Bank merger

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A bank merger is an operation in which two or more banks dissolve and transfer their assets and liabilities to another entity in order to create a new entity.

The bank merger is the response that banking agents give to certain circumstances and strategies to achieve more profound entities. In the bank merger, two or more entities that until then were independent unify their structures and assign their assets and liabilities to achieve a higher-level entity that allows cost savings and achieve objectives that until now they could not.

In a changing world, the reasons for a bank merger can be several, although they all go in the same direction: creating new entities to achieve economies of scale.

Why there is a bank merger

Bank mergers are carried out to reduce costs in the banking market, since with them it is possible to keep clients but reduce offices and operating costs. The cost reduction is derived from being able to operate with a greater scope, since mergers usually come from small and medium-sized banks that have been anchored and cannot grow any more by themselves, creating entities that can compete with the larger ones.

Mergers are also derived from problems in the financial sector and the weakness with which banks face crises, being rescued in many cases and forced by the banking authorities to merge with healthy banks before liquidating them. Despite this, mergers often have associated costs such as job losses, elimination of business lines, and restrictions of some kind.

Types of bank mergers

Bank mergers can be of various types depending on the level of integration achieved between the banks involved in the merger:

  • Total merger: The banks that are members of the merger process group all the assets and liabilities dissolving their legal personality and creating a third entity that will be the depositary of all the above. From this moment on, the entity created will be the only one that operates under its name.
  • Cold fusion: In this case the entities are integrated in favor of common objectives and strategies, a single central structure and board of directors, but in which each merged company retains its name, its culture and part of its autonomy. This form of fusion is a partial integration, and is considered a first step towards full integration.
  • Assignment of assets: There is the possibility that several entities assign part of their assets or resources to constitute a third entity and operate with it. In this case, the companies that contribute resources do not disappear or become integrated, but rather give up a small part of their capital to form an entity. This occurs when a cluster of action is created in the sector, for a specific objective or because they decide to transfer their toxic assets and clean their balance sheets (creation of a bad bank).

Tags:  banking economic-analysis Colombia 

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