Merger of Investment and Commercial Banks - Research Paper Example

Merger of Investment and Commercial Banks In this project, a detailed examination of the merger of Investment bank and Commercial bank is carried out. It is of great significance to evaluate the benefits of such mergers which will ultimately reflect not only on the banking industry, on the stock market as well. This will also have its effect on the large economy as a whole. Will the merger of two banks have its effect on their performance – will it create a value or not? It is essential to undertake a detailed study of the impact of merger of both investment banks and commercial banks in order to arrive at a proper conclusion on this question Introduction: Banking is a large subject, which is closely related with both finance and economics. The banking has a global application in the present times. It mainly deals with the principles of collection of deposits and allocation of loans and funds. A bank generally deals with its customers, and carries out its activities on the basis of certain principles and laws. In the present scenario, apart from these basic activities, the banks are involved in many other functions including merger and acquisition. On the whole, the merger of an investment bank and commercial bank results in the combination of two banks resulting in a larger group. It is a global phenomenon, in the current scenario, the number of merger and acquisition in the banking industry is on an increase. Therefore, it is necessary to stress the global merger of banking industry especially in developing economies. One of the fundamental reasons for such merger of banks is the competition among the banks. Other than this, the stock market fluctuations and monetary policies also affect the merger of banks. Fiscal policy of the banks is largely related to the allocation of resources and the proper distribution of income. The proper implementation of fiscal policy is very essential for maintaining a constant price level, elimination of job redundancy, which will result in the implementation of effective economic growth. So, the fiscal policy plays a very vital role in the accomplishment of economic objectives. The approach towards both fiscal and monetary policy is quite different from one to another. Whereas monetary policy stresses on two concepts, such as the rate prevailing for the borrowal and the supply of money, which based on accepting of deposits and lending of money. IMF (International Monetary Fund) plays a great role in relation to the macro economic policy development. It is an organization established at international level, which is giving higher priority to the financial systems and other implementations globally, which is especially dealing with the foreign exchange rates and balance of payments. Therefore, the merger of investment and commercial banks should affect both economically and financially in the global banking industry. Literature Review: Merger of Investment and Commercial Banking an Overview: At present, the banking industries give priority on developing the economies of scale by falling down the total expenditure. Moreover, the merger of global banking industry will have a great impact on developing countries. In this particular project, a discussion is being undertaken about the fact that whether the merger of investment and commercial banks should create any value or benefit. To take a most appropriate decision based on this fact requires an appropriate and detailed study about this concept. Investment banks mainly concentrate on improving or raising the value of funds. “The investment banks have recently enjoyed an almost unprecedented period of strong economic conditions and growth, which has enabled them to deliver record earnings. The industry has largely stabilized in recent years around a small number of major players, and there have been few recent mergers and acquisitions.” (Investment Banking, Growth. 2007). Nowadays, investment banks playing a major role in the field of investment, through which it is possible to raise funds in a most effective manner. Investment banks are useful in several ways for increasing the global economy, such as through this it is possible to issue various securities, organizing various assets related to the business etc. “Low margins, workflow disconnects, and data redundancies continue to challenge investment banks. Complying with mandated regulations like Basel II and incorporating frameworks like Straight Through Processing (STP) present additional challenges. To be able to work round-the-clock in such demanding environments investment banks have made technology an integral part of their strategic initiatives.” (Investment Banking. 2007). The essence of financial management is to raise and utilize the funds raised effectively. Commercial banks and international capital markets are competing well for raising the external sources of funds in an effective manner. Like domestic loans, commercial banks all over the world extend Foreign Currency (FC) loans for carrying out various international operations. Moreover, commercial banks also provide to over draw above the loan amount. The primary role of the commercial banks is to cater to the short term requirements of the industry. But there after, the commercial banks have started taking an interest in term financing of industries in several ways, though the formal term lending is so far small and which is applicable only to major banks. Nowadays the concept of term lending by banks has become a disruptive issue. This is due to the reason that the term loans should not provide liquidity concept, which is a major consideration in all banking operations. But traditionally, banks should provide only for short terms and for operations which results in the automatic liquidation of such credits over short periods. On the other hand, it is also necessary to give keen attention on the traditional concept of liquidity, which requires modification. The proceeds of the term loan are generally used for fixed assets or expansion in plant capacity. But the repayment of such loan should take a long period of time. The liquidity of such loan should depend on the anticipated income of the borrowers. The technique of providing long term finance should extend the credit term after a proper appraisal of applications for term loans. The degree of liquidity in the provision for regular amortization of term loans is more than that of the demand loans which are renewed from year to year. Actually, the term financing controlling both the banker and the borrower, so long term planning is required to ensure that cash inflows is adequate to meet the instruments of repayments and allow an active turnover of bank loans. In commercial banks, always there is a criteria of liquidity, it will introduce flexibility in the operations of the banking system. While providing loans, it is necessary for the banks to under go several appraisal and evaluation in an effective manner. Banking function is giving more stress of improving the financial viability and return on investment by controlling the element of risk to certain extend. The merger of commercial banks and investment banks may or may not create value, which not only affects the economies of scale and stock markets, but the banking industry as a whole. “However, banks acting as both lenders and advisors face a potential conflict of interest that may mitigate or offset any certification effect. Overall, it is necessary to find evidence of a net certification effect for target firms but conflicts of interest for acquirers. In particular, target firms earn higher abnormal returns when the targets own bank is hired as merger advisor, consistent with the banks role as certifier of the (more informationally opaque) targets value to the acquirer.” (Allen et al. 2007). It is very clear that the merger of commercial banks and investment banks should create some relevant changes in the overall economy. The impact of this merger will create certain influence in the banking industry; later on it will ultimately affect the economy as a whole. Effective and efficient control of finance, cost and revenue facts are essential to consider. Moreover, the effect of merger will create a lot of changes in the capital markets also. Moreover, it is necessary to evaluate the economic integration of an economy also. “Consolidation emerged as a defining characteristic of the modern banking world, primarily to leverage the benefits of large size, expanding and diversifying bank loan portfolios to lessen the likelihood of failure and harnessing core competencies.” (Sharma 2004). Above all these, it is necessary that an effective stress is laid on the economies of scale, and risk factors. Moreover, it will also lead to liberalization, privatization, as well as globalization. Banks should aim at generating maximum returns and in the globalized competitive scenario it is not tough enough to depend on the available ways of raising finance. Resource mobilization has to be undertaken through various innovative ways or financial products which may meet the investor needs effectively. The mechanism of procurement of funds is giving stress for- Identification of the sources of finance. Determination of finance mix. Raising of funds. Internal fund generation. Moreover, this merger will also influence the GDP growth of the country. It is very essential to make a clear analysis of the rapid changes in the business environment and market avenues, according to the technological enhancement. This will not only maximize sales, but also improves the economy. Research Methodology Research methodology gives focus on the collection and analysis of various matters related to a relevant topic. The type of method adopted depends upon the nature of the topic. The topic of the research differs from its nature on the basis of the data to be required for the study. In this particular topic, it is necessary to evaluate whether the merger of investment banks and commercial banks can create value? In this regard, it is necessary to consider the type and value of merger, and capitalization impact on the stock market. This is because the mergers in the banking industry will depend on the share holders’ returns. Moreover, it will also affect the overall profitability and cost efficiency. In addition to this, it is necessary to consider the normal returns, abnormal returns, and cumulative abnormal returns. The merger of commercial and investment bank should create an effective value internationally. The impact of this reflects not only on the economy but the banking industry as well. Moreover, it is also affecting the financial and economical areas, and also the stock market fluctuations. This merger plays a wider role in the economy, such key roles are mentioned below- Encouraging the investment procedure by withdrawing the savings.i.e. Mobilization of savings for improving investment. Attainment of the overall growth of the economy in a global manner. Reorganization of wealth and capital. More importantly, it is also necessary to consider the diversification impact, which takes place due to the merger of banking industry. Cash flows, and liquidity dimension is also taken in to account in respect of undertaking merger. In addition to this, through merger, it is possible to undertake the implementation and diversification impact through out the economy. The merger is greatly influencing the financial markets to a great extend. The sources of fund determination done by the banks are being done on the basis of financial strategy being developed by banks, the leverage, and financial conditions prevailing in the economy as a whole. Also, the impact of merger in the banking industry greatly influences the international capital markets. Therefore, an effective appraisal mechanism of various banks are crucial while undertaking the concept of merging of banks. Conclusion Appropriate analysis and interpretation of banking rules and procedures and the effective implementation of various tools and techniques that are contributing to a great extend in the overall development of the global economy and banking industries. It is necessary to consider the economic and financial situations that prevail in the economy due to the merger impact. Therefore, it is clear from the discussion that the merger of commercial and investment banks should improve the overall financial viability as well as the technical feasibility. It gives greater stress on its customers and in the improvement of the economies of scale. Bibliography ALLEN, Linda et al. (2004). The role of bank advisors in mergers and acquisitions. Questia. Vol. 36. Last accessed 15 December 2007 at: http://www.questia.com/googleScholar.qst;jsessionid=HvFQvchTpCLPf0vQN6svQb7qgnYg1Qbhp3fF4LhWwvznpDvWvkZP!-1027159540?docId=5006413518 Investment Banking. (2007). Growth. [online]. Kpmg.com. Last accessed 15 December 2007 at: http://www.kpmg.com/Industries/FS/IBanking/ Investment Banking. (2007). [online]. Tata Consultancy services. Last accessed 15 December 2007 at: http://www.tcs.com/Industries/Bank&Fi_IB.html SHARMA, Manoranjan (2004). Banking consolidation must be synergy-driven. [online]. The Hindu Business line. Last accessed 15 December 2007 at: http://www.thehindubusinessline.com/bline/2004/12/30/stories/2004123000200800.htm Read More