Financial Consolidation and Monetary Policy
English, William B., Federal Reserve Bank of New York Economic Policy Review
The 1990s were characterized by substantial financial sector consolidation across a large number of industrialized countries. This consolidation included within-industry and within-country consolidation as well as cross-industry (for example, banking and insurance) and cross-border consolidation. In addition to mergers and acquisitions, there was a substantial increase in joint ventures and strategic partnerships between financial sector firms. The number of these looser affiliations increased especially rapidly in recent years.
In response to this ongoing transformation of the financial landscape, the Group of Ten (G-10) undertook a study of financial sector consolidation.1 The resulting report, produced by the G- 10's Task Force on the Impact of Financial Consolidation on Monetary Policy (Group of Ten 2001) includes an analysis of the patterns and causes of consolidation in different sectors and countries. The report also evaluates the possible effects of consolidation, both in the past and going forward, in a number of important policy areas, including supervision, efficiency and competition, payments systems, and monetary policy.
At the outset, those organizing the study thought that consolidation could have significant implications for the conduct and effectiveness of monetary policy (Ferguson 2001, p. 6). Consolidation could affect monetary policy by influencing the implementation of policy, the monetary transmission mechanism, or the environment for policy (including, for example, the liquidity and volatility of financial markets or the effects of difficulties at large institutions). However, the report concludes that the effects of consolidation on monetary policymaking have generally been very modest thus far, and that consolidation is unlikely to pose significant problems going forward (Group of Ten 2001, Chapter 4).
The next section provides some background on financial sector-and especially banking industry-consolidation in recent years. Section III summarizes the G-10 report on consolidation and monetary policy, laying out the reasons why one might expect consolidation to have effects on monetary policymaking, the evidence gathered by the task force, and the conclusions reached. Section IV offers some possible implications of the report for U.S. policymakers; Section V concludes.
II. CONSOLIDATION AND BANKING INDUSTRY CONCENTRATION
The financial sector consolidation of recent years has been driven by a number of factors, including technological advances, deregulation, globalization of financial markets, and increased pressure from shareholders.2 This consolidation has been accomplished through mergers and acquisitions as well as by joint ventures and strategic alliances. Such ventures and alliances are arrangements between firms allowing each to remain autonomous while also engaging in a "new business arrangement to achieve predetermined objectives" (Group of Ten 2001, p. 41). These looser links may be particularly useful when differences in language, regulation, corporate culture, or expectations make a formal merger either too expensive or prohibitively risky. They may also allow firms to move more gradually toward a merger (Group of Ten 2001, p. 32).
As shown in Table 1, the pace of financial sector consolidation picked up considerably over the past decade. The number and dollar volume of financial sector mergers and acquisitions increased rapidly over the 1990s. The bulk of these transactions-84 percent by dollar volume-reflected mergers within a single industry, and an even larger percentage reflected mergers of firms in the same country. The number of joint ventures and strategic alliances, while considerably smaller than the number of mergers and acquisitions, also expanded greatly over the course of the decade, with particularly fast growth recently. As one might expect, the fraction of joint ventures and strategic alliances accounted for by cross-border deals has been considerably higher than the comparable share of mergers and acquisitions. …