What should Regulators So about Merger Policy ? 黃子玲 林佳佑 許芳誠

Agenda Abstract Abstract M&A in European M&A in European M&A in USA M&A in USA M&A in Japan M&A in Japan

Abstract Merger policy needs to be driven by different considerations in Europe, Japan, and the United States. Merger policy needs to be driven by different considerations in Europe, Japan, and the United States.

M&A in European

A set of challenges Political Problem Political Problem The effects of banking mergers on loan contracts The effects of banking mergers on loan contracts

Political Problems Government: Government: In order to protect local market, efficient institution will take over poorly management banks. Letting a set of efficient banks exist means the biggest bank will be foreign. Protest for bank mergers Protest for bank mergers EX: Italian EX: Italian

The Effects of Banking Mergers on Loan contracts Why small firms are likely to see a disruption in credit ? Why small firms are likely to see a disruption in credit ? In the market mergers & Out of market mergers Size: Market power (Monopoly ) & Efficiency Different organization structures Relationship with finance institution What will happen if large banks reduce the supply of credit to small borrowers ? What will happen if large banks reduce the supply of credit to small borrowers ? Due to poor quality of small firms’ loan, borrowers may mot have their lending relationship with the bank served. Due to poor quality of small firms’ loan, borrowers may mot have their lending relationship with the bank served.

M&A in USA

History The Glass-Steagall Act of 1933 The Glass-Steagall Act of 1933 Separate the deposit-taking and loan- making bankers from the underwriter or dealer bankers. Create firewall between the commercial bankers and investment bankers.

History Gramm-Leach-Bliley Act of 1999 Gramm-Leach-Bliley Act of 1999 Glass-Steagall Act repeals Glass-Steagall Act repeals Section 20 Section 32 Financial Holding Company & Financial Holding Company & Financial affiliation. Financial affiliation.

Regulation The biggest problem The biggest problem How do we regulate a banking system which is simultaneously populated with a number of huge, global institutions and 1000s of tiny financial intermediaries?

Regulation Design a system that mimics the discipline that would be imposed by a market but deals with the reality that what makes sense for $100 billion banks may not make sense for $100 million dollar banks.

Regulation Be careful not to set up incentives for other firm to take advantage of loose rules for banks with low levels of assets. Regulatory arbitrage

M&A in Japan

Three salient facts about Japan’s banking crisis Japanese banks remain the largest in the world. Japanese banks remain the largest in the world. Japanese banks are amongst the least profitable in the world. Japanese banks are amongst the least profitable in the world. It is not clear how or why the situation will improve. It is not clear how or why the situation will improve.

Problems confronting Japanese banks 1. Under-capitalized Banks 1. Under-capitalized Banks Under-reserving against acknowledged problem loans problem loans Improper treatment of deferred tax credits

Problems confronting Japanese banks Ever-greening Ever-greening rolling over loans giving interest concessions partially forgiving loans to firm with grim repayment prospects repayment prospects

Problems confronting Japanese banks Over-banking Over-banking According to Hoshi and Kashyap’s calculation in 1999, if Japanese corporate borrowing patterns move toward US pattern, Japanese bank assets could shrink by 25 to 50 percent. According to Hoshi and Kashyap’s calculation in 1999, if Japanese corporate borrowing patterns move toward US pattern, Japanese bank assets could shrink by 25 to 50 percent. By 2004, the quantity of bank loan in Japan has dropped only by 10 percent, implying that much more adjustment is needed. By 2004, the quantity of bank loan in Japan has dropped only by 10 percent, implying that much more adjustment is needed.

Problems confronting Japanese banks Backerward Banks Backerward Banks Japanese banks still rely heavily on traditional banking, and the outdated business model results in the low profitability of Japanese banks. Japanese banks still rely heavily on traditional banking, and the outdated business model results in the low profitability of Japanese banks.

Problems confronting Japanese banks The banking problems are defined to be over once the banks ： The banking problems are defined to be over once the banks ： Are well capitalized Stop ever-greening non-performing loans Are earning rate of return comparable to their global competitors their global competitors

Advice to policymakers The public fund to poorly-performing banks should be redirected. The public fund to poorly-performing banks should be redirected. →Rather than keep all the major institutions a float, regulators should focus on trying to engineer a smooth transfer of assets out of the system. →Rather than keep all the major institutions a float, regulators should focus on trying to engineer a smooth transfer of assets out of the system.

Advice to policymakers The most obvious mechanism for an orderly transition would be a set of sales to foreign financial institutions. The most obvious mechanism for an orderly transition would be a set of sales to foreign financial institutions. →for banks become attractive targets to foreign institutions regulators should : →for banks become attractive targets to foreign institutions regulators should : move to a more transparent set of rules and stop trying to manage market forces. move to a more transparent set of rules and stop trying to manage market forces. be willing to let a foreign owner shed employees and lines of business of an acquired bank.