ABSTRACT
Economists and policy-makers in the agencies that regulate banks have had three different responses to banks' merger wave. One view is that the merger wave solves the problem of excess capacity caused by the banking industry's secular slide in the past two decades. This view draws on the "new leaming" approach to industrial structure, according to which market concentration will emerge due to the superior efficiency of successful competitors. A second view holds that regulators should remain hostile to market concentration, and hence to mergers. In this view, either the excess capacity in banking is overstated, or widespread mergers are not the best way to eliminate it. A third view is emerging among regulators. This view suggests a new basis for evaluating the advisability of mergers: the reaction of equity markets to bank actions. Like the first view, this third view anticipates the emergence of more market concentration and fewer banking firms. But unlike the "new leaming" approach, it draws conclusions about bank behavior from equity-market reactions rather than from structural market studies. This chapter reviews these competing views in turn, as weIl as their implications for regulatory oversight.
