Discussion
- Discussion
Robert Litan of Brookings commented on the comparative reforms of the 1990s in the United States and Europe. Much of the activity in the U.S. banking industry had no parallel in the domestic insurance industry. Perhaps a pent-up agenda of mergers due to interstate banking provisions explains the flurry of banking mergers. Dave Cummins responded that Reigle-Neil and similar regulatory change in Europe led to mergers and acquisitions in the banking industry and that the United States never had significant restrictions on interstate mergers. Without closely examining the relative size of European insurers, Cummins did acknowledge the existence of very large European companies due to a precedent of involvement in universal banking activities, which is not the norm for the American market. A cross-Atlantic comparison of firm size would be insightful, both at the level of the mega insurer and of the middle market.
Alan Berger of the Federal Reserve lauded the inclusion of a survey of banking literature. Insurance studies must draw on banking sector research because the empirical work is so much more extensive. Most European banking studies have asked why there have been so few cross-border banking mergers when there have been plenty of cross-border insurance mergers. Future research would do well to examine pairs of countries rather than individual countries. Specifically, what characteristics exhibited by country pairs are common to successful cross-border mergers? This inquiry might support a new trade theory of foreign direct investment in which efficiency gains come from expanding to a country similar to one's own as opposed to traditional theory of comparative advantage, which would encourage mergers across dissimilar countries. The banking industry seems to support this new trade theory; the insurance industry may fit in as well. [End Page 254]
Stuart Brahs of Principal Financial Group expressed an interest in case study analysis. For example, Alliance Capital Management had a successful venture in its acquisition of RJF in France, but not in its merger with Dresdner in Germany. Cummins expressed interest in the case study approach and mentioned a banking paper by Stephen Rhoades that examines seven mergers to pinpoint the source of efficiency gains and losses.
Thomas Holzheu of Swiss Economic Research Unit disagreed on what had the greater impact on insurance in the 1990s, pointing to the removal of rate regulation, which increased competitive pressure on small suboptimal insurers, as the reason for the dominance of domestic mergers. Cross-border deregulation had less effect. Freedom of trade eliminated the requirement of holding a subsidiary in the country of business, but in reality doing business effectively requires a physical presence. The wave of mergers occurred before the single market was created, but the machinery of rate regulations imposed severe limitations on doing business. The European deregulation experience of 1994 and 1995 may shed light on the current U.S. insurance market.
Several attendees wanted to discuss the role that nationalism may play in the relative difficulty of banking mergers over insurance mergers. Ulrik Bie of the Royal Danish Embassy and Central Bank of Denmark discussed the recent building of financial conglomerates in Scandinavian countries to keep out Southern European banks, Deutsche Bank in particular. The European Central Bank has encouraged consolidation because working with larger entities is easier than working with small ones, but governments, especially in larger countries, have resisted foreign ownership in the banking sector. This is especially the case when banking is the dominant sector but is famously untrue in the United States and the United Kingdom.
Larry White of New York University discussed several misperceptions that lead to the persistence of mergers in the face of empirical evidence against them. Although economies of scale are exhausted at some modest level, practitioners believe the contrary. First, practitioners may be unduly optimistic about the potential payoff of a merger. Those aware of the likelihood of failure still imagine themselves lucky. Alan Berger of the Federal Reserve added that scale economies exist, but the diseconomies get overlooked; combining two back-office operations may reduce costs, but agency costs, management problems, and the corporate jet increase costs. Finally, improvements in operating costs may come from closing down some operations, [End Page...
