Academic journal article Federal Reserve Bank of New York Economic Policy Review

Understanding Financial Consolidation

Academic journal article Federal Reserve Bank of New York Economic Policy Review

Understanding Financial Consolidation

Article excerpt

KEY NOTE ADDRESS

It is my pleasure to speak with you today, and I thank Bill McDonough and the Federal Reserve Bank of New York for inviting me to participate in this conference. The subject of the conference, the impact of financial innovation on monetary policy, is one of fundamental interest to central banks. Bill has asked me to provide my thoughts on one of the important structural changes of recent years: consolidation in the global financial system and its ramifications for monetary policy and other areas of central bank concern.

Consolidation of all types of business activities has been a prominent feature of the economic landscape for at least the past decade. The financial sector has participated actively in this development. Indeed, the past few years have witnessed an acceleration of consolidation among financial institutions.

In recognition of the importance of this marketplace evolution, and especially its potential effects on a wide range of public policies, the finance ministers and central bank governors of the Group of Ten nations in September 1999 commissioned a major study of the possible effects of financial consolidation on matters of policy concern to central banks and finance ministries in the G-10. This study, which I was privileged to direct, was released to the public in January 2001. Today, I would like to discuss the study's major findings and their implications.

THE G-10 STUDY OF FINANCIAL CONSOLIDATION

The G-10 study had two primary objectives. It attempted to isolate the effects of consolidation from those of other powerful forces transforming our financial systems, and to identify key areas in which financial consolidation requires new or accelerated policy development. The diversity of the economies involved-even among the G- 10, Australia, and Spain-and the interdependent nature of many of the forces affecting our financial systems made achieving these objectives difficult, to say the least. However, I believe the study was a success.

Patterns and Causes

With a study of the depth, breadth, and, quite frankly, the length of this one, it is always potentially dangerous and even possibly misleading to summarize the key points in a few words. However, I believe that policymakers should communicate to a wide audience their thinking on important policy concerns, and thereby stimulate and contribute to dialogues in the public and private sectors. Thus, despite the risks, I would like to highlight what are, in my judgment, the study's key findings and policy implications.

The report documents that, in the nations studied, a high level of merger and acquisition activity occurred during the 1990s among financial firms, defined to include depository institutions, securities firms, and insurance companies. During the decade, approximately 7,500 transactions, valued at roughly $1.6 trillion, were consummated. Moreover, the pace of consolidation increased over time, including a noticeable acceleration in the last three years of the decade. For example, the annual number of deals increased threefold during the 1990s, and the total value of deals increased almost tenfold. In Europe, roughly two-thirds of merger and acquisition activity, as measured by the value of the European firm acquired, occurred during the decade's last three years. According to a variety of measures, the United States accounted for about 55 percent of M&A activity, partly because of our historically large number of relatively small financial firms. However, it is also true that many very large U.S. banking institutions expanded their geographic footprint by acquiring other very large banks, especially later in the decade.

Most of the past decade's merger and acquisition activity in the financial sector involved banking organizations. Acquisitions of banking firms accounted for 60 percent of all financial mergers and 70 percent of the value of those mergers in the nations studied. …

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