Pros and Cons of Merger Pros- 1. More assets and locations 2. One of the 3 biggest banks in US in terms of wealth Cons- 1. Short-run declining stock price
Social & Economic Consequences Small Banks Today Old way of Banking Big Banks today New way of Banking
Social & Economic Consequences Big Banks are Less Willing to Cater to Small Businesses and Low Income Individuals 1) low-touch Banking 2) High Fees 3)Availability of Credit
Social & Economic Consequences What if ONE Large Bank Failed? Big Banks Require a Large Sum of Money to Bail Out Taxpayers Interconnectedness of Banks Failure of Entire Banking System
Too Big to Fail What dose this phrase mean? Which banks can and cant fail, and when the banks are left to fail what are the repercussions? When the government decides a bank is too big to fail where dose the money come from to bail them out and does this pose a threat of moral hazard?
The Glass-Seagall Act After the stock market crash of 1929 congress decided to pass the Glass-Seagall act This Act separated Investment and commercial banking This law was repealed by Bill Clinton in 1999
The Housing Crisis In 2003 the fed dropped the interest rate encouraging risky borrowers to become home owners The availability of credit helped drive up housing prices and by late 2006 the entire market was over priced. Borrowers defaulted on their homes and left the bank to foreclose at a fraction of the amount owed on the properties
Bank Expansion Smaller banks began to struggle and fail and were inevitably bought up by bigger banks These big banks bundled in thousands of toxic assets in with their good ones. This bundling caused big productive banks to go under.
Solution Republicans put forth a proposal that would add a chapter to the bankruptcy code that deals with large, troubled financial institutions. Democrats are also drafting a bill where failing institutions can be dismantled through government intervention without the help of taxpayers money. This bill is expected to put a cap on bailouts at 2 billion dollars
Conclusion: We learned… Banks Merge Because Profitability Competition When Banks Merge Stocks Generally Decrease Small Businesses Receive Fewer Loans When Banks Do Fail, Taxpayers Foot the Bill