The threat of more bank mergers in the post-pandemic GCC region
The myth of “too big to fail” just doesn’t hold up and bank mergers result in more pricing power for large banks that eliminate market choices, says Dr Sheikh Selim
Dr. Sheikh Selim, Programme Director of Money, Banking and Finance, University of Birmingham Dubai
In the past few years, several bank mergers that failed to deliver have caught the attention of industry experts and researchers. The often misplaced myth of “too big to fail” has neither gained consensus among bankers nor established evidence of success in India.
Vague success of the first wave of bank mergers in the GCC was also evident in the pre-pandemic drop in returns to private equity and venture capital funds. These mergers failed to contribute to economic recovery following the drop in global oil prices. They did little in boosting the efficiency of the industry and in providing enhanced safety and profits to investors.
What these did is what typically oligopolistic markets do: Offer more pricing power to the big banks and eliminate choices for the market.
While S&P reports in 2019 predicted a fall in merger activities in GCC banks, the pandemic-hit economic recovery and investment demand in several industries (e.g. technology, tourism, and health) created an opportunity to revive the discussion among banks.
Industry experts foresee GCC-based financial institutions re-engaging in merger talks that may generate a pooled risk of over $1 trillion worth of banking assets.
No theory or evidence has clearly established that bigger banks are more efficient. Even when banks merge solely with the aim to grow bigger by pooling assets, there is no fresh infusion of capital. Instead, given the recovery-guided investment demand, mergers may be primarily motivated by pure survival interest of smaller banks (e.g. bail out) or by consolidating liabilities of two or more banks against a pooled longer-term costly debt.
None of these are solutions to the non-performing assets of the banks that are planning to merge, no matter which way they plan to repackage the liabilities.
Case studies have revealed the perils of bank mergers in light of efficiency and operations. Typically, in periods of uncertainty, the possibility or the announcement of bank mergers prompts anxiety and insecurity in bankers, which eventually leads to business and efficiency loss.
The complex details of mergers and their relevant terms and conditions overtake the priority business activities of the managements involved, which triggers a widespread negligence of everyday operations and the longer term sustainability goals of individual banks. Compared to global standards, the GCC region is already under par in terms of financial inclusion.
Further mergers of banks, amidst the economic crisis that we are in today, is unlikely to bring any good news in that either. The post-pandemic economic scenario warrants the re-establishment of value chains and creation of fresh capital by fixing non-performing assets.
Some of these processes will include harsh outcomes for some parts of the market. Pooling the liabilities cannot minimise the harshness of the pandemic-led economic loss that banks with negative net equity are facing. It can neither strengthen the private equity or venture capital market for the relatively larger banks.
Resorting to mergers therefore cannot be a long-term solution in mitigating the financial gaps in the banking industry. Unless competition policy regulates or restricts such attempts, the moral hazard of mergers will emerge as a serious concern for the GCC banking industry.
Compared to global standards, the GCC region is already under par in terms of financial inclusion
In the history of mergers and acquisitions, moral hazards that eventually led to plan-to-fail-mergers are plentiful. Often in periods of crisis, businesses identify vested interests in exiting their losing valuation. Albeit not in the banking industry, the case was similar for British Steel in 1999.
Their competitor, Hoogovens, found interest in taking implicit control of the sinking ship and aimed at enhancing their market share in the region through merger. That infamous merger, the Corus group, eventually failed in a few years and was acquired by Tata Steel of India.
It leaves little confusion in understanding that the Corus merger was never intended to enhance market efficiency. It was a plan to fail – a moral hazard in which vested interest guided two large companies in paving an exit route from commitments and liabilities.
The GCC banking sector is on the verge of such dark incentives, and without industry intervention or government regulations that prohibit such hazardous mergers, the dual threats of further loss in market efficiency and shortage of investment options and choices remains very much alive.
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The threat of more bank mergers in the post-pandemic GCC region
The myth of “too big to fail” just doesn’t hold up and bank mergers result in more pricing power for large banks that eliminate market choices, says Dr Sheikh Selim
Dr. Sheikh Selim, Programme Director of Money, Banking and Finance, University of Birmingham Dubai
In the past few years, several bank mergers that failed to deliver have caught the attention of industry experts and researchers. The often misplaced myth of “too big to fail” has neither gained consensus among bankers nor established evidence of success in India.
Vague success of the first wave of bank mergers in the GCC was also evident in the pre-pandemic drop in returns to private equity and venture capital funds. These mergers failed to contribute to economic recovery following the drop in global oil prices. They did little in boosting the efficiency of the industry and in providing enhanced safety and profits to investors.
What these did is what typically oligopolistic markets do: Offer more pricing power to the big banks and eliminate choices for the market.
While S&P reports in 2019 predicted a fall in merger activities in GCC banks, the pandemic-hit economic recovery and investment demand in several industries (e.g. technology, tourism, and health) created an opportunity to revive the discussion among banks.
Industry experts foresee GCC-based financial institutions re-engaging in merger talks that may generate a pooled risk of over $1 trillion worth of banking assets.
No theory or evidence has clearly established that bigger banks are more efficient. Even when banks merge solely with the aim to grow bigger by pooling assets, there is no fresh infusion of capital. Instead, given the recovery-guided investment demand, mergers may be primarily motivated by pure survival interest of smaller banks (e.g. bail out) or by consolidating liabilities of two or more banks against a pooled longer-term costly debt.
None of these are solutions to the non-performing assets of the banks that are planning to merge, no matter which way they plan to repackage the liabilities.
Case studies have revealed the perils of bank mergers in light of efficiency and operations. Typically, in periods of uncertainty, the possibility or the announcement of bank mergers prompts anxiety and insecurity in bankers, which eventually leads to business and efficiency loss.
The complex details of mergers and their relevant terms and conditions overtake the priority business activities of the managements involved, which triggers a widespread negligence of everyday operations and the longer term sustainability goals of individual banks. Compared to global standards, the GCC region is already under par in terms of financial inclusion.
Further mergers of banks, amidst the economic crisis that we are in today, is unlikely to bring any good news in that either. The post-pandemic economic scenario warrants the re-establishment of value chains and creation of fresh capital by fixing non-performing assets.
Some of these processes will include harsh outcomes for some parts of the market. Pooling the liabilities cannot minimise the harshness of the pandemic-led economic loss that banks with negative net equity are facing. It can neither strengthen the private equity or venture capital market for the relatively larger banks.
Resorting to mergers therefore cannot be a long-term solution in mitigating the financial gaps in the banking industry. Unless competition policy regulates or restricts such attempts, the moral hazard of mergers will emerge as a serious concern for the GCC banking industry.
In the history of mergers and acquisitions, moral hazards that eventually led to plan-to-fail-mergers are plentiful. Often in periods of crisis, businesses identify vested interests in exiting their losing valuation. Albeit not in the banking industry, the case was similar for British Steel in 1999.
Their competitor, Hoogovens, found interest in taking implicit control of the sinking ship and aimed at enhancing their market share in the region through merger. That infamous merger, the Corus group, eventually failed in a few years and was acquired by Tata Steel of India.
It leaves little confusion in understanding that the Corus merger was never intended to enhance market efficiency. It was a plan to fail – a moral hazard in which vested interest guided two large companies in paving an exit route from commitments and liabilities.
The GCC banking sector is on the verge of such dark incentives, and without industry intervention or government regulations that prohibit such hazardous mergers, the dual threats of further loss in market efficiency and shortage of investment options and choices remains very much alive.
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