Question

How does consolidation in our financial system affect competition for financial services? Is convergence in our financial system good or bad for competition?

Answer 1

The primary motives for financial consolidation are cost savings, revenue enhancements, improvements in information technology, financial deregulation, globalisation of financial and real markets, and increased shareholder pressure for financial performance. The consolidation could ensure doubling the businesses of financial sector and that could further increase their global competitiveness. Consolidation of the financial sector could also reduce the unhealthy competition prevalent between the banks now.

Mergers and acquisitions typically seem to transfer wealth from the shareholders of the bidder to those of the target. The economies of scale exist, but mainly among smaller firms. The effects of consolidation on competition depend on the demand and supply conditions in the relevant economic markets, including the size of any barriers to entry by new firms. Higher concentration in banking markets may lead to less favourable conditions for consumers, especially in markets for small business loans, retail deposits and payment services.

In general, the competition reduces as a result of financial system consolidation and benefit the financial sector by reducing bargaining power of customers, thus, increasing the margins in addition to further increasing the margins by reducing costs. But this could provide them an opportunity to foray into global markets and compete with different set of firms, thus, taking them to a altogether new levels of play.

Convergence in financial system is a necessary evil - both, good and bad for the competition initially and in long run.