Bank Consolidation and Stability: The Canadian Experience, 1867-1935 - Assignment Example

 BANK CONSOLIDATION AND STABILITY: THE CANADIAN EXPERIENCE, 1867-1935 The summary/overview The manuscript tests the concepts of establishing how merger, acquisition, and consolidation may influence stability and the systemic risks. The study can be used to guide strategist on issues related systemic risks and stability when considering merger and acquisition in the banking system. Through the concept of concentration hypothesis, the researchers used the transfer-function to estimate the systemic stability for bank mergers and acquisition. The author develops a simplistic probability framework that could have application as the model of prediction. The study found that M & As provides a positive impact on systemic risks for the transfer function estimation based on aggregate Z-score. Other evidence from the history and empirical findings favoured the efficiency hypothesis as opposed to the hypothesis of the imminent failure. The authors assessed how Banking system over relying on merger guidelines based on Herfndahl-Hirshman Index might curb the possibility of increasing risks associated with M & As. General Assessment The understanding of risks and stability for banks undergoing merger and acquisition has drawn immense attention hence widely published in the banking empirical literature. The area of study is important for strategies in the banking sectors as well as the investors to devise methods that assess the possibilities of securing risks or attaining stability after merger and acquisition. Most of the empirical and theoretical framework was relevant with the exception of a few materials and concepts used by the author. However, I believe the area studied is very important. Therefore, I wish to illustrate and give my personal views as follows: Major comments 1. I am not sure whether the probabilistic model proposed and developed by the author as a mean of analysing the relationship between the systemic stability and the merger of banking system can provide the function it was proposed to offer. 2. The reason relates to the description of the model. The authors assert that the model uses a theoretical framework in establishing the differences between the imminent failure hypothesis and the efficiency hypothesis. One would wonder how they measured the levels of failure in the banks. Using financial distress, and bank failure as the indicator is relative and not objective. 3. Besides the model uses the assumption that when banks have low levels of probability for failure, they are likely to experience reduced systemic crises, and contagious bank runs, which were not substantiated appropriately as would be expected (Carlton and Picker, 2006). The author also used the aggregate Z-score in measuring systemic stability, which I think was most appropriately selected for the study requirement. 4. The authors compared both the pre and the post-merger instabilities of the banks undergoing the merger and acquisition in order to address the questions of their merger. The way the authors addressed the Chebyshev inequality is very simplistic and may miss the most important information not provided in the synergy and cash flow hence making the model looks rather too simplistic and inappropriate for the audience of this journal. Perhaps, the authors could have described at least three items and selected one or two, or even compared a model that captured the items together or separately, that would be interesting (Guiso et al., 2006). 5. The study was based on bank merger yet the author acknowledges that other reasons for shrinking closure of branches could also play a significant role. Besides, the author builds their empirical literature findings by Carlson and Michener (2006; 2009) that studied how branching impacted immense competition as opposed to geographical diversity for the stability of banks in the US. The postulation of such findings to the Canadian market segment may not reflect the best approach because of the differences between the banking systems in the two regions. 6. To build their hypothesis on lack of regulated banking system that characterised the period of their study, the author notes that both Wells (1989) and Schuler (1992) reported studies on banking system that dates back before 1914. The author acknowledges that these studies may not provide appropriate empirical finding on the free banking system, given the notion that the establishment of chartered banks required approval by the parliament. Using such controversial literature as the source of empirical verification, and the justification of the hypothesis of efficiency versus imminent failure is misleading and inappropriate. 7. I doubt the rationale used in the selection of the alternative data for the study. For instance, the author illustrates that lack of complete balance sheet for the period studied formed their shift for the aggregate data from the banks originating from the national data. How such data reflected the information from the individual banks was not illustrated when compared with other studies (Demirguc-Kunt et al., 2004). 8. The author preferred national data to the accounting data because of the interest in studying the level of risks. One would imagine such data do not illustrate the scenarios for the individual banks because they must be portraying industrial average, which has its faults. In fact, from the statistical findings, there were great discrepancies between the z-scores of the industry data and the individual bank data. One would expect a close association between the two levels to help in making consistent conclusions. Instead, the author was mainly interested in the z-score as a reflection of the level of system risks, which has risks as previously illustrated (Boyd and Runkle, 1993; Boyd and Nicolo, 2005). 9. I am not sure whether the author should have used the z-score test in illustrating the changes in the number of mergers and bank branches. They used the z-score in describing the effects of consolidation. Assuming that consolidation avoids insolvency by increasing the value of X-score, the described their finding by relating high z-score with increased stability of the banks, and low systemic risks yet most banks did not have comprehensive data. One would wonder how such scores were interpreted without illustrating the challenges of the data collection. In fact, the author concludes that the findings are consistent with concentration-stability hypothesis and efficiency hypothesis that was not justified by the previous studies (Cetorelli and Gambera, 2001) 10. I am not certain whether diversification through geographical expansion on the banking system is associated with growth and development as illustrated by the author because I did not see any effort in referring to some of the previous studies on the same. Besides, the author associates the merger and acquisition as well as the opening of new branches as a form of reducing risks (Rossi and Volpin, 2004; Goodhart et al. 1998). One would argue that opening more branches and the implementation of merger and acquisition might have equal chances for success and failure in risks. As much as it achieves extensive market coverage, the benefits do not absolve the institution from the problems associated with increased risks (Demsetz and Strahan, 1997). The author did not make any effort in illustrating these concepts in the manuscript. 11. On numerous occasions, the author assumes that consolidation translates to reduced risks and increased stability. From the perspective discussed in the paper, it is as if the author is making a deliberate attempt to illustrate these concepts at all cost. The way the concepts are build is difficult to guarantee the readers that there is a problem the paper attains to achieve through a scientific approach. There is the lack of a straightforward effort to justify that acquisition and merger may lead to sustainability and increased market share. I have read all the articles the author used in the manuscript and find it rather interesting how the author relates some of the concepts from the theoretical framework of the current study. Another fault captured in the study is the linking of post-merger risks with the erosion of capital and profits. I have problems when authors bring out theoretical concepts without proper illustration and justification. 12. The author uses a simplistic approach that post-merger in the Canadian banking system was not related to post-merger failure, yet the study did not set out to carry study the concept. Besides, there was no theoretical background to back such assertions. 13. Insufficient justification of the concepts cast a lot of doubt on the relevance and the significance of the entire study. For instance, on page 10, the author raises an argument that needed citation and literature justification yet none was availed. The author asserts that the concept of low-risk exposure and the high market power could happen when there I financial consolidation of institutions like banks. One would expect such assertions to have a sound theoretical background. Perhaps the author did not take the entire work seriously. How the author associates these concepts with the sustainability for the acquiring banks to remain relevant in the market segment was not illustrated comprehensively as previously in other studies (Grout and Zalewska, 2006; Aktas, et al,, 2006). Perhaps the author assumes that these concepts are general knowledge in the custody of the audience. However, one must always remember that scientific information is available to the public who may decide to use the information. Prior to using such information in the formulation of policies one must have the certainty that the information provider has scientific backing and meets the threshold for its application in the selected domain these may not be true for this manuscript owing to limited deliberate steps taken to illustrate concepts (Barth et al., 2006). 14. It is very interesting to analyse different aspects of the study and make a statement based on the statistical values when the two are independent variables (Andrade et al. 2001). For instance, the author studied the merger and acquisition of banks as well as the opening of branches as a way of reducing risks and increasing stability posts the merger or consolidation. These variables are different and should not be treated as similar alternatives the way the author treats the variables. Perhaps the best approach is to carry out the analysis separately and interpret them separately other that relating the two variables to consolidation. My argument for the inconsistency in these variables is because each of them presents a different scenario that may not relate to one another or may not capture the similarities the author is illustrating. Therefore, the two variables must be treated independent of one another and interpreted separately, the author may compare the two variables on the stability and systemic risks. 15. The study used limited data for its study, which may not be representative of the findings illustrated. It requires additional data to make the findings representative and appropriate for future work and policy formulation. Using fewer number of data is likely to skew the finding and generate error type II, hence making the finding unrealistic. Besides the selection of contingency table for the assessment of the relationship between bank consolidation and the instability and systemic risks are not justifiable. The author describes the findings in the contingency table without doing the analysis. Scientific data are based on appropriate methods for the analysis of the data to obtain findings that can be used in generating observations (Barth et al., 2006). The relationship in the contingency table does not illustrate the causality effect thereby making it faulty to use the method as a way of assessing the possible causes of risks and stability. Besides there are limited formal statistical tests to justify the findings illustrated by the author, one would expect the author to carry out a series of test to help in the justification of the objectives. The simplistic approach makes the study so basic and simple (Boyd and Nicolo, 2005;). For instance, the Fisher’s test used one-tailed test instead of the two-tailed test. Using one-tailed test may omit some associations not captured in the current study. Maybe if the authors used a two-tailed approach, their findings would not have been significant. The author did not organise the ideas and logic to flow in a chronological sequence perhaps that is the reason there are many repetitions in the paper. The author repeats most of the finding making the paper seems long and extensive yet it does not replicate the same in its coverage. 16. The study fails to clear the many doubts generated by the author while trying to justify the objectives. Most of the concepts generated by the author are not discussed adequately. Instead of paying close attention to such concepts and theoretical justification, the author majored on illustrating findings from their study. However, the findings were not adequately collaborated with previous work. Contrary, the study generated ideas and concepts with important consideration in the field of study despite the inadequacies in the study itself. Some of the concepts raise in the study are the various forces that drive the merger and acquisition. The author did a commendable job in illustrating these concepts. Minor comments/issues 1. The paper has grammar mistakes. There a couple of sentences that are very long and seems convoluted. Such sentences are difficult to understand and may describe several concepts in a shallow manner because the author is trying to capture multiple items in one sentence hence causing confusion. The author needs to revise the paper for grammar mistakes by using short sentences and separating different concepts in different sentences. 2. The paper is very long. Usually, manuscripts are short and specific. However, this paper is very long for a normal manuscript. Perhaps the main reason the author did not pay attention to the size of the manuscript. Besides the author repeats most of the concepts while discussing the results, this repetition may have played a significant role in making the paper too long for a manuscript. 3. The selection of literature used by the author is wanting; most of the concepts generated by the author while attempting to lay down the hypothesis were not justified adequately. The author struggles to explain the concepts because there is a lack of enough literature relevant to the study. 4. I disagree with some of the references used in the study because they do not support the concepts addressed. 5. The sources of data were also the limiting factors. The author uses aggregate national data and the few individual data from the banks. Besides, the limited number of data used makes the study non-representative. Besides, there are many flaws in the way data was analysed based on z-score and Fischer’s to establish the relationship between the consolidation process and variables like systemic risks and stability. 6. The paper distracts the audience because there is a lack of logical sequence and flow of ideas. The paper was not organised well, and this creates a notion of repetition because the author refers to concepts earlier discussed in other concepts. However, most disturbing areas are the lack of justification and making reference to previous findings. References Aktas, N., E. De Bodt, and R.W. Roll, 2006. "Is European M&A Regulation Protectionist?," Catholic University of Louvain, SSRN Discussion Paper. Andrade, G., M. Mitchell, and E. Stafford, 2001, "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives 15, 103-120. Barth, J., G. Caprio, and R. Levine, 2006. Rethinking Bank Regulation: Till Angels Govern (Cambridge University Press, Cambridge UK). Berger, A.N., A. Saunders, J.M. Scalise, and G.F. Udell, 1998, "The Effects of Bank Mergers and Acquisistions on Small Business Lending," Journal of Financial Economics 50, 187-230 Berger, A.N., R. Demsetz, and P. 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