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Geographic Diversification: Domestic Chapter 22

Geographic Diversification: Domestic Chapter 22. Financial Institutions Management, 3/e By Anthony Saunders. Domestic Expansions. Historically FIs' ability to expand constrained by regulation.

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Geographic Diversification: Domestic Chapter 22

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  1. Geographic Diversification: Domestic Chapter 22 Financial Institutions Management, 3/e By Anthony Saunders

  2. Domestic Expansions • Historically FIs' ability to expand constrained by regulation. • Regulations also create potential opportunities for new entrants to exploit existing monopoly rents.

  3. Regulatory Factors Impacting Geographic Expansion • Insurance companies • State regulated. • Usually easy to establish subsidiaries • Thrifts • Since 1980s, restrictions on expanding across state lines have been loosened considerably.

  4. Constraints on Domestic Expansion • Commercial Banks • Restrictions on intrastate banking have been liberalized in a piecemeal fashion. • Interstate restrictions: • McFadden Act, 1927 • From 1927 to 1997 relied on establishing subsidiaries rather than branching. • Multibank holding companies (MBHC)

  5. Stages in Regulation of BHCs • One-bank holding company loophole in Douglas Amendment 1956. • Growth in one-bank holding companies from 1956 to 1970. • 1970 Bank Holding Company Act Amendments. • Permissible activities “closely related to banking”

  6. Erosion of Interstate Banking Restrictions • Regional and national banking pacts • Nationwide • Nationwide reciprocal • Regional reciprocal • Purchase of troubled banks • Nonbank banks • Ended by Competitive Equality Banking Act, 1987

  7. Erosion (continued) • Expansion in OBHC activities. • Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 • U.S. and nondomestic banks allowed to branch interstate.

  8. Synergies from Geographic Expansion • Cost synergies • X-efficiency • Less evidence of cost savings from economies of scale and scope • Revenue synergies • Enhance revenues by expanding into growing market or less than fully competitive market • More stable revenue stream

  9. Monopoly Power Concerns • Regulators concerned with merger activity that could result in monopoly power. • Concentration ratios such as Herfindahl-Herschman Index (HHI) employed to measure the effects of merger. • HHI = sum of squared percentage market shares.

  10. Other Factors Impacting Geographic Expansion • Attractiveness of bank merger measured in terms of merger premium. • Analysis indicates that highest merger premiums paid for well-managed banks in relatively uncompetitive environments.

  11. Success of Geographic Expansion • Investor reaction • Abnormal returns for both acquiring bank and target bank. • Postmerger performance • merged banks tended to outperform industry • improved ability to attract loans and deposits, increase employee productivity and enhance asset growth.

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