Benefits of Big Mergers Said to Vanish Quickly
MARINA DEL REY, Calif. - The efficiencies and economies of scale that many bankers see as a reason for merging may be less dramatic than expected, said Robert Parry, president of the Federal Reserve Bank of San Francisco.
"Many studies find that once a bank is larger than $400 million in deposits, economies of scale appear to be exhausted," Mr. Parry said in a speech. "When you do a post-mortem on most bank mergers, the combined institution doesn't seem to run more cheaply or profitably than the two did separately."
Mr. Parry said studies of the stocks of the affected banks generally do not support the profitability of mergers, particularly interregional ones.
The Fed president did not comment specifically on the planned merger of San Franisco-based BankAmerica Corp. and Los Angeles-based Security Pacific Corp. It would be the largest combination in U.S. banking history, creating a $200 billion-asset holding company. BankAmerica has projected saving $1.2 billion a year within three years.
Mr. Parry said recent Federal Reserve staff studies of the ratio of noninterest expenses to assets found that the ratio declined only temporarily after mergers, and subsequently returned to prior levels.
Mr. Parry said achieving production efficiencies also can be difficult, partly because big institutions can become difficult to steer and vulnerable to volatile market conditions unless they can react quickly.
"If it's hard to cut costs in big banks - that is, if it's hard to stay |mean' enough to stay |lean,' - then the rate of [industry] consolidation will be determined by the availability of good |big bank' management."
The regional Fed executive also noted that the portfolio diversification that would be expected to reduce risk in a merger, particularly one that is across regions, also may not be significant.
One reason is that investors are able to diversify their portfolios by owning a mix of bank stocks.
"A bank cannot expect lower costs of financing or rewards from the marketplace for achieving diversification through merger," Mr. Parry said.
To support this point, he compared the stock prices of regionally diversified banks with those that are not diversified.
A merged institution can offer a wider array of products, but many institutions now offer different products through third parties, he added.