Magazine article American Banker

Fed Official Raises Warning on Cross-Industry Mergers

Magazine article American Banker

Fed Official Raises Warning on Cross-Industry Mergers

Article excerpt


Federal Reserve Board Governor Roger W. Ferguson Jr. on Tuesday warned banks against rushing to merge with insurance and securities firms.

"The movement to financial conglomerates may prove transitory," Mr. Ferguson said at a conference sponsored by the University of Massachusetts, Boston.

"This business strategy surely is not for all financial services firms."

Efforts 15 years ago to create financial supermarkets flopped, he said, pointing to the Sears, Roebuck and Co.-Dean Witter-Coldwell Banker and American Express-Shearson mergers as examples.

"Despite the enthusiasm for financial supermarkets in the early 1980s, by the end of the decade the concept had stagnated and the press instead reported the benefits of specialization and the provision of niche services," he said.

Mr. Ferguson questioned the two prime reasons for creating conglomerates: economies of scale and diversification of risk. Historically, conglomerates have not been able to deliver products more efficiently than niche players, he said. Also, it is very tough to manage risk across different types of businesses, he said.

"Before any steps toward conglomeration are taken, each potential participant in such a merger must judge whether this extraordinary set of skills is to be found in any managerial team," he said.

Despite these challenges, Mr. Ferguson said he expects more financial companies to create conglomerates once Congress reforms banking laws. "I would not be surprised at a wave of cross-industry mergers within the financial sector, particularly among the largest firms," he said.

A surge in cross-industry mergers would force the Fed to review its antitrust policies, he said. This would include evaluating the effects of mergers on automated teller machine and point of sale networks, he said.

Regulators also would have to rely more on market forces to keep financial firms in check, he said. …

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