Question

11. Suppose that after a few mergers and acquisitions, only one bank holds 70% of all deposits in the United States. Would you say that this bank would be considered too big to fail? What does this tell you about the ongoing process of financial consolidation and the government safety net?

Answer 1

Answer:-

Yes, Of Course this bank would be considered as TOO BIG TO FAIL if it holds 70% of all the public deposits of the United States. There would be sufficient capital and good CAPITAL ADEQUACY RATIO available with this bank. If there is no default on obligation and liquidity is maintained enough than we can say it is a good sign of growth.

Performance of a bank is generally measured by following Ratios

1- CAR:- Capital Adequacy Ratio

2- Liquidity Ratio- Have sufficient Liquidity available

3-Portfolio Quality- Have asset base of Standard Quality.

Now a days, It is being observed that mergers and acquisitions are happening at a large level. It is an indicator that industry is becoming comptetive and there is no monopoly in the market. M & A results in financial gains and Synergy. Combined entity will have economies of scale and positive impact on their profitability.

This tell us the scenario of market situation and necessary steps to be taken to maintain the economy un-effected from recession and inflation to act as a safety net.