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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