What should Regulators So What should Regulators So

about Merger Policy ?about Merger Policy ?

黃子玲 林佳佑 許芳誠黃子玲 林佳佑 許芳誠

AgendaAgenda

AbstractAbstractM&A in EuropeanM&A in EuropeanM&A in USAM&A in USAM&A in JapanM&A in Japan

AbstractAbstract

Merger policy needs to be driven by Merger policy needs to be driven by different considerations in Europe, Japan, different considerations in Europe, Japan, and the United States. and the United States.

M&A in EuropeanM&A in European

A set of challenges A set of challenges

Political ProblemPolitical Problem

The effects of banking mergers on loan The effects of banking mergers on loan contracts contracts

Political ProblemsPolitical Problems

Government: Government: In order to protect local market, efficient In order to protect local market, efficient institution will take over poorly institution will take over poorly management banks.management banks.

Letting a set of efficient banks exist Letting a set of efficient banks exist means the biggest bank will be foreign. means the biggest bank will be foreign.

Protest for bank mergers Protest for bank mergers

EX: Italian EX: Italian

The Effects of Banking Mergers on The Effects of Banking Mergers on Loan contractsLoan contracts

Why small firms are likely to see a disruption in Why small firms are likely to see a disruption in credit ?credit ?

In the market mergers & Out of market mergers In the market mergers & Out of market mergers Size: Market power (Monopoly ) & EfficiencySize: Market power (Monopoly ) & EfficiencyDifferent organization structures Different organization structures Relationship with finance institutionRelationship with finance institution

What will happen if large banks reduce the What will happen if large banks reduce the supply of credit to small borrowers ?supply of credit to small borrowers ?

Due to poor quality of small firms’ loan, borrowers may mot have Due to poor quality of small firms’ loan, borrowers may mot have their lending relationship with the bank servedtheir lending relationship with the bank served. .

M&A in USAM&A in USA

HistoryHistory

The Glass-Steagall Act of 1933The Glass-Steagall Act of 1933

Separate the deposit-taking and loan-maSeparate the deposit-taking and loan-making bankers from the underwriter or deaking bankers from the underwriter or dealer bankers.ler bankers.

Create firewall between the commercial Create firewall between the commercial bankers and investment bankers.bankers and investment bankers.

HistoryHistory

Gramm-Leach-Bliley Act of 1999Gramm-Leach-Bliley Act of 1999

Glass-Steagall Act repealsGlass-Steagall Act repealsSection 20Section 20

Section 32Section 32

Financial Holding Company &Financial Holding Company &

Financial affiliation.Financial affiliation.

RegulationRegulation

The biggest problemThe biggest problemHow do we regulate a banking system How do we regulate a banking system which is simultaneously populated with a which is simultaneously populated with a number of huge, global institutions and number of huge, global institutions and 1000s of tiny financial intermediaries?1000s of tiny financial intermediaries?

RegulationRegulation

Design a system that mimics the Design a system that mimics the discipline that would be imposed by a discipline that would be imposed by a market but deals with the reality that market but deals with the reality that what makes sense for $100 billion banks what makes sense for $100 billion banks may not make sense for $100 million may not make sense for $100 million dollar banks.dollar banks.

RegulationRegulation

Be careful not to set up incentives for other Be careful not to set up incentives for other firm to take advantage of loose rules for firm to take advantage of loose rules for banks with low levels of assets.banks with low levels of assets.

Regulatory arbitrageRegulatory arbitrage

M&A in JapanM&A in Japan

Three salient facts about Japan’s Three salient facts about Japan’s banking crisis banking crisis

Japanese banks remain the largest in the Japanese banks remain the largest in the world.world.

Japanese banks are amongst the least Japanese banks are amongst the least profitable in the world.profitable in the world.

It is not clear how or why the situation will It is not clear how or why the situation will improve.improve.

Problems confronting Japanese Problems confronting Japanese banksbanks

1. Under-capitalized Banks1. Under-capitalized Banks

Under-reserving against acknowledgedUnder-reserving against acknowledged

problem loansproblem loans

Improper treatment of deferred tax credits Improper treatment of deferred tax credits

Problems confronting Japanese Problems confronting Japanese banksbanks

Ever-greeningEver-greening

rolling over loansrolling over loans

giving interest concessionsgiving interest concessions

partially forgiving loans to firm with grimpartially forgiving loans to firm with grim

repayment prospectsrepayment prospects 　　 　 　　 　

Problems confronting Japanese Problems confronting Japanese banksbanks

Over-bankingOver-banking

According to Hoshi and Kashyap’s calculation in 1999, According to Hoshi and Kashyap’s calculation in 1999, if Japanese corporate borrowing patterns move toward if Japanese corporate borrowing patterns move toward US pattern, Japanese bank assets could shrink by 25 tUS pattern, Japanese bank assets could shrink by 25 to 50 percent. o 50 percent.

By 2004, the quantity of bank loan in Japan has droppBy 2004, the quantity of bank loan in Japan has dropp

ed only by 10 percent, implying that much more adjusted only by 10 percent, implying that much more adjustment is needed.ment is needed.

Problems confronting Japanese Problems confronting Japanese banksbanks

Backerward BanksBackerward Banks

Japanese banks still rely heavily on traditioJapanese banks still rely heavily on traditional banking, and the outdated business mnal banking, and the outdated business model results in the low profitability of Japanodel results in the low profitability of Japanese banks.ese banks.

Problems confronting Japanese Problems confronting Japanese banksbanks

The banking problems are defined to be oThe banking problems are defined to be over once the banksver once the banks ：：

Are well capitalizedAre well capitalized

Stop ever-greening non-performing loansStop ever-greening non-performing loans

Are earning rate of return comparable toAre earning rate of return comparable to

their global competitorstheir global competitors

Advice to policymakersAdvice to policymakers

The public fund to poorly-performing The public fund to poorly-performing banks should be redirected.banks should be redirected.

→ →Rather than keep all the major Rather than keep all the major institutions a float, regulators should focus institutions a float, regulators should focus on trying to engineer a smooth transfer of on trying to engineer a smooth transfer of assets out of the system. assets out of the system.

Advice to policymakersAdvice to policymakers

The most obvious mechanism for an orderly The most obvious mechanism for an orderly transition would be a set of sales to foreign transition would be a set of sales to foreign financial institutions.financial institutions.

→ →for banks become attractive targets to for banks become attractive targets to foreign institutions regulators should : foreign institutions regulators should :

move to a more transparent set of rules move to a more transparent set of rules and stop trying to manage and stop trying to manage market forces.market forces.be willing to let a foreign owner shed employees be willing to let a foreign owner shed employees and lines of business of an acquired bank.and lines of business of an acquired bank.