Pros and Cons of Financial Institution Consolidation

Assignment type Coursework / Assignment
Discipline Business and Management
Description What are the pros and cons of financial institution consolidation. Example of writing below: There are many pros and cons that are common with many institutional consolidations, also known as mergers. In the financial sector, the number of commercial banks in the US has declined rapidly, from 11,462 at the end of 1992 to 5,809 in 2014, while credit unions in the US went from 10,316 in 2000 to 6,491 in 2014 (Greer, 2014). But why is there such a rampant pace of consolidation? Proponents of financial institution mergers say that it is beneficial for the customer in several ways. One benefit of a merger or acquisition in the financial sector is the opportunity to capitalize and leverage significant economies of scale and provide more value as a combined entity then either could provide on their own (Pettinger, 2012). In the example of banks and from the customer perspective, adding branch and ATM locations, integrating financial systems and client base, the newly merged bank will be able to offer several conveniences and financial products that are attractive to a broader range of customers. In today’s world, people want and sometimes demand speed, accuracy and convenience. By integrating two institutions into one, the economies of scale explained above can make certain operating costs lower and can prevent them from being passed on to the consumer. The most obvious benefit of a merger or acquisition from the company’s perspective is that it reduces competition in the marketplace. With less competition and higher market share, firm’s can usually increase prices for consumers, driving sales and profit (Pettinger, 2012). This however, can be seen as a clear negative from the customer perspective. One con of financial institution consolidation is the potential for job loss. In the event the takeover firm practices “asset-stripping”, which is defined as the merging or elimination of under-performing divisions of the target firm, the likelihood and propensity of job loss is high (Pettinger, 2012). In conjunction with job loss, employee duress typically comes with consolidation because employees are fearful they will be fired, re-structured or workload changed under new leadership. A second con that can come out of financial institution consolidation is the increase in the amount of debt the new firm has on it’s balance sheet. To start, if either company previously has debts before the consolidation, the debt load is now larger by combining the companies (Gaille, 2015). In addition, because of the scale, consolidations typically involve the takeover firm using debt-financing to conduct the merger or acquisition. This will also inevitably add to the leverage of the firm and is something that should be analyzed closely before proceeding with the consolidation.