Read and learn - Chaos theory.....an underlying order?

[Dover]

This and the other related articles are all about consolidation of our financial system and perhaps extends to similar strategies being applied to other major economic players such as the Automotive Industry (re: the meme about only needing two rather than three automakers in the U.S.).

Very informative about how we got here (some aspects are quite prescient for a 1998 paper) and surprisingly readable for the laymen or economic dummies like myself. Learn about the 'too big to fail' policy, glass-steagall story, elimination of deposit insurance, etc.

Financial Consolidation: Dangers and Opportunities

by Frederic Mishkin

This paper argues that although financial consolidation creates some dangers because it is leading to larger institutions who might expose the U.S. financial system to increased systemic risk, these dangers can be handled by vigilant supervision and a government safety net with an appropriate amount of constructive ambiguity. Financial consolidation also opens up opportunities to dramatically reduce the scope of deposit insurance and limit it to narrow bank accounts, thus substantially reducing the moral hazard created by the government safety net. Reducing the scope of deposit insurance, however, does not eliminate the need for a government safety net, and thus there is still a strong need for adequate prudential supervision of the financial system. Moving to a world in which we have larger, nationwide, diversified financial institutions and in which deposit insurance plays a very limited role, should improve the efficiency of the financial system. However, it is no panacea: the job of financial regulators and supervisors will continue to be highly challenging in the future.

http://www0.gsb.columbia.edu/faculty/fmishkin/PDFpapers/w6655.pdf




And some related papers/articles >>>>


A previous post of mine about this issue:
http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=114&topic_id=47172

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Just 3 ‘superbanks’ now dominate industry
Sudden consolidation raises questions about regulation, consumer impact

The financial crisis that has been sweeping the globe has reshaped nearly every corner of the economy, but no industry has been altered more radically than banking.

Several of the nation's biggest banks have failed or been absorbed by healthier institutions, leaving three giant "superbanks" with an unprecedented concentration of market power: Bank of America, JPMorgan Chase and Wells Fargo.

While that may be good news for emerging giants and the failing companies they helped rescue, the new oligopoly raises troubling questions about regulation and competition, analysts and consumer advocates say...

http://www.msnbc.msn.com/id/27441147



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US Bank Consolidation Not A Given

October 2008 | M&A Analysis

On October 5th PNC Financial Services, backed by US$7.7bn from the US Treasury Department's US$250bn Troubled Asset Relief Program (TARP), announced that it was acquiring embattled bank National City for US$5.58bn. The deal makes PNC the fifth-largest bank by deposits in the US, but more importantly it also represents the first instance of a bank using capital from the recent government bailout to make an acquisition. Treasury Secretary Hank Paulson has already handed US$125bn to the US's nine largest lenders, stating that the remaining funds should be used for recapitalisation and to fund takeovers. Consequently, to many the PNC deal seemed to offer a blueprint for further industry consolidation going forward. It has been widely predicted that the ongoing turmoil in the financial markets will lead to rapid deal volume at lower valuations, with national banks looking to expand operations and regional banks seeking defensive mergers. Banks in California and the Midwest, for example, with heavy exposure to mortgage debt, would be likely targets.

Reason For Pause
However, there are reasons to doubt that such consolidation will occur at the level or pace that many are expecting. Gerard Cassidy, a banking analyst at RBC Capital Markets, tells CFW that 'I think there's going to be a freeze in deals, we're heading into the teeth of the recession and with that comes credit problems.' He claims that while potential buyers may well 'have seen what Wells Fargo and others were able to accomplish in transactions where the sellers had a gun to their head, this does not guarantee that for TARP-funded would-be-acquirers the target banks will be willing to sell.' Cassidy adds that 'if you're Keycorp or Capital One, if you've received these TARP equity funds and now you want a deal like PNC or Wells just completed - good luck - because there aren't going to be many of them out here. The only reason they would sell is if they were forced too as Wachovia and National City were.'


The key point is that the same regulation and legislation that has produced the TARP package, and therefore increased the ability of some banks to buy, has also taken the pressure of other companies to sell. For in addition to TARP, the US treasury has also guaranteed all checking account deposits in the US. The key area where National City and Wachovia had been losing money was in commercial deposits. Businesses around the US that were running through their payroll through the banks could not take the risk that the bank may fail and pulled the funds out. By guaranteeing deposits, the Treasury has removed the possibility of a run on any regional bank, and in so doing even weaker banks will be in less of a rush to sell.

Catch 22
This is not to say takeovers won't happen. Cassidy adds that 'the treasury has identified 22 companies - and if you are not on that list of approvals, you've got a problem, the scarlet letter has been put on you and the question becomes do you have enough capital to make it through the downturn?' ...cont'd

http://www.corporatefinancingweek.com/file/70429/us-bank-consolidation-not-a-given.html


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IMF Working Paper 2003

Bank Consolidation, Internationalization,and Conglomeration:

Abstract

This paper documents global trends in bank activity, consolidation, internationalization, and financial firm conglomeration, and explores the extent to which financial firm risk and systemic risk potential in banking are related to consolidation and conglomeration. We find that while there is a substantial upward trend in conglomeration globally, consolidation and internationalization exhibit uneven patterns across world regions. Trends in consolidation and conglomeration indicate increased risk profiles for large, conglomerate financial firms, andhigher levels of systemic risk potential for more concentrated banking systems. We outline research directions aimed at explaining why bank consolidation and conglomeration do notnecessarily yield either safer financial firms or more resilient banking systems


http://www.imf.org/external/pubs/ft/wp/2003/wp03158.pdf


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Bank Concentration, Competition, and Crises

Abstract:

Motivated by public policy debates about bank consolidation and conflicting theoretical predictions about the relationship between bank concentration, bank competition and banking system fragility, this paper studies the impact of national bank concentration, bank regulations, and national institutions on the likelihood of a country suffering a systemic banking crisis. Using data on 69 countries from 1980 to 1997, we find that crises are less likely in economies with more concentrated banking systems even after controlling for differences in commercial bank regulatory policies, national institutions affecting competition, macroeconomic conditions, and shocks to the economy. Furthermore, the data indicate that regulatory policies and institutions that thwart competition are associated with greater banking system fragility.

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Introduction

The consolidation of banks around the globe is fueling an active public policy debate on the impact of consolidation on financial stability. Indeed, economic theory provides conflicting predictions about the relationship between the concentration and the competitiveness of the banking industry and banking system fragility. Motivated by public policy debates and ambiguous theoretical predictions, this paper investigates empirically the impact of bank concentration and bank regulations on banking system stability. Some theoretical arguments and country comparisons suggest that a less concentrated banking sector with many banks is more prone to financial crises than a concentrated banking sector with a few banks (Allen and Gale, 2000, 2004).

First, concentrated banking systems may enhance market power and boost bank profits. High profits provide a “buffer” against adverse shocks and increase the charter or franchise value of the bank, reducing incentives for bank owners and managers to take excessive risk and thus reducing the probability of systemic banking distress (Hellmann, Murdoch, and Stiglitz, 2000; Besanko and Thakor, 1993; Boot and Greenbaum, 1993, Matutes and Vives, 2000).

Second, some hold that it is substantially easier to monitor a few banks in a concentrated banking system than it is to monitor lots of banks in a diffuse banking system. From this perspective, supervision of banks will be more effective and the risks of contagion and thus systemic crisis less pronounced in a concentrated banking system. According to Allen and Gale (2000), the U.S., with its large number of banks, supports this 1See Group of Ten (2001), Bank for International Settlements (2001), International Monetary Fund (2001). See Carletti and Hartmann (2003) and Boyd and De Nicoló (2005) for an overview of the literature. 2Rather than focusing on the links between concentration and the portfolio decisions of banks, Smith (1984) holds banks’ asset allocation decisions constant and examines the liquidity side of the balance sheet. He shows that less competition can lead to more stability if information about the probability distribution of depositors’ liquidity needs
“concentration-stability” view since it has had a history of much greater financial instability than the U.K or Canada, where the banking sector is dominated by fewer larger banks.

An opposing view is that a more concentrated banking structure enhances bank fragility. ...>

http://www.econ.brown.edu/fac/Ross_Levine/Publication/F...


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[ixion]

1. consolidation of power or money is never a good thing

as we are witnessing now. And we're making it worse by allowing these so-called "super" banks to exist, IMO.

[Dover]

2. Yes, I tend to agree...primarily because I'm not convinced ANY regulatory body can rein them in

or prevent the vast and profound damage that results from a failing corporate/financial behemoth
of their size. They've become too big to regulate, and far too complex and opague. It just ain't
gonna work because it's too porous to contain and effects too broad a spectrum.
It's the nature of the beast whose appetite and growth has also been outpacing the laws.

And concentration of power has never provided the level of diversity needed for a free system.
Not to mention all the conflicts of interest in having your bank wear so many hats.

It does seem that consolidation is still on track as the current model because our tax dollars,
via TARP, are being used for acquisitions and who knows what else.

[Fovea]

3. The gods of efficiency and concentration

show favor on ever smaller groups of the faithful.
Wealth concentration beyond a given point actually destroys wealth.

Some class war and Inefficiency is needed in an economy.
It provides additonal velocity and a safety net of redundancy.
Without class warfare, the rich always win and eventually everyone else loses.

Moreover, any business that is too big to fail is not a business, it is a government agency without portolio .
If it is too big to fail, it cannot be subjected to any other restraint such as regulation. If it cannot fail, it is above the law as well.