Term Paper: - Structure, Governance, and Regulations

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[. . .] The following terms are often heard in the banking world:

Merge-to unite: to lose identity by being absorbed or combined;

Merger: combining two or more companies into one;

Bank Merger: consolidations of two or more banks' charters (there are two types of mergers).

Bank-Bank Mergers: the mergers are between existing banks (interbank mergers).

Acquisition: Gaining, or acquiring by one's own efforts. In banking terms: acquisitions are a transaction in which the banks retain their separate charters.

One example of the Bank-to-Bank merger would be the Nations Bank and Bank of America merger, in which the two separate companies merged to form one. The other, more common type of merger, which is known as the Bank-Nonbank Merger, involves the merger of a commercial bank and securities firm under a bank holding company. An example of this type of merger would be the Citicorp and Travelers merger into Citigroup.

The policies for bank mergers and acquisitions have been a major part of economical success and growth that raise the living standards of the United States. In this light, the growth of bank mergers and acquisitions is related to its legislation, to move away from competition and the relaxation of branching restrictions.

The United States has also set itself apart from other nations by having thousands of smaller and independently owned banks, rather than the major financial institutions with many branch offices. One unique characteristic of the U.S. is that there is a major legal atmosphere that envelops banking to prevent banks from branching out and reducing competition.

In the U.S., the first successful banks were state banks. Chartered by state authorities, state banks were allowed to issue their own distinct banknotes under a single bank charter. This provided a monopolizing power over state banks and loyalty to the local banker. The introduction of bank branching added power by carrying over there bank charter to separate offices.

It is important to understand that there is a difference between merging and branching. Branching is a part or extension of a company -- a distantly located office of a business, which functions with the same company goal and providing the same services. The laws were considered in keeping branches from spreading outside of state.

It was not until the Bank of the United States (1791), that a national chartered bank was introduced, mostly to create a government note and issue a national debt all proposed by the government. The government's plan was to have a national debt kept perpetual, to keep the rich financiers in the U.S. To become creditors they would receive interest therefore keeping them loyal and dependent on the national government. The Bank of the U.S. was the only bank to branch across state lines that automatically caused opposition from the monopolizing state chartered banks.

Even though the charter expired in 20 years, the agreement was that any bank with too much financial power should be monitored. This caused many states to limit branching both across and within their state borders; many states even outlawed branches, closing down all branches to have only one office. In addition, the charter of the Bank of the U.S. was not renewed until 1816 for a lifespan of 20 years again. However, before this charter ended, the government killed the renewal of the charter with the Bank Veto and War bill. The government funds were pulled out and placed in state banks before the national charter ended in hopes of driving national banks out of business. This started a time of little supervision, called the Free Banking Era. Many banks were free to open anywhere, causing fraudulent scandals over bank notes and a lot of banks failed due to remote head offices.

These problems -- bank failure and fraudulent bank notes -- were rectified by the National Banking Act of 1863, which stated that federal governments could charter national banks and issue a more uniform currency, bank notes that were fully backed. Because of this act, national banks were required to back their banknotes with interest bearing federal government bonds. Therefore, in case of a national bank failure, the bond on deposit would repay the noteholder. This act also created the Controller of the Currency, a department of the U.S. Treasury, which gave the Comptroller of the Currency primary supervisory control of the national banks.

This act gave birth to the national banking system with federally chartered banks. This gave the states the power to limit branching within their borders. This prevented banks from expanding the amount of bank notes in circulation that caused the money supply to decrease. State bank notes were then taxed in order to drive state chartered banks out of business. However, this only made state banks more competitive with the invention of demand deposit accounts or checking accounts. This is another reason the U.S. is different from other countries because of this dual banking system. Banks were supervised side-by-side creating a balance of competition.

The next step toward the supervision of companies that own one or more banks or incorporate their different services was under the Federal Reserve Act. Under this act, lawmakers considered a central bank to safe guard and protect against panics or large bank failures. In 1913, the Federal Reserve Act created the Federal Reserve System, consisting of 12 federal reserve district banks and a Board of Governors to directly monitor banks and monitor bank policies. The Board of Governors approves bank mergers and retain the veto power over district banks choices.

All national banks had to become members of the Federal Reserve System and state banks had the choice to become members. National banks were chartered and supervised by the Comptroller of Currency. The Federal Reserve system is independent of any government agencies, only held accountable to Congress. This means there is no checks and balance of power, operating on its own with no budget that needs to be submitted. To have political independence of a central bank is good though, to avoid favoritism to any political party, platform, or consideration. This helped to create a competitive environment.

According to the McFadden Act of 1927, national banks were not allowed to operate outside of their home states and had to obey state regulations governing intrastate branching. Banks were able to get around this act by the introduction of the bank holding company. The bank holding company is not a bank itself but a corporation that is able to acquire a bank located in another state and operate it as a completely owned subsidiary.

In order to prevent this expansion of power, the legislation passed the Bank Holding Company Act of 1956. In the requirements, expansion was up to the state law to permit interstate acquisitions. Second of all, banking and commerce were to be separated by restricting the companies to banking and closely related activities. Now the Federal Reserve got sole regulatory responsibilities of bankholding companies and for a company to become a bank holding company, they must gain approval. In addition, the act enabled existing banks to retain their bank holding companies. Finally, the act defined bank as an institution that recognizes demand deposits and makes loans. This caused controversy over the word "and" which created nonbanks, which accepted deposits but did not make loans, and then nonbank offices, which made loans but did not accept deposits.

As the number of bank holding companies and mergers grew, the fear of monopolies became an imminent danger. To prevent this rise, the legislation pushed for the Bank Merger Act of 1960 that asked for applications of the acquisition be approved by the Federal Reserve Bank in the district of the takeover. This meant that the surviving bank's location would be under the jurisdiction of one of the twelve reserve banks, and the responsible reserve bank would request the other banking institutions' effect of the merger and their completive factors. Focusing on these things, the criteria for evaluating the merger application were made.

The criteria consisted of the financial and organizational assets, the prospects of the new institution, and the convenience and needs of the community it would serve. The Federal Reserve would only approve the merger if it does not lessen competition and create a monopoly unless its effects are beneficial to the community regarding the convenience and the needs of the community. Later in 1977, the Federal Reserve were also given the reporting on bank institutions' small business lending and community involvement under the Community Reinvestment Act. This is important because the merger approval process required further analysis of mergers.

In 1982, the Depository Institutions Act (Garn-St.Germain) gave the Federal Deposit Insurance Company (FDIC) and the Federal Savings and Loan Insurance Corporation (FSLIC) emergency powers to merge banks and thrifts across state lines. Finally in 1994, The Riegal-Neal Interstate Banking and Branching Efficiency Act eliminated the restrictions from interstate banking. The act would repeal… [END OF PREVIEW]

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