Monday, April 5, 2010

Banking Consolidation Is Not Natural

Public policies have been encouraging concentration in the sector since the 1980s, in complete opposition to the general downsizing trend followed by most other firms. An early warning was issued by John H. Boyd and Stanley L. Graham back in 1991. Here is the summary of their paper, “Investigating the Banking Consolidation Trend”, in the Minneapolis Fed Review:

“This paper examines whether the U.S. banking industry's recent consolidation trend—toward fewer and bigger firms—is a natural result of market forces. The paper finds that it is not: The evidence does not support the popular claims that large banking firms are more efficient and less risky than smaller firms or the notion that the industry is consolidating in order to eliminate excess capacity. The paper suggests, instead, that public policies are encouraging banks to merge, although it acknowledges that other forces may be at work as well.”

Read the complete article here .

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