The Global Bank Merger Wave: Implications for Developing
Countries ∗
Gary A. Dymski Department of Economics
University of California, Riverside Riverside CA 92521 USA
April 8, 2002
1. Introduction
This paper reconsiders the causes and implications of the global bank merger wave,
especially for developing economies. Most academic studies of this bank merger wave have
focused on the U.S. Studies of cross-border mergers (Demirgüç-Kunt, Levine, and Min 1998,
Group of Ten 2001) largely consider the developed economies, with just a few (Claessens and
Jansen 2000; Clark, Cull, Peria, and Sanchez 2001) examining cross-border financial mergers in
developing economies. All of these studies almost invariably rely on two maintained hypotheses:
first, that a set of common ―micro-economic‖ forces—economies of scale and scope, unleashed
by deregulation and driven by technical change—underlies this global financial merger wave;
second, the U.S. merger wave constitutes the global paradigm. The links between mergers,
efficiency, and U.S. experience are demonstrated via the case of the large U.S. banks; for after
undergoing continuous consolidations since 1981, these banks are more profitable than other
regions‘ large banks. Table 1 illustrates this point using profits per $1000 of assets as a
benchmark. The fact that the largest U.S. banks have recently increased in size relative to the U.S.
market, while the largest banks in other national areas are smaller relative to their national
markets (Table 2), suggests that mergers elsewhere may lead to efficiency gains in other nations.
These maintained hypotheses suggest that the largest and most efficient banks, especially
those from the U.S., should be given full scope to engage in global mergers—that is, in
consolidations involving cross-border acquisitions of banks (Agénor 2001). This will lead to a
global homogenization of banking, dominated by efficient institutions. Berger, DeYoung, Genay,
and Udell (2000) develop an argument of precisely this sort: they assert that only the largest and
most efficient banks are able to enter and succeed in foreign markets over a sustained period; so
global acquisitions (and entry more broadly) will enhance global banking efficiency. This has a
powerful implication for developing economies. For a global bank merger wave dominated by
large overseas banks should, by enhancing efficiency, create a sounder and less crisis-prone
banking sector. So cross-border bank consolidation should provide some protection against
another East Asian financial crisis.1
The author appreciates many insightful comments by Joao Ferraz, Nobuaki Hamaguchi, Jim Crotty,
John Zysman, members of the economics faculty at Musashi University, Tokyo, and participants in the
Rio Workshop on Mergers and Acquisitions. Any remaining errors are his responsibility.
1
Some studies have found empirical evidence that foreign banks‘ entry may, however, reduce small
businesses‘ access to credit in developing economies (see Clark, Cull, Peria, and Sanchez 2002).
1
, This paper constructs an explanatory framework that challenges the maintained
hypotheses
the pace that global mergers
of macroeconomic growth, arethe
efficiency-driven and that
size and distribution of the U.S. case
domestic defines
income, andthethe
paradigm
size and strength of
domestic financial markets. This framework builds on ideas about mergers and acquisitions because
for all other nations‘ banking systems. The first maintained hypothesis is questionable that have emerged in
the empirical
the fields literature
of industrial finds little
organization evidence
and ofbehavior,
strategic links between
somemergers
of which andarefinancial firms‘in the paper by
summarized
performance,
Cantwell measured
and Santangelo in in
thisterms of either
volume. Theseprofitability
authors argueor operating
that mergersefficiency (Berger, Demsetz,
and acquisitions are triggered either
and Strahan (1999), Dymski (1999), and Rhoades (2000)). Efficiency effects
by factors that enhance corporate competitiveness, or factors that respond to changes in the market are also weak in and
European
regulatory bank mergers
environment. (OECD (2000)). Studies
Competitiveness-driven mergersof cross-border
entail efforts tomergers
enhance have reached
market the same
power, to defend
conclusion; for example, Claessens,
market position, to gain synergies and/or economies ofDemirgüç-Kunt, and Huizinga (1998) and Demirgüç-Kunt
and Huizinga
scope, (1998)
or to reduce show that and
transactions cross-border
information entry by Environmentally-driven
costs. multi-national banks hasmergers not increased
represent
profit
responses to regulatory shifts, efforts to gain access to new technologies, and attempts to U.S.
rates in these markets. And the U.S. experience cannot be a global paradigm because
banks‘
overcome verycapital-market
dominance in inefficiencies.
global financial markets does not leave similar niches available for
other nations‘ banks; instead, other nations‘ banks inhabit a global financial terrain in which U.S.
banks are Previous studies of
dominant—an bank mergers
especially crucialhave ignored the
consideration forfact thatin
banks banks are firms,
developing and as such
economies.
must develop strategies in changing and uncertain environments. These studies implicitly assume
The explanatory
that financial framework
market equilibria dictateproposed here attributesoptima
what financial-market bank mergers
are, andtoare macrostructural
driving toward
circumstances
homogeneous and bestbanks‘
practices.strategic
2
The motives
evidenceasforgoal-seeking
this view isfirms.
slight.Macrostructure
Economies of here scalerefers to
the key elements of banking firms‘ environment
considerations justify, at best, mergers of moderate-size banks. Recurrent market meltdowns and
loan-loss episodes suggest that best practices are elusive, if not time- and place-specific.
The macrostructural environment has a controlling effect on what kinds of global (cross-
border) bank mergers are feasible, and which are undertaken. Nations‘ banks can implement
cross-border purchases only if they have access to capital markets—and this access varies widely
from nation to nation. Nations‘ banks are targets for acquisition only insofar as they offer
customer bases and/or assets that fit into the strategic orientations of acquiring overseas banks.
Brazil‘s banking markets offer different strategic opportunities than those of, say, the United
States or Korea.
2
Ennis (2001) shows an information-theoretic approach to banking to demonstrate that banks of different size, and
banks with different business models, can persist despite the ongoing merger wave. The models on which he rely do
not, however, incorporate bank strategy; in this approach, banks‘ optimal behavior is largely dictated by the
particularities of the information and risk environment within which they operate.
2
, This argument leads to a reconsideration of what banking is. Previous studies of bank mergers
implicitly define banking as a fixed set of activities, which can be done poorly or well. Banks
are essentially harvesters of pre-existing, if technologically-dependent, opportunities for
conducting transactions and accumulating wealth by buying and trading claims on financial
assets. The alternative view developed here views banking as a seeding and cultivating activity.
Opportunity sets in banking markets evolve endogenously; banking market outcomes are open;
and efficiency in the sense of Pareto dominance cannot be well-defined. This paper argues that
large banks increasingly engage in harvesting, not seeding and cultivating, activities.
Consequently, their role in local markets consists fundamentally of servicing the financial needs
of households that have already passed minimal threshold wealth levels; it is not their duty to
cultivate the growth of new businesses and hence of a new population of prosperous households.
Implications for developing economies. Many analysts were confident in the early 1990s
that eliminating obstacles to price movements and capital and goods flows would assure
sustained growth for developing economies. This confidence has been shaken since the mid-
1990s—the Mexican peso crisis of 1994, the East Asian financial crisis of 1997-98, the Russian-
Brazilian currency crises of 1998-99. IMF and World Bank economists now assert that open
cross-border flows of capital must be accompanied by improved financial governance. This can
involve better prudential control of domestic banks in developing countries; but such control
may be prone to inefficient rents demanded by powerful local constituencies (Agénor 2001).
Acquisitions of developing-economy banks by megabanks provide another path to better
governance, since implicitly megabanks are more efficient, more market-oriented, and regulated
by more experienced national banking authorities. So providing maximum scope for the global
expansion of first-world megabanks could, in this view, ensure universally higher welfare
levels.3 This view is challenged here. Megabanks‘ expansion into developing economies is
clearly welfare-increasing for some economic units located there; but it cannot be assumed that
all will benefit, or that the net impact when summed across society will be positive.
The remaining sections are organized as follows. Section 2 presents a model of global financial
mergers. Section 3 discusses bank mergers in the U.S., and then Section 4 takes up the Western
European case. Section 5 discusses global bank mergers involving East Asia, and Section 6
turns to the situation of Latin America. Section 7 concludes.
1. A model of global financial mergers
We begin with the relationship between mergers and bank strategies, and then turn to the
role of macrostructural factors. In strategic terms, we can distinguish between defensive and
offensive financial mergers. Defensive mergers involve efforts to preserve core bank activities in
given market areas in the face of heightened external competition. Costs can be cut by
eliminating workers or closing duplicate offices. Defensive mergers may also permit the
surviving entity to offload bad debts, declare capital losses, and even become ―too big to eat.‖
Some gains from geographic diversification may also result. Offensive mergers involve efforts to
expand the range of bank activities—by entering new product markets, capturing new customers
within market areas, or entering new geographic markets. Recalling the Cantwell and Santangelo
3
Crystal, Dages, and Goldberg (2002) make this argument on the basis of comparisons of foreign and domestic
banking firms in selected Latin American nations, using ratings-agency and balance-sheet data for the 1997-2000
period. These authors caution that their data are fragmentary.
3
Countries ∗
Gary A. Dymski Department of Economics
University of California, Riverside Riverside CA 92521 USA
April 8, 2002
1. Introduction
This paper reconsiders the causes and implications of the global bank merger wave,
especially for developing economies. Most academic studies of this bank merger wave have
focused on the U.S. Studies of cross-border mergers (Demirgüç-Kunt, Levine, and Min 1998,
Group of Ten 2001) largely consider the developed economies, with just a few (Claessens and
Jansen 2000; Clark, Cull, Peria, and Sanchez 2001) examining cross-border financial mergers in
developing economies. All of these studies almost invariably rely on two maintained hypotheses:
first, that a set of common ―micro-economic‖ forces—economies of scale and scope, unleashed
by deregulation and driven by technical change—underlies this global financial merger wave;
second, the U.S. merger wave constitutes the global paradigm. The links between mergers,
efficiency, and U.S. experience are demonstrated via the case of the large U.S. banks; for after
undergoing continuous consolidations since 1981, these banks are more profitable than other
regions‘ large banks. Table 1 illustrates this point using profits per $1000 of assets as a
benchmark. The fact that the largest U.S. banks have recently increased in size relative to the U.S.
market, while the largest banks in other national areas are smaller relative to their national
markets (Table 2), suggests that mergers elsewhere may lead to efficiency gains in other nations.
These maintained hypotheses suggest that the largest and most efficient banks, especially
those from the U.S., should be given full scope to engage in global mergers—that is, in
consolidations involving cross-border acquisitions of banks (Agénor 2001). This will lead to a
global homogenization of banking, dominated by efficient institutions. Berger, DeYoung, Genay,
and Udell (2000) develop an argument of precisely this sort: they assert that only the largest and
most efficient banks are able to enter and succeed in foreign markets over a sustained period; so
global acquisitions (and entry more broadly) will enhance global banking efficiency. This has a
powerful implication for developing economies. For a global bank merger wave dominated by
large overseas banks should, by enhancing efficiency, create a sounder and less crisis-prone
banking sector. So cross-border bank consolidation should provide some protection against
another East Asian financial crisis.1
The author appreciates many insightful comments by Joao Ferraz, Nobuaki Hamaguchi, Jim Crotty,
John Zysman, members of the economics faculty at Musashi University, Tokyo, and participants in the
Rio Workshop on Mergers and Acquisitions. Any remaining errors are his responsibility.
1
Some studies have found empirical evidence that foreign banks‘ entry may, however, reduce small
businesses‘ access to credit in developing economies (see Clark, Cull, Peria, and Sanchez 2002).
1
, This paper constructs an explanatory framework that challenges the maintained
hypotheses
the pace that global mergers
of macroeconomic growth, arethe
efficiency-driven and that
size and distribution of the U.S. case
domestic defines
income, andthethe
paradigm
size and strength of
domestic financial markets. This framework builds on ideas about mergers and acquisitions because
for all other nations‘ banking systems. The first maintained hypothesis is questionable that have emerged in
the empirical
the fields literature
of industrial finds little
organization evidence
and ofbehavior,
strategic links between
somemergers
of which andarefinancial firms‘in the paper by
summarized
performance,
Cantwell measured
and Santangelo in in
thisterms of either
volume. Theseprofitability
authors argueor operating
that mergersefficiency (Berger, Demsetz,
and acquisitions are triggered either
and Strahan (1999), Dymski (1999), and Rhoades (2000)). Efficiency effects
by factors that enhance corporate competitiveness, or factors that respond to changes in the market are also weak in and
European
regulatory bank mergers
environment. (OECD (2000)). Studies
Competitiveness-driven mergersof cross-border
entail efforts tomergers
enhance have reached
market the same
power, to defend
conclusion; for example, Claessens,
market position, to gain synergies and/or economies ofDemirgüç-Kunt, and Huizinga (1998) and Demirgüç-Kunt
and Huizinga
scope, (1998)
or to reduce show that and
transactions cross-border
information entry by Environmentally-driven
costs. multi-national banks hasmergers not increased
represent
profit
responses to regulatory shifts, efforts to gain access to new technologies, and attempts to U.S.
rates in these markets. And the U.S. experience cannot be a global paradigm because
banks‘
overcome verycapital-market
dominance in inefficiencies.
global financial markets does not leave similar niches available for
other nations‘ banks; instead, other nations‘ banks inhabit a global financial terrain in which U.S.
banks are Previous studies of
dominant—an bank mergers
especially crucialhave ignored the
consideration forfact thatin
banks banks are firms,
developing and as such
economies.
must develop strategies in changing and uncertain environments. These studies implicitly assume
The explanatory
that financial framework
market equilibria dictateproposed here attributesoptima
what financial-market bank mergers
are, andtoare macrostructural
driving toward
circumstances
homogeneous and bestbanks‘
practices.strategic
2
The motives
evidenceasforgoal-seeking
this view isfirms.
slight.Macrostructure
Economies of here scalerefers to
the key elements of banking firms‘ environment
considerations justify, at best, mergers of moderate-size banks. Recurrent market meltdowns and
loan-loss episodes suggest that best practices are elusive, if not time- and place-specific.
The macrostructural environment has a controlling effect on what kinds of global (cross-
border) bank mergers are feasible, and which are undertaken. Nations‘ banks can implement
cross-border purchases only if they have access to capital markets—and this access varies widely
from nation to nation. Nations‘ banks are targets for acquisition only insofar as they offer
customer bases and/or assets that fit into the strategic orientations of acquiring overseas banks.
Brazil‘s banking markets offer different strategic opportunities than those of, say, the United
States or Korea.
2
Ennis (2001) shows an information-theoretic approach to banking to demonstrate that banks of different size, and
banks with different business models, can persist despite the ongoing merger wave. The models on which he rely do
not, however, incorporate bank strategy; in this approach, banks‘ optimal behavior is largely dictated by the
particularities of the information and risk environment within which they operate.
2
, This argument leads to a reconsideration of what banking is. Previous studies of bank mergers
implicitly define banking as a fixed set of activities, which can be done poorly or well. Banks
are essentially harvesters of pre-existing, if technologically-dependent, opportunities for
conducting transactions and accumulating wealth by buying and trading claims on financial
assets. The alternative view developed here views banking as a seeding and cultivating activity.
Opportunity sets in banking markets evolve endogenously; banking market outcomes are open;
and efficiency in the sense of Pareto dominance cannot be well-defined. This paper argues that
large banks increasingly engage in harvesting, not seeding and cultivating, activities.
Consequently, their role in local markets consists fundamentally of servicing the financial needs
of households that have already passed minimal threshold wealth levels; it is not their duty to
cultivate the growth of new businesses and hence of a new population of prosperous households.
Implications for developing economies. Many analysts were confident in the early 1990s
that eliminating obstacles to price movements and capital and goods flows would assure
sustained growth for developing economies. This confidence has been shaken since the mid-
1990s—the Mexican peso crisis of 1994, the East Asian financial crisis of 1997-98, the Russian-
Brazilian currency crises of 1998-99. IMF and World Bank economists now assert that open
cross-border flows of capital must be accompanied by improved financial governance. This can
involve better prudential control of domestic banks in developing countries; but such control
may be prone to inefficient rents demanded by powerful local constituencies (Agénor 2001).
Acquisitions of developing-economy banks by megabanks provide another path to better
governance, since implicitly megabanks are more efficient, more market-oriented, and regulated
by more experienced national banking authorities. So providing maximum scope for the global
expansion of first-world megabanks could, in this view, ensure universally higher welfare
levels.3 This view is challenged here. Megabanks‘ expansion into developing economies is
clearly welfare-increasing for some economic units located there; but it cannot be assumed that
all will benefit, or that the net impact when summed across society will be positive.
The remaining sections are organized as follows. Section 2 presents a model of global financial
mergers. Section 3 discusses bank mergers in the U.S., and then Section 4 takes up the Western
European case. Section 5 discusses global bank mergers involving East Asia, and Section 6
turns to the situation of Latin America. Section 7 concludes.
1. A model of global financial mergers
We begin with the relationship between mergers and bank strategies, and then turn to the
role of macrostructural factors. In strategic terms, we can distinguish between defensive and
offensive financial mergers. Defensive mergers involve efforts to preserve core bank activities in
given market areas in the face of heightened external competition. Costs can be cut by
eliminating workers or closing duplicate offices. Defensive mergers may also permit the
surviving entity to offload bad debts, declare capital losses, and even become ―too big to eat.‖
Some gains from geographic diversification may also result. Offensive mergers involve efforts to
expand the range of bank activities—by entering new product markets, capturing new customers
within market areas, or entering new geographic markets. Recalling the Cantwell and Santangelo
3
Crystal, Dages, and Goldberg (2002) make this argument on the basis of comparisons of foreign and domestic
banking firms in selected Latin American nations, using ratings-agency and balance-sheet data for the 1997-2000
period. These authors caution that their data are fragmentary.
3
