop a differentiated base of products which can be priced at a premium to obtain extraordinary profits(efficiency-structure hypothesis).† ( Santillà ¡n-Salgado ,2005, p85).Due to this reason, in order to earn more profits , banks want to increase market shares. Mergers and acquisitions are the most important way for corporate restructuring and enlarge corporate scale in new markets.