Merging Banks and Risks Associated
adminSeptember 12, 2019September 13, 2019 Uncategorized No Comments
In a couple of years, it’s likely that the majority of banks inAsia and Europe would look forward to merging or acquiring other smaller banks.Every bank in a growing economy is looking to either purchase another bank orbe bought by a bigger bank. Many of such banks see acquisition or merger as achance to scale up their operations which can reach and cater to a broadermarket.
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However, it has drawbacks as well – particularly for the staff andbusiness units that work independently and have their style of working. Thereare multifaceted administration hassle, employees, ongoing deals, and logisticswhich are part of an active merger or acquisition. It’s easy to forget therisks that bank mergers pose to all involved.
Efficiency of systems
Acquiring a bank not just scales efficiencies, but also operational effectiveness. Every bank has an infrastructure in place for AML, Compliance, Risk Management, Accounting, Infrastructure, Operations, and IT Security and as the two banks merge, they can efficiently consolidate and manage those operational infrastructures. Financially, a larger bank will have a lower accumulated risk profile as a more significant number of similar loans will decrease overall institutional risk.
Compliance andRisk
Another factor which is considered crucial during a merger is arisk and compliance culture of banks involved. Every financial institutionhandles banking compliance and banking regulations differently, but it’sessential that the merging banks agree on their approach moving forward.Imagine if two mismatched risk cultures clash during the merger, it maynegatively affect the profitability of the business which can change the bottomline if both cultures don’t agree to a standard working solution.
Execution risk is another significant danger in bank mergers. Insome cases, bank officials don’t commit time and resources into bringing thetwo banking platforms together, which results in impacting customers who losefaith in the newly merged bank too. The newly formed bank should dedicateenough experienced resources towards integration to build a new entity.
Keeping and Promotingthe in-house talent
The biggest fear for people in the merger is the uncertainty ofjobs, while this does not affect the balance sheet, but retaining and disposalof talent becomes a challenge even for leadership. Bank mergers can be viewedat multiple levels, and most of them fail to look over at people or cultureinto account. Failure to assess cultural fit is one reason why many bankmergers ultimately fall through. Throughout the merger, the bank needs tocommunicate and interact with employees and addressing the issues. HumanResources plays a very crucial role, and this human element should never bedisregarded or downplayed.
Scaling up andlending
A newly formed bank merger would help it to scale up businessquickly, expand and acquire new customers instantly. The acquisition gives theconsolidated bank an incremental capital to work with when it comes to lendingto its new and old customers or to invest. It also provides a comprehensivegeographical reach in which they are operating and new geographies or productsthey want to launch, which enables the combined bank to achieve their growthgoals faster.
UnderstandingTechnological Gaps
Bank mergers and acquisitions empower your business to fillproduct or technology gaps. Acquiring another bank may offer an exceptionalbusiness model or financial solution which is at times more comfortable thanbuilding that business from scratch. From a technology perspective being takenover by a larger financial institution might allow both organizations to acceptbest practices and upgrade its technology platform significantly and cater toits customer business needs.
Customer Impact andPerception
While undergoing the merger, it’s critical that you pay attentionto the impact it has on customers. Notably smaller or semi-government bankswhere customers respond to their needs differently and can look at acquisitiondifferently especially if their bank is getting acquired. It is essential thatemployee manage customer expectations with regular meaningful and vigilantcommunication. Once the merger is underway, customers should be handheld toensure that changing technology platforms of financial products should notimpact customers business as it can spread negativity if one does not payattention.
Bank mergers and acquisitions are complex procedures with thepossibility of extraordinary payoff – or extraordinary peril – so it’sessential that you organizations pay detailed attention on each aspect oracquiring or getting merged.
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Disclaimer : This content is meant for information only and should not be considered as an advice or opinion, or otherwise. CAC – Corporate Analyst and Consultant Pvt.Ltd.does not intend to advertise its services through this.
Posted by:
CA Harmeet Singh Vohra
CAC – Corporate Analyst and Consultant Pvt.Ltd.
Accounting, Compliance, Risk Management
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