Bank Consolidation and Stability: The Canadian Experience - Case Study Example

Bank consolidation and stability: The Canadian Experience, 1867-1935. Contents Summary 3 Strength of the report 4 Shortcomings 5 Arguments 6 Justification of Methodology 7 Interpretation of results 8 Final Recommendation 9 References 11 Summary This paper emphasizes on various aspects of consolidation of the banks and the causes of failure of the banks. The paper also justifies whether the banks are required to be consolidated or not. The arguments have been justified with reference to the hypothesis. The Canadian experience has been cited as an example. The reason for the failure of the mega banks has been emphasized. Various statistical methods and data have been applied which has benefitted in understanding the paper accurately with clear justification and facts. This paper has been introduced with the purpose of establishing the relationship between the consolidation of the banks and the stability of the banks. This paper has also focused on the measure or the assistance that the government is required to provide to the banks in order to reduce the instability. The author in his article has used evidence for supporting the hypothesis. The author has provided an idea about the failure that is encountered by the banks and provides a guideline of the merger that helps in achieving a balance between the stability and competition of the banks. The author has also explained the impact of the mega mergers. The impact and the influence of competition on the risk taking capacity of the banks have been explained and the risk factors have been focused in this paper (Emmons, Gilbert and Yeager, 2004). The main aim or the objective of this paper is establishing the relationship between the stability and consolidation. In order to explain and justify the relation various aspects have been explained along with the Canadian bank which has been considered as a reference. Canadian bank have played a major and important role in making arrangements for merger and acquisition in maintaining stability of the banks. Evidence has been used for supporting the hypothesis. Strength of the report This paper focuses on the importance of merger and acquisition. This paper justifies whether the banks should be consolidated or not. It emphasizes on the process or the ways for maintaining stability of the banks. The various advantages of the merger and acquisitions have been focused in this paper. The risk associated with the consolidation has been mentioned in this paper. The main aim behind publishing of this paper is to develop the relationship between the stability of the banks and the consolidation of the banks in order to explain the reason behind the failure of the banks. This paper also emphasizes on the Canadian experience which is considered as a reference in explaining the cause of failure that is encountered by the banks and the steps that is required to be adopted for bringing stability among the banks. The conventional theory that is associated with branch banking have been explained which explains the stability of the banking system. The author has focused on the techniques for minimizing the instability of the banks and assisting the insolvent banks (De Nicolo and Kwast, 2002). The reader prefers this type of journal since the paper signifies a wide spectrum of various aspects of maintaining stability by the banks. This paper focuses on various concepts of economics, banking, financial accounting and credit banking. It will guide them in explaining the different hypothesis that has been applied for explaining the pros and cons of consolidation of the banks towards maintaining of stability. But the hypothesis that is used in this paper is required to be explained elaborately. The improvements that the author is required to make in this journal for providing more benefit to its reader is that the pros and cons have been mentioned but the causes of the failure of the banks have not been explained elaborately and its impact on the performance and productivity of the banks have not been explained elaborately. The author has also emphasized on the factors responsible for the failure of the banks (Carlson and Mitchener, 2006). Shortcomings Although the author in his paper has applied various hypotheses for verifying and evaluating the sensitivity, the author has not divided the premerger and post merger hypothesis on the basis of years. The use of hypothesis and statistics in this paper is more which makes the article very complex and critical to understand and formulate. The author has focused on the importance of merger and consolidation but has not emphasized on the cause of such failure. The author is required to critically assume the market factors that have resulted in failure. The author is required to interpret the empirical findings as evidence against the concept. The author has not emphasized on the risk taking ability of the banks and the author did not focus on the various interventions of the government. The author has not considered the parameters for distinguishing between the solvent and insolvent banks (Berger, Klapper and Turk, 2009). It has also been observed by considering the qualitative or the descriptive part or section of the paper that the author has not differentiated the banks on the basis of its sample that is the loan ratio variable. Although the author have supported the hypothesis related to maintaining of stability by the banks with adequate reference, the author has not provided any compelling evidence indicating that the merger have taken place due to the failure of the banks. The steps or the measures that are required to be adopted by the bank for maintaining of stability have not been mentioned. The author in his paper has not emphasized more on the failure hypothesis. The study was more focused on the oligopolistic industry and geographic diversification towards maintain of stability by the banks. The failure of the banks with the help of probability model has not been clearly explained in this paper. The author have discussed about the risk that is encountered by the banks but in this article the author has not established properly the relation between the stability and the risk taking capacity of the banks and its affect on competition (Beck, Demirgu and Levine, 2006). Arguments The author in this article has focused on the arguments that whether the banks are required to be consolidated or not in order to maintain stability among the banks. The author has applied various evidences and hypothesis in explaining the relationship between stability and consolidation. But the author have also discussed about the failure of merger. The pros and cons of the consolidation of the banks have been focused on this paper .The author in his paper has also provided various arguments explaining that the merger and consolidation of the banks cannot be regarded as the only cause for reducing the risk of instability of the banks. The new provisions that have been enacted by the banks have prohibited the entrance of new banks and it has imposed restrictions that the banks are required to deposit a minimum amount in entering into the industry. The double liability provision has been enacted for maintaining stability among the banks and reducing the extent of competition that exist among the banks. Lack of financial safety and security has de motivated the banks from undertaking risk. The author has emphasized that the reduction of risk is encountered by the banks through the application of merger and acquisition has been decreased with the economies of the bank in developing the branch banking system. But the author has also argued that the concept of merger and acquisition should not be ignored fully since it depends on the actual loan portfolio of the banks (DeYoung, Evans, Lam and West, 2013). The author in this paper have provided alternative hypothesis such as the risk diversification of the banks through the merger and acquisition. The author in this paper has justified his point and arguments on the basis of various models. But the author has not explained his points with variables. The author is required to focus on the variables for explaining the stability of the banks. The banks should not only consider that the stability of the banks can be maintained through consolidation but should also consider that the stability in the banks can also be achieved through the process of diversification. The author in its paper has also focused on the basis of two hypothesis that is imminent failure hypothesis and efficiency hypothesis which explains the stability position of the banks. But the disadvantage or the limitation of this two hypothesis is that this hypothesis are subjected to the intervention of the government and the politicians on the sound banks for acquiring the insolvent banks and on the other side the solvent banks prefer to conduct its activity cooperatively for achieving economies of scale through merger. Justification of Methodology The assumptions that have been made by the author in explaining the relationship between the stability and the completion is that the banks are required not only to concentrate on the level of competition existing in the industry but also on the risk taking capacity of the banks. The author has assumed that in order to maintain stability it is the duty or the responsibility of the regulators in considering the mega merger. The various factors or the causes of risk are required to be identified by the banks and therefore necessary steps are required to be formulated in order to reduce the risk. The author has also assumed that the risk can be reduced through financial consolidation but sometimes it may not be able to reduce the risk if the company acquires the asset through merger and acquisition that is risky in nature The author also assumes the fact that the less failure do not signify that the bank is less risky in terms of its expected value (Gup, 2002). The methodology that is used in this study is focused towards explaining the relationship between stability and consolidation by considering the stability of the Canadian bank. The author in this report has used various statistical techniques and has focused on secondary and qualitative research, but in order to explain elaborately the author is required to conduct primary research and also prepare open ended question in determining various aspects towards maintaining of stability by the banks. Variables are required to be identified and applied in the hypothesis. Probability model have been used in explaining the stability of the banks where only two factors or elements are taken into consideration which includes failures of the banks and the financial distress of the banks. Therefore the author is required to identify the other factors contributing towards maintaining of stability among the banks. The methodology that is used for the paper can be identified with the model that has been applied and the various hypotheses have been formulated for supporting it with evidence. Interpretation of results The results support the conclusions. The probabilistic model that has been formulated by the author is based on the notion that the bank can reduce the risk through mergers. The model emphasized that the bank with independent random cash flow has the ability in reducing the probability of default after the merger or acquisition of the banks. The author has also conducted the research on the basis of the difference that exists between the imminent failure and also the efficiency hypothesis. The imminent failure hypothesis have been conducted by the author for explaining the fact that the insolvent and the weak banks are being acquired by the solvent banks under the instruction and directives of the government with the intention of maintain stability among the banks. The second hypothesis that is the efficiency hypothesis that is conducted by the author emphasizes on the fact that the mergers or the consolidation of their banks are undertaken by considering various market forces in order to assist the well performed banks in removing the less performing banks from the market. Therefore both this hypothesis has been conducted for attaining the same result that is stability. The statistical method that has been used by the author in explaining the hypothesis explains the stability and solvency position of the banks. Z-score is regarded as the important parameter in evaluating the solvency position of the banks. It also determines the extent of systematic risk that is encountered by the banks. The increase or the rise in the Z-score signifies that the bank is stable and it is has less systematic risk. The author in justifying the stability and solvency of the banks has focused on Z score and capital asset ratio. The author has focused on various related aspects for maintaining stability among the banks. The author have reflected on the merger and acquisition, consolidation and diversification for reduction of risk and maintaining of stability and solvency by the banks. The author has also focused on the extent of competition that exists among the banks in the market. But the author has not emphasized or focused on the risk taking ability of the banks and the ways through which the competition affects and influences the risk taking ability of the banks. Final Recommendation The example of the consolidation of the Canadian bank has been used for explaining the stability of the bank through the consolidation of the banks. The criticism is that merger and acquisition is not only the measure for reducing the risk that is faced by the banks. The instability and the risk of the banks can also be reduced through diversification. The paper is based on the two hypotheses that is efficiency hypothesis and imminent failure hypothesis which is subjected to the intervention of the government. The author has applied various statistical tools for explaining the stability but it did not apply variable that will determine the risk encountered by the banks. The research is conducted by the author is on the basis of secondary research therefore the probability have been applied on the basis of assumptions which may not provide correct or adequate result. The shortcomings or the limitation that is encountered by the banks are not fixed. It can be reduced and minimized by undertaking necessary steps or measures for minimization of risk and maintain of stability by the banks. The author has conducted both the hypothesis that is the imminent hypothesis and efficiency hypothesis. But it has been observed that the findings and the discussion of the research supports the efficiency hypothesis rather than considering the imminent failure. The findings of the study are focused towards maintaining of stability of the banks. The problem in this article is that the author has emphasized on the hypothesis and the author have used Canadian bank as an example for maintaining stability through consolidation. But the author have not mentioned about the different types of bank. The author has not mentioned various parameters of banks. The paper can be accepted. The author has included all aspects related or associated with maintaining of stability of the banks. But the author is required to apply some more statistical tool and variable for explaining the article and minimizing the risk that is encountered by the bank in maintaining of stability. References Beck, T., Demirgu, A. and Levine, R., 2006. Bank Concentration, Competition and Crises: First Results, Journal of banking and finance, 30(1). pp.1581-1603. Berger, A., Klapper, L.F. and Turk , R., 2009. Bank Competition and Financial Stability, Journal of financial services research, 35 (1). pp. 99-118. Carlson, M. and Mitchener, K. J. 2006. Branch banking, bank competition and financial stability, Journal of Money, Credit and Banking, 38(5), pp. 1293-1328. De Nicolo, G. and Kwast, M., 2002. Systemic risk and financial consolidation: are they related. Journal of Banking and Finance, 26 (1). pp. 861-880. DeYoung, R., Evans, P., Lam,P.S. and. West, K.D., 2013. Discussion of Ferrero, Journal of money, credit and banking, 47(1). pp. 7-10. Emmons, W.R., Gilbert, A. and Yeager, T.J., 2004. Reducing the risk at small community banks: is it size or geographic diversification that matters, Journal of Financial Services Research, 25 (1), pp. 259-281. Gup, B., 2002. Megamergers in a global economy: causes and economy. Westport CT: Quorum Books. Read More