The Advantages of Bank Mergers

by Dennis Hartman; Updated September 26, 2017

Banks play a major role in the economy, serving as sources for loans and giving consumers places to deposit their savings. Commercial banks, which include most of the local branches people use every day, are also a big business, delivering profits to their stockholders and employing thousands of office staff, tellers and managers. When banks merge it can have benefits to both the owners and the community of customers.

Economies of Scale

In economics, the term economies of scale refers to the financial advantage that a business gains when it expands, including the growth that occurs in a merger. Banks that merge pool their assets and streamline their processes. This means that whereas two separate banks would need to invest in two different projects to deliver similar results, the single bank that exists after a merger only needs to invest in the program once and apply its results to the entire company. This reduces the cost of providing services and basic operations, which results in higher profits or lower costs passed along to bank customers.

Debt Consolidation

Banks provide loans to many of their customers, but to do so they must often incur high levels of debt themselves. Banks borrow money to expand, meet payroll obligations, invest in marketing and make loans to individual and business customers. When banks merge they can consolidate their debt, which reduces the amount of interest they pay compared to the total debt two separate banks carry on their own. Consolidating debt is especially important when a bank spends money arranging a merger, which leaves less money to pay down existing debt.

More Branches

One of the primary reasons banks merge is to acquire new branches and expand geographically. Merging means that a bank takes on new locations, including local branches in states, cities and neighborhoods it might not currently serve. This is far more cost-effective than opening the same number of new branches. It also provides a benefit for customers who will find more places to make deposits, get cash and perform other banking tasks conveniently.

Regulation and Oversight

The federal government tracks bank mergers to ensure that they don't violate regulatory policies or violate antitrust laws. However, when banks merge in accordance with the law, they reduce the number of individual institutions the government must track and oversee. Fewer banks mean fewer opportunities for bank failure. This is especially beneficial when two small local or regional banks merge, strengthening their collective market position and giving the new bank a better chance to compete with major commercial banks in the area.