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2 Stan. J.L. Bus. & Fin. 1 (1995-1996)
Too Good to Be True - The Unfulfilled Promises behind Big Bank Mergers

handle is hein.journals/stabf2 and id is 7 raw text is: TOO GOOD TO BE TRUE? THE UNFULFILLED PROMISES BEHIND BIG BANK MERGERS Arthur E. Wilmarth, Jr.* I. INTRODUCTION -------------------------------------------------------------------------------------------- 2 II. THE CONSOLIDATION TREND -------------------------------------------------------------------- 7 A. THE MAGNITUDE OF CONSOLIDATION SINCE 1980 ----------------------7 B. STRUCTURAL IMPLICATIONS OF THE CONSOLIDATION TREND -------------12 III. THE DISPARITY BETWEEN THE PREDICTED BENEFITS AND ACTUAL RESULTS OF BIG BANK MERGERS ----------------------------------------------------------- 14 A- THE FAILURE OF CONSOLIDATION TO IMPROVE THE EFFICIENCY OF THE BANKING INDUSTRY --------------------------------------------------------------------------------- 14 1. The Comparative Inefficiency of Big Banks -------------------------14 2. The Absence of Evidence Indicating that Large Banks Are Likely to Improve Their Relative Inefficiency within the Near-Term Future -------------------------- 17 B. THE FAILURE OF BIG BANK MERGERS TO PRODUCE HIGHER PROFITABILITY21 C. THE NEGATIVE IMPACT OF BIG BANK MERGERS ON COMPETITION AND SERVICE TO CONSUMERS AND SMALL BUSINESS ------------------------27 1. The Anticompetitive Effects of Increased Market Concentration Levels ----- 27 2. The Adverse Effects of Big Bank Mergers on Service to Consumers -------31 3. The Adverse Impact of Big Bank Mergers on Loans to Small Businesses ------ 34 a. The Role of Banks as Primary Providers pf Small Business Credit ----- --- 34 b. The Lack of Commitment by Big Banks to Small Business Lending ------36 D. THE INCREASE IN SYSTEMIC RISK CAUSED BY BIG BANK MERGERS --------- 41 1 The Role of Big Banks in Precipitating the 1991 Banking Crisis ----------41 2. The Continuing Appetite of Large U.S. Banks for High-Risk Activities -------- 46 a. Speculative Investment and Trading Activities ----------- 47 b. The Systemic Risk Implications of Big Bank Domination of the Derivatives Markets -------------------------------------------------------------------------- -- --------------------- 51 c. High-Risk Consumer Lending Strategies Pursued by Big Banks- --55 d. Growing Risks to Big Banks from Foreign Loans and Investments ----------59 E. LESSONS TO BE LEARNED FROM JAPAN'S CURRENT BANKING CRISIS ------- 61 . Associate Professor of Law, George Washington University Law School. B.A. Yale University; J.D. Harvard University. I wish to thank the George Washington University Law School and Dean Jack Friedenthal for a summer research grant that supported my work on this article. I also wish to thank Germaine Leahy, Head of Reference for the Law School's Library, and Michael Levine, a member of the Law School's Class of 1997, for their superb research assistance. I am indebted to Lawrence Kreider, Patricia McCoy, Dick Pierce, Stephen Rhoades, and Jim Watt for their very helpful comments on a preliminary draft of this article. Unless otherwise indicated, this article includes developments through December 20, 1995.

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