Commercial and investment banking
The banking industry is becoming one of the most fluctuating and risky business industries in today’s financial markets. There are many financial and political reasons behind this uncertain business environment for banks. Therefore, in these circumstances the bank consolidation is one of the most reliable methods for banks to sustain the poor economic environment. If any bank is suffering from a poor financial situation or couldn’t compete in the presence of larger banks, then two smaller banks can merge themselves to become larger financially stronger bank. One of the advantages of banking consolidation is that the ‘child bank’ becomes the asset of ‘parent bank’ and by doing so; child bank can get those financial opportunities which were out of their reach due to poor or limited financial assets. Moreover, parent bank does not interfere with the NCI or shareholder’s interests. (Boyd, and Graham)
Another main advantage of mergers between banks is that it is with a view that in banking industry the growth of banks stops or slows after a few years. It usually happens because of shortage of opportunity in the specific financial market. Therefore, in these circumstances, bank from one market or country, consolidate or do merger with the banks of other financial market or other country. This step from the parent bank opens the new business opportunities for both banks. (G)
One of the major disadvantages of bank consolidation is that it creates a lot of layers between lower management and the higher management. This increase in the management layers normally results into poor management and conflict of interests. Moreover, ‘parent bank’ also interferes in the decision making of ‘child bank’ which affects the efficiency of ‘child bank’. (G)
An independent central banking is another way to do banking in a safer way to protect financial cycle of any country. There are few advantages of independent central banking. The first advantage is that it eliminates any rivalry between big giants which cause damage to the smaller banks. Moreover, it can control the inflation rate by injecting and ejecting the cash from the market according to the needs of the market. The main reserves of the country can be managed properly and it becomes very difficult to perform any illegal action regarding money, such as money laundering. By implementing independent central banking, professionals can give their view to the government officials regarding financial decisions in an effective way. Furthermore, funds transfer between different banks can be nil and it can save a lot of transaction cost of the customers. (Pettinger)
One of the disadvantages of independent central banking is that the central bank can develop their own monopoly in the financial market. A central bank can impose any extra charges or cut down interest rates at their will. Internal auditing can be manipulated very easily in the central bank. Furthermore, due to the large quantum of transactions, it is highly probable that external auditors may not find frauds or poor allocation of financial resources. An independent central banking system creates influence on the decision making of government officials regarding budgets and funds allocation for common citizens. Another disadvantage of independent central banking is that at any point bank from another country can leave the central banking in case of any merger or political situations. This action can create problems and cause increase in the inflation, interest and tax rates. This sudden change in rates causes a lot of problems to the bank customers and common citizens. (Lee)
Boyd, John, and Stanley Graham. "Investigating the Banking Consolidating Trend." Federal
of Minneapolis. 1 Sep 1991: Web. 12 Oct. 2013. <http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3766>.
G, Jackie. "Bank Consolidation – It’s Merits and Demerits."Personal Finance., 25 Sep
2009. Web. 12 Oct. 2013. <http://jackieg.hubpages.com/hub/Bank-Consolidation>.
Pettinger, Tejvan. "Benefits of Central Bank Independence."economicshelp., 9 Jan 2008. Web.
12 Oct. 2013. <http://www.economicshelp.org/blog/165/finance/benefits-of-central-bank-independence/>.
Lee, Richard. "Taking Advantage Of Central Bank Interventions." investopedia., 26 Jan 2011.
Web. 12 Oct. 2013. <http://www.investopedia.com/articles/forex/11/taking-advantage-central-banks.asp>.