Earlier this week, it was reported that UBS and Credit Suisse were in preliminary merger talks. These two banks are Switzerland’s largest banks and they are also longstanding competitors. If combined, they would become Europe’s largest bank. Both banks have major international interests including in the US.
A few years ago, two of the banks I deal with were involved in a merger. To be fair, it was DNB First that acquired East River Bank. All of the East River Bank branches were converted to DNB First. You would think that the impact of this would be minimal since we were customers of both banks.
Of the two banks, DNB First was much more aggressive in their lending practices and we definitely preferred DNB First over East River. But several of the senior executives from East River Bank were given responsibility for the loan committee at the parent company. The loan underwriting team from East River Bank was given responsibility for loan review reporting to their former bosses, now in charge of the loan committee. Needless to say, the loan underwriting practices at DNB First changed and became much more conservative.
Nearly every middle-market bank in the industry is looking to either acquire another bank or be acquired, and it’s likely that yours is no exception. Many banks see an acquisition or merger as a chance to expand their reach or scale up operations quicker. Yet, a bank acquisition is not without its drawbacks as well – particularly for the unprepared banking customer.
So why would banks be merging in today’s environment?
Many banks were consolidated in the wake of 2008, not because they wanted to be acquired, but because the banking regulator forced the issue through their stress tests. If a bank’s balance sheet was suspected of being weak, the regulator required an increase in the bank’s equity in order to keep operating.
There are numerous banks in Europe where we will see this kind of consolidation in the next 18 months. For the moment, in the US, the Federal Reserve has agreed to guarantee the debt of the banks on a large scale. We don’t really know how this will play out in the long term.
Integration risk is a major danger in bank mergers. In some cases, banking executives don’t commit enough time and resources into bringing the two banking platforms together – and the resulting impact on their customers causes the newly merged bank to fail completely. Sabadell bought TSB from Lloyds in 2015, the UK parent bank provided a £450-million “dowry” fund to facilitate the three-year integration project to move TSB’s customers onto Sabadell’s system. Once complete the integration was expected to save £160 million a year. But by 2018, following the migration of 1.3 billion records, its customers reported a host of major glitches. Online banking customers were locked out of accounts or even saw the accounts of other users. The ensuing problems cost the chief executive his job.
