Financial Industry Megamergers - Research Paper Example

One of them is connected with the regulatory agreements of megamergers which actually are dependent on the antitrust concentration. Hoenig (1999) is worried that when megamergers become the prevalent financial institutions, governments will be forced to close down those that become less influential, out of fear to create unsecure financial system. Thus, the government implicitly guarantees such mergers that might be uninsured depositors or creditors, which eventually lead to unstable and less efficient financial structure (Hoenig, 1999).

Hoenig (1999) says that he is less optimistic about the challenges that occur in the merging processes. He also suspects that in the near future financial specialists have to cope with merger institutions that are "too big to fail" and advises that experts have to carefully balance between the "economic benefits of consolidation" and the "potential costs to the financial system (p.2)." Hoenig (1999) remarks that consolidation in the financial services happen in three dimensions: within the banking industry, between banks and other financial organizations and across national borders.

Up to 1999, there is an apparent decline of banking institutions. In the 1980s the number of banks in the United States is about 12 thousand. The estimated number in 1999 is 7 thousand (Hoenig, 1999). The same trend is occurring in most of the European countries. In the U.S the alliance is between commercial banking and investment banking services. In Europe, the model unifies the banking and insurance operations (Hoenig, 1999). Hoenig (199) discusses that the primary reason for consolidation in the financial services industry is to overcome possible problems and weaknesses caused by real estate lending, for instance.

Another important factor is the development of telecommunication and information technology which lowered the prices of the banking sector. Greater economies of scale are achieved through merging various services, forcing small companies to merge in order to increase the competition (Hoenig, 1999). Legal boundaries have also been removed, so that interstate banking is now feasible. International consolidation is a fact with many countries opening up their "domestic financial markets by liberalizing foreign ownership of domestic financial institutions (Hoenig, 1999, p.3)." Megamergers pose serious questions about the public policy, such as whether the consolidation is in the public interest.

Thus, banking agencies and Justice Departments have to take into consideration public policies before confirming an acquisition (Hoenig, 1999). To satisfy the public interests banking organizations continue to be active even after merging especially in order to create good records for servicing their communities. Hoenig (1999) highlights that megamergers in the U.S do not have antitrust problems and follow the traditional merger recommendations, focusing on different range of financial activities.

The new policy issues that Hoenig (1999) mentions concern the protections of the financial conglomerates guaranteed by the government as "too big to fall" institutions. This can lead to serious consequences. Because the activities of these megamergers constitute a large proportion of the country's payment system, possible