Assessment of Mergers and Acquisitions in Banking on Small Open Economy as Sustainable Domestic Financial System Development

By Novickyte, Lina; Pedroja, Graziano | Economics & Sociology, January 1, 2015 | Go to article overview

Assessment of Mergers and Acquisitions in Banking on Small Open Economy as Sustainable Domestic Financial System Development


Novickyte, Lina, Pedroja, Graziano, Economics & Sociology


(ProQuest: ... denotes formulae omitted.)

Introduction

Global mergers and acquisitions processes in banking have prompted a lively discussion on the part of scholars and practitioners regarding the influence of concentration on the efficiency and competition levels in the banking system, the financial and macroeconomic stability of countries and the growth of economies. According to the World Bank, a survey of 72 countries has revealed banking concentration in more than half (57 per cent or 41 countries) of them to have exceeded 71 per cent in 1990-2009.

In recent years, studies of the effects of concentration on the financial system have become particularly important for several reasons, one of the most significant of them being the rapid processes of banking concentration and consolidation that are taking place on the global or national level, posing questions about the influence of the growing concentration on financial stability.

The purpose of this article is to identify underlying causes affecting the mergers and acquisitions in banking and to assess their effect on the domestic financial system.

The authors used qualitative and quantitative methods of study in examining the impact of bank mergers and acquisitions on the country's financial system. The article includes logical analysis and synthesis of studies dealing with bank mergers and acquisitions. To identify the potential elements that lead to stability in the financial system, and the possible impact that the on-going consolidation process might have on the banking sector, the authors have carried out expert analysis.

Theoretical Concept of Mergers and Acquisitions in Banking

The concentration of banks on the market is growing thanks to consolidation processes that are taking place in the banking sector. Consolidation typically occurs as a result of mergers or acquisitions between market players. Such mergers and acquisitions are usually driven by an ambition to gain as much weight as possible in the international banking space, to eliminate competition from profitable areas of business, to procure added financial benefits for the shareholders, to expand the range of services, and to effectively manage the resources available.

Such consolidation processes inevitably affect the financial system of a country or region. The concern with the constitution of the banking system and its stability stems from the exclusive role that banks play in the financial system and economy. The line between the traditional banking and other types of financial brokerage activities has been growing thin over the past few decades, with banks expanding the boundaries of their business to cover the areas of securities, fund management, and insurance. On top of that, the rapid growth of assets of banks operating on a global scale further advances their role both on the national and global level.

In the light of globalisation processes, the success of banking operations relies directly on the choice of the business strategy and business model, on how banks are able to turn their market advantages into account and to reinforce their position on the market. The importance of the banking sector in the economy supports the relevance of the issue at hand and allows probing into the consolidation processes within the banking sector, as well as their impact on the financial system.

Furthermore, Vaskelaitis and Deltuvaite (Deltuvaite & Vaskelaitis, 2007; Deltuvaite, Vaskelaitis, & Pranckeviciute, 2007; Deltuvaite, 2012; Deltuvaite, 2009) analysed the influence of concentration on the efficiency and stability of the banking sector, and systematic risk management in the same. Jasiene and Novickyte (2011) studied the consolidation processes of the banking sector, as well as the role that they play in and the potential impact they have on the stability of the financial sector.

The intercourse between concentration in the banking sector and the stability of the financial system has been broadly covered in the scientific literature. …

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