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Banking - Essay Example

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Although a preferred means of solving the inherent challenges in the current banking industry, the reality is that it has its own disadvantages, as discussed in this essay. According to economists, there are a number of benefits of banks consolidation. One of these advantages is increased efficiency in the banking sector. Consolidation eliminates geographical restrictions in the banking industry, exposing it to high levels of competition, driving out all inefficient banks from the industry. This is not the only way of ensuring efficiency in the banking sector; moving to larger banking organizations too increases their levels of efficiency due to economies of scale and scope of work. Since consolidation increased the diversification of the loan portfolios by banks, thus lowering the probability of a future banking crisis. Mergers and acquisitions in the banking industry are economical, providing banks with an opportunity to minimize their expenditures. In the event of a merger, there is closure of overlapping branches, laying off any unnecessary staff, and sale of unwanted capital goods, thus minimizing some of the operational expenditures while at the same time creating some of income for the bank. Merging also increases sales volumes of banks’ products, especially when done from a central branch. One of the major advantages of consolidation in the banking sector is market diversification, creating new geographical markets. With these new markets is an increase in business revenues. Bank mergers additionally create stronger market power, changing the pricing offered by the banks. Although argued as a means of beating the inherent operation problems in the industry, consolidation faces a myriad of drawbacks. Critics of this form of banking fear on the elimination of the smaller banks from the banking industry due to acquisitions. Not only do the investors lose in such instances; small businesses too lose their source of funding. Large business organizations seek funding from large banks while small businesses seek for funding from the small banks. If large banks acquire the small banks in an effort to minimize competition, small businesses lose their source of funding. If this trend persists, the banking industry risks suffering from domination by a few banks. This makes the banking industry less competitive, reducing the quality of services provided to the customers. Some of the economists however argue that this does not have any significant effects on the industry, since there is freedom of entry into the market, and thus balances the equation of competition. Differences in the working cultures of the merging banks could lead to failure of these mergers. In their initial stages of merge, different businesses suffer from increased operational costs, for instance resultant from communication differences. Although experts argue on the efficiency of creating bank mergers, the reality is that when a merger takes place, managers face more vast and complicated organizations, exceeding their usual capacity. They may lack the essential expertise required in the field, reducing such bank’s efficiency. Some of the experts argue that the creation of stronger markets provides the banks with an opportunity to exploit their customers. Strong markets mean that there are reduced ...Show more


Merits and Disadvantages of Banking Consolidation Banking consolidation is the merging up of banks or buying out of small banks by bigger banks in an effort to create larger entities. Strategically, the banking industry, through consolidating, responds to the forces of competition in the industry contributed by increased levels of deregulation, globalization and financial innovation…
Author : bradleywintheis
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