What is behind the wave of mergers in the banking industry?
A: Several economic factors have caused banking institutions to merge over the past several years. These factors include:
- Greater efficiency. Banks often are able to operate more cost effectively by increasing their size. The costs of many functions don't double when the scale of operation doubles. As a result, mergers are one way to keep costs and prices down.
- Leveraging technology. Banks and their customers have become increasingly accustomed to the advantages of new and expensive technologies. Many of these technologies are too expensive unless costs can be spread over a large number of customers. Mergers are often necessary to allow banks to introduce and maintain the technologies customers increasingly demand.
- Changing laws. Laws which had prevented many banks from operating in more than one state recently have been removed or overridden. The advent of interstate banking and branching means more opportunities for banks operating in different states to merge with each other.
- Diversification. One effective method of controlling risks inherent in bank lending is to diversify operations across different geographic regions and different types of customers. Mergers can help diversify such risks.
- Broader array of products. Mergers may give banking institutions an opportunity to offer a broader array of services. A merger of two banks with different expertise can result in a combination more to the liking of customers looking for one-stop shopping.