Financial intermediation - Essay Example

It was based on the efficiency hypothesis model and was distinguished from the imminent failure model. After analyzing 33 mergers during the 1867-1935 period, the author found that the consolidation and integration (which result as consequences of mergers and acquisitions) reduce systemic risk. An important variable in this finding is the identification of the role of diversification in the dilution and management of risks. The study also proposed the empirical validity of concentration-stability hypothesis as a framework for explaining the stability of Canadian banks.

It was found that strong concentration of banks, which came as an offshoot of mergers and acquisitions, was a strong predictor of stability. What is good about the paper The paper is significant for several reasons. It contains important insights on the developmental evolution of the Canadian banking sector. The author has also proposed and explained insights that could enrich the extant literature on the positive impact of mergers and acquisitions (M&As). The successful use and evaluation of hypotheses and the systematic assessment approaches included can provide helpful insights to researchers interested in the same or in related research topics.

These constitute the reasons why it is worthy of publication. This section will explain this in detail. An important insight postulated by the study is the explanation why the Canadian banking system outperformed the United States banking system during the Great Depression (p.6). The author was able to provide important evidences, most particularly, the argument that Canada avoided the crisis by maintaining a banking system typified by risk diversification through branching (p.6). This aspect in the study contributes an insight to the body of literature in regard to the incidence of bank failures, vulnerabilities and risks that could be avoided.

The emerging principle is that mergers have cushioned the Canadian banking system from the Great Depression by diluting the risks. Here, a theoretical evidence was presented: the cases of the cross-province acquisitions from 1900-1931led to risk diversification because the bulk of business for each bank in a consolidated financial institution is based on its home province, hence, the risk for the entire organization is allocated according to its branches, operating in their respective locations.

Furthermore, the study also explained the differences between mergers and acquisitions than simply branching out. If the bank is concerned with risks or is interested with diluting it, branching would be an option because it also meant the diversification of operation across Canada. However, it was explained how M&As have different degree of risk exposure than branching, effectively classifying one from the other. If one does think about it, mergers and acquisitions diversify through integration and accumulation of resources whereas branching diversifies by expanding and spending resources.

In the former, there is an inward flow of resources where the latter sees an outflow. This is the reason why in the study's comparative analysis, it was found that "out of the 10 chartered banks that remained in business in 1935, six had been involved in acquisitions," and that "only one out of the 26 failed banks was involved in bank consolidation" (p.9). The study used Fisher's exact test to evaluate the relationship it revealed that bank consolidations did not result or