Bank Mergers in a Deregulated Environment: Promise and Peril

Deregulation in banking and finance may hold promise for consumers, but what actually seems to be developing is trouble. Large banks are combining into small clusters of mega-banks with national and global reach, supported by government safety nets premised on fears they are too big to be allowed to fail . One result, among several, is that retail banking suffers. This work evaluates existing bank merger policy and offers workable proposals for new legislative actions that would enhance the benefits of bank mergers without exacerbating the weaknesses. The authors review the historical role of governments in protecting banks from competition, then the modern policy that promotes competition, and present a model to explain and highlight the problems that today’s policies are causing. In the end they turn to their own research and conclude that while a special bank merger policy is still warranted, it needs to be adapted in ways that would rein in the trend toward bigness and soften the impact this has domestically and internationally.