Mergers & Consolidation

1 period

AIM

What are the benefits and drawbacks of mergers and consolidations in the banking industry?

LESSON OBJECTIVES

Students will be able to:

• Explain how bank mergers and consolidations within the banking industry strengthen banks and the industry     
• Explain why mergers and consolidations within the banking industry may adversely affect consumers.

TEACHER BACKGROUND

Legislative changes that permitted interstate banking and competitive pressures to reduce costs let to widespread consolidation of the banking industry during the 1980s and 1990s. Large and regional banking organizations can provide to their customers a wider variety of products and services across state lines than community banks can provide. Consumers, however, may find that large banks offer less personalized service and less competitive rates than community banks. This lesson explores both sides of this provocative issue.

MATERIALS

• Worksheet III-4.A, "Two Viewpoints on Bank Mergers" (BC.3.04.1.1.doc)     
• Worksheet III-4.B, "Taking a Position on Bank Mergers" (BC.3.04.1.2.doc)     
• Teacher Provided Materials     
• Speaker (such as New Accounts Advisor) from a local bank to discuss differenttypes of accounts available

SPRINGBOARD

Ask the students to read Worksheet III-4.A, "Two Viewpoints on Bank Mergers."

>>>>> Although both Tran and Clara are commenting on the same development, they view it differently. What are the differences in their viewpoints? What question do the two letters raise about bank consolidation?

LESSON DEVELOPMENT

>>>>> In response to the two letters to the editor, three individuals representing different viewpoints on the issue of bank merger and consolidation were asked to write brief articles presenting their position. Look at Worksheet III-4.B, "Taking a Position on Bank Mergers." (Have the students read Article I silently or have the article read aloud by a student or students.)


>>>>> Tran Nguyen believes that bank mergers will make our banking system stronger and more efficient. What evidence does he give in support of his viewpoint?

1. Large banks are less likely to fail because they have large amounts of capital and a reputation that makes it easier for them to raise additional capital (While some argue that the government helps large banks avoid failure to avoid the perception of a disruption in economy, this is not based on fact or policy); 2. economy of scale can be achieved through the use of modern equipment and advanced methods that could not be used in a smaller operation; 3. duplication can be eliminated by combining the separate operations of two or more banks.

Now have the students read Article II.

>>>>> Clara Singh is afraid that what is good for the big banks will not be good for the consumer. How could bigger and fewer banks work to the disadvantage of the consumer?

A decline in the number of banks through mergers and consolidations could lead to less competition for depositors and for borrowers. This could lead to a decrease in interest rates paid to depositors and an increase in interest rates charged borrowers.

Now have the students read Article III.

>>>>> Helen Kang states that community banks may be small but they are very often prosperous. Why do these prosperous banks feel threatened?

The failure of a large bank may cause greater economic disruption than the failure of a small bank. This disruption could result in increased costs to the FDIC in the event of a large bank failure. Members of the public who perceive that the federal government will not allow a large bank to fail may deposit their funds in large banks rather than small banks.

Divide the class into 3 groups. Assign each group one of the positions explained in the articles on bank mergers, and have them try to convince the other two groups that their position is correct.

>>>>> Case Studies: Would you oppose or favor each of the following mergers? Why?

Case I: Two banking giants now control 35% of the deposits in state X. Together they will be in a strong position to increase their percentage of depositors through massive advertising. (Note: this is an extreme example; there is no way that federal banking regulators or the Department of Justice would allow two banks, each controlling 35 percent of deposits in a state, to merge.)

Case II: Two small banks, the only banks in town, have served their local community for the past 50 years. They feel that by combining operations they can boost efficiency, improve service, and pass savings in operating cost on to their consumers.

Case III: Three banks have discussed merging. They are located in three different states, which are widely separated geographically. They plan to compete head on with the larger banks in their areas of the country.

SUMMARY

The Department of Justice and the Federal banking agencies (Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System, and the Office of Thrift Supervision) are responsible for setting guidelines to implement laws concerning competitive aspects of mergers and consolidations of banking organizations. Should these agencies loosen or strengthen their competitive guidelines? Explain.

APPLICATION

Write a brief editorial explaining your position on the issue of bank mergers and consolidation.

HOMEWORK

A. Visit a commercial bank in your town and obtain a brochure listing the services offered by that institution. Which services are offered to individual consumers? To businesses?

B. Have students comparison shop local financial institutions to determine the types of checking accounts available, including the name of the checking accounts, costs, and whether the accounts pay interest. Have students share their findings with the class and determine through group evaluation which plan seems to be the best.

C. Invite a new accounts advisor from a local bank to discuss different types of savings accounts, checking accounts, and checking account records. Have students prepare questions beforehand for the guest lecturer and write a summary afterwards of the speaker's comments.