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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Mergers within the financial industry and the effect on interest rates

Mergers within the financial industry and the effect on interest rates

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ADP

ADP
Manager - Equity Analytics
Manager - Equity Analytics
Good Morning to all,

I was trying to understand the effects of the proposed mergers within the financial industry but couldn't get a clear answer.    

Does anyone have an idea what would be the effect on the money supply (what I'm ultimately thinking of is the interest rates) if there are mergers within the financial industry?.
As we do practice fractional reserve banking wouldn't mergers mean the speed loans are created are slowed intern putting pressure on rates?

Antonym

Antonym
Vice President - Equity Analytics
Vice President - Equity Analytics
@ADP wrote:I was trying to understand the effects of the proposed mergers within the financial industry but couldn't get a clear answer.    

Does anyone have an idea what would be the effect on the money supply (what I'm ultimately thinking of is the interest rates) if there are mergers within the financial industry?.
As we do practice fractional reserve banking wouldn't mergers mean the speed loans are created are slowed intern putting pressure on rates?
Typically, larger firms would benefit from (i) economies of scale and (ii) higher credibility; therefore, they would be able to source funds, and lend, at lower rates than smaller firms would. The proposed mergers would exert downward pressure on interest rates.

ADP

ADP
Manager - Equity Analytics
Manager - Equity Analytics
@Antonym wrote:
@ADP wrote:I was trying to understand the effects of the proposed mergers within the financial industry but couldn't get a clear answer.    

Does anyone have an idea what would be the effect on the money supply (what I'm ultimately thinking of is the interest rates) if there are mergers within the financial industry?.
As we do practice fractional reserve banking wouldn't mergers mean the speed loans are created are slowed intern putting pressure on rates?
Typically, larger firms would benefit from (i) economies of scale and (ii) higher credibility; therefore, they would be able to source funds, and lend, at lower rates than smaller firms would. The proposed mergers would exert downward pressure on interest rates.

Hi Antonym thanks for the reply, I was thinking more on the lines that the speed that which money is created is reduced (creation of loans) due to lesser institutes circulating the money thus making money scarce and putting upward pressure on rates. Any idea what has been the effect on rates in other countries where bank mergers have happened, I think Singapore and US have had similar large scale pushes for consolidation but i couldn't find the effect on rates.

Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
Good thoughts,

1) If a good company merges with another good company ( purely an example LFIN with VFIN), I see their loan books will grow . So their ability to give out loans and better yet attract funds ( maybe foreign even) to loan out will be more.

2) Even if 3 weak companies merge to become stronger, I still see their ability to attract more funds (to loan out) is better.

So in essence an upward pressure on interest rates i don;t see ( convince me othrwise please)

From what I understand, Sri Lankan Banks/Fins do not have enough money to fund development projects within Sri Lanka even.

Objectively I see this merger is needed as we have far too many Fincos ( weak ones also) . So it is not a bad move .

But the real political motives I don't know.

Someone else can add to the negatives as they see. We need to discuss both sides.




@ADP wrote:
@Antonym wrote:
@ADP wrote:I was trying to understand the effects of the proposed mergers within the financial industry but couldn't get a clear answer.    

Does anyone have an idea what would be the effect on the money supply (what I'm ultimately thinking of is the interest rates) if there are mergers within the financial industry?.
As we do practice fractional reserve banking wouldn't mergers mean the speed loans are created are slowed intern putting pressure on rates?
Typically, larger firms would benefit from (i) economies of scale and (ii) higher credibility; therefore, they would be able to source funds, and lend, at lower rates than smaller firms would. The proposed mergers would exert downward pressure on interest rates.

Hi Antonym thanks for the reply, I was thinking more on the lines that the speed that which money is created is reduced (creation of loans) due to lesser institutes circulating the money thus making money scarce and putting upward pressure on rates. Any idea what has been the effect on rates in other countries where bank mergers have happened, I think Singapore and US have had similar large scale pushes for consolidation but i couldn't find the effect on rates.

nimantha80


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Competition possible to decrease which will help reduce cost,specially in advertising.May have a effect on interest rates too.(downward).

yellow knife


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
There are different views to be considered under this heading. Merging of two companies are strategic decisions which are not forced upon on companies by anyone else as per the capitalistic views.

There should be freedom in decision making of company owners/directors/shareholders. The expropriation bill passed in parliament to acquire pelwatta plc etc as well as these proposed mergers are not good decisions to safeguard the individual property right as per capitalistic economic principles. These demotivate the entrepreneurial spirit of a nation.

Suppose i owned a finance company called Maharagama Finance. I was asked to get listed so that my company accounts will be available to the general public and i become answerable to shareholders at AGMs and I also get capital additions. So I will not have any problem regarding that and Market Descipling is one pillar of Basell 2. I don't have any concern of that being the owner.

Now being the owner or largest shareholder of MF , I dont have an objective of growing but maintaining a good business in my region and my marketing strategy is Niche Marketing like Chilaw Finance.
Now I am all of sudden asked to get merged, which enable me to sell my controlling stake to a big player and get out or to remain as a director without selling my stake. Had I was asked to sell my stake two years ago when business was booming and when everyone was paying rentals satisfactorily, I would have sold my stake at a very high price. Now the market situation is different. Lorrys, tippersm excavators are loaded in my vehicle yard and there is no second hand value , NPL ratio is like a rubber ball in water. So I wont be able to do a better deal now. Dont I being the owner have a right at least to sell my share when I wont to sell instead of forcing to sell when my company is in bad shape?
This is not motivating for the real entrepreneurs but may be passive investors like small scale share traders.

The next negative factor is the fate of other indirect income earners of finance companies. Lets think about the landlords, janitorial service providers, security-guards, etc of these firms that are going to vanish. The direct employees are assured of job but not the indirect types.

However positive factor is having big asset base will enable high ability to provide loans and ability to get foreign funds at lesser rates...

Need more views on this

ADP

ADP
Manager - Equity Analytics
Manager - Equity Analytics
@slstock wrote:Good thoughts,

1) If a good company merges with another good company ( purely an example LFIN with VFIN), I  see their loan books will grow . So their ability to  give out loans and  better yet  attract funds ( maybe foreign even)  to loan out will be more.

2) Even  if 3 weak companies merge  to become stronger,  I still see their  ability to attract more funds  (to loan out)  is better.

So in essence an upward pressure on interest rates i don;t see ( convince me othrwise please)

From what  I understand, Sri Lankan Banks/Fins do not have enough money to fund development projects within  Sri Lanka even.  

Objectively I see this merger is needed as we have far too many Fincos ( weak ones also) . So it is not a bad move .

But the real political motives I don't know.

Someone else can add to the negatives as they see. We need to discuss both sides.




@ADP wrote:
@Antonym wrote:
@ADP wrote:I was trying to understand the effects of the proposed mergers within the financial industry but couldn't get a clear answer.    

Does anyone have an idea what would be the effect on the money supply (what I'm ultimately thinking of is the interest rates) if there are mergers within the financial industry?.
As we do practice fractional reserve banking wouldn't mergers mean the speed loans are created are slowed intern putting pressure on rates?
Typically, larger firms would benefit from (i) economies of scale and (ii) higher credibility; therefore, they would be able to source funds, and lend, at lower rates than smaller firms would. The proposed mergers would exert downward pressure on interest rates.

Hi Antonym thanks for the reply, I was thinking more on the lines that the speed that which money is created is reduced (creation of loans) due to lesser institutes circulating the money thus making money scarce and putting upward pressure on rates. Any idea what has been the effect on rates in other countries where bank mergers have happened, I think Singapore and US have had similar large scale pushes for consolidation but i couldn't find the effect on rates.

Hi slstock,

with fractional reserve banking (what we have today)  money is created through debt (loans). The ability to grant loans is based on the amount of reserves a bank holds.(I think 9/10 of the reserves can be used to grant loans 1/10 has to be kept with Central Bank. When a bank grants a loan the money 'created'  circulates through the economy and finally winds up in another bank as a deposit. This deposit intern forms part of the reserve mentioned above. This cycle hypothetically continues until the initial loan amount is gathered as a reserve with the Central Bank. in the process the initial loan of Rs 100  has created Rs 900 with the system.
Wow that's a mount full. I'm thinking if the number of players are reduced would it have cause this system of loan creation to slow thus making money scarce thus putting upward pressure on rates.

On The plus side long term both your observations plus Antonym comments are very valid and i do believe it would be a positive this in the long run.

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