Economic history of the Dutch Republic and Financial history of the Dutch Republic The Dutch East India Company was the first company to issue bonds and shares of stock to the general public. It was also the first publicly traded companybeing the first company to be listed on an official stock exchange. The Dutch also helped lay the foundations of the modern practice of investment banking. History of investment banking in the United States Investment banking has changed over the years, beginning as a partnership firm focused on underwriting security issuance, i.
Morgan Chase is about to complete its merger with Bank One. These megamergers are notable not only for their size but also for the geographic scope Banking industry driving forces the new institutions will serve. Indeed, they may signal the beginning of a process for building a truly national banking franchise.
As mergers continue to shape the structure of the banking industry in the U. Background on recent consolidation The Riegle-Neal Act allowed interstate branch banking beginning inand, since then, the number of large bank mergers has increased significantly.
Figure 1 plots this trend along with another noteworthy trend, namely, that most of the large bank mergers in recent years involved institutions headquartered in different states; the latter point suggests that these are market-expansion mergers, where the acquirer and the target have few overlapping operations in their respective banking markets.
Although the markets they serve are much bigger, so far none of these three megabanks has come close to having a banking franchise that spans all 50 states, which is now legally possible.
Another noteworthy fact about the recently announced megamergers is that the target banking companies are healthy institutions that are likely to survive as independent organizations. This is in stark contrast both to the late s and early s in the U. For example, the return on average assets in for the two merger targets, Bank One and FleetBoston, were 1.
This suggests that the recent megamergers are not motivated by economic weakness but rather by other economic forces. Economic forces driving megamergers We can identify four economic forces that may be driving large bank mergers. First is economies of scale—the relationship between the average production cost per unit of output and production volume.
A firm that produces a higher volume of output can see its unit cost of production decline because the costs of some of the inputs are fixed, such as administrative and overhead expenses. However, diseconomies of scale also are possible.
The average production cost may start to rise when output exceeds a Banking industry driving forces volume because it may be more costly to manage a very large firm; these costs may stem from corporate governance issues, difficulties in coordination and execution, and diminished flexibility in responding quickly to changing markets.
While banking researchers generally agree that economies of scale do exist in the industry at low levels of output, there is less agreement about whether diseconomies of scale emerge at high levels of output.
The passage of Riegle-Neal allows these banking organizations to consolidate the individual state charters into a single charter, thus greatly streamlining management and operations.
On the cost side, it is apparent that the cost structure of running a network of bank branches across multiple states should be more efficient than running a group of individually capitalized bank subsidiaries. On the revenue side, research on megamergers suggests that merged banks experienced higher profit efficiency from increased revenues than did a group of individual banks, because they provided customers with higher value-added products and services Akhavein, Berger, and Humphrey The second economic force is economies of scope—a situation where the joint costs of producing two complementary outputs are less than the combined costs of producing the two outputs separately.
This may arise when the production processes of both outputs share some common inputs, including both capital such as the actual building the bank occupies and labor such as bank management. In the past, banking organizations were not allowed to engage in securities activities except on a limited, case-by-case basis through their so-called Section 20 subsidiaries.
Also, general insurance activities were not permitted for banking firms, except in very small towns with fewer than 5, residents. GLB allows banking organizations to expand into securities and insurance activities in a much more straightforward way see Furlong for more details.
Although the two recently announced megamergers mainly involve combining banking activities, the potential of scope economies among banking, securities, and insurance could further increase the optimal size of a large banking organization today compared to pre-GLB days.
The third economic force is the potential for risk diversification. Research suggests that geographic expansion would provide diversification benefits to a banking organization not only by reducing its portfolio risk on the asset side, but also by lowering its funding risk on the liability side, as it spreads funding activities over a larger geographic area Hughes, Lang, Mester, and Moon Furthermore, research suggests that product expansion could yield diversification benefits, most notably between banking and securities activities, while less so between banking and insurance see the survey article by Kwan and Laderman Thus, a bigger bank is expected to be less vulnerable to economic shocks, and that alone could reduce its cost of capital, further compounding the benefits of scale and scope economies that come only from the production process.
These may include the desire to run a larger firm and the desire to maximize their own personal welfare. Empirical research has shown that managerial compensation and perquisite consumption tend to rise with firm size.
The muted market response to merger announcements raises questions about the true magnitude of the net economic benefits underlying large bank mergers.
Policy implications First and foremost, bank mergers have the potential to raise antitrust concerns, which must be resolved satisfactorily before being approved.
Because bank mergers can alter banking market structure and because market structure influences banking competition and hence the price of banking services to customers, all bank merger applications are scrutinized by banking regulators.
In addition, the Department of Justice has the authority to challenge any mergers that are deemed harmful to competition. Research suggests that the markets for many banking products and services remain local in nature, despite the advances in information technology and electronic commerce Rhoades In fact, the recent market-expansion megamergers themselves are testimony to the importance these large banking organizations attach to maintaining a local market presence.
Thus, the current regulatory practices of defining banking markets locally in evaluating the effects of proposed mergers on competition seem justified. When a proposed merger is found to result in an unacceptably high level of concentration in local banking markets, divestitures in those markets are often required as a condition for regulatory approval in order to preserve meaningful competition.Packet 1.
STUDY. PLAY. A company's "macro-environment" refers to: The strength of the federal banking system. whether the industry's key driving forces yield firms in the industry adequate profits are strong or weak. rivalry among competing sellers tend to be more intense when. FIVE FORCES MODEL Until recently, Porter’s Five Forces Model was the dominant theory applied to factors driving competitive forces in an industry.
It hypothesizes that the level of competitive intensity within an industry arises from five specific sources in determining attractiveness of an industry to potential entrants. The purpose of this study is to determine the underlying and driving forces or causation based upon examination of resent banking merger activity.
A content analysis was performed utilizing the FDIC Applications for Merger/Acquisitions from and Industry Structure Trends In U.S.
Commercial Banking: Emergence Of The Top 5 Banks merger and consolidation trend in the banking industry. However, the major driving force for this trend was. Industry analysis—also known as Porter’s Five Forces Analysis—is a very useful tool for business strategists.
It is based on the observation that profit margins vary between industries, which can be explained by the structure of an industry. It’s essential to provide strategic guidance to the innovation process, so in this chapter we take a look at six essential forces that are driving the changes that are occurring across much of today’s world.