"Thinking Big - A Survey of International Banking"

Essay by Vilaxon July 2007

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It has been obviously observed that banks all over the world are climbing up in size, either through organic growth or, mostly, through M&A. It is easy to read the mind of prestigious CEOs from grand banking institutions the ambitions of acquiring more and more members under its holding umbrella on a global scale. Pros and cons as well as objectives of this size-up trend are discussed in the article together with other closely related issues such as foreign competition, competitive strength, ownership and state protectionism.

Theoretically, benefits from M&A are firstly brought about from the pursuit of economies of scale, which pertains to the integration of banks' supply chain, reducing additional costs incurred on one additional service or package of services rendered. However, bigger is just better in some relevant range as at some time diseconomies of scale will also start creeping in.

Secondly, economies of scope is targeted, implying that a financial service provider can save on operating costs when it expands the mix of its output because some resources such as management skill and plant and equipment are more likely efficiently used in jointly producing multiple services rather than just turning out one service from the same location. Fixed costs can be spread over a greater number of service outputs. Thirdly, with the severe separation between ownership and control, M&A opportunities create a big room for managers to construct their empirical building. Short-term minds might be satisfied with positive consolidated figures, however, in many cases, whether the businesses are a good long-term fit is a timing question. Lastly, acquisition strategy is considered by many players as an opposition against being acquired, means of extending their presence in emerging markets, directing regulatory influences...