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CHAPTER 14   Understanding the Financial System, Money, and Banking   477


                    The Large Bank Merger Wave

                           umerous large bank mergers in recent years promise to change the
                           financial systems in the United States, Europe, Japan, and other
                    Ncountries around the world. For example, the largest U.S. bank was
                    formed in 2003 when Bank of America, the third largest U.S. bank, and
                    FleetBoston, the seventh largest U.S. bank, agreed to merge. This merger was
                    followed by the announcement of another mega-merger between Wells Fargo
                    and Bank One in January 2004. Other large U.S. merger deals that took place in
                    recent years were First Chicago–Bank One, Wells Fargo–Norwest, Bank of
                    America–NationsBank, Citigroup–Travelers Group, and Chase Manhattan–
                    J.P. Morgan. Megabank mergers are not unique to the United States. In Europe,
                    some of the mergers that have taken place in recent years are Banque
                    Indosuez–Credit Agricole in France, Credit Suisse–Swiss Volksbank and Union
                    Bank of Switzerland–Swiss Bank Corporation in Switzerland, Generale
                    Bank–Fortis Group in Belgium, and the cross-Atlantic ocean merger between
                    Deutsche Bank in Germany and Bankers Trust in the United States. Other
                    European banks are growing fast through mergers, including Spain’s Banco
                    Santander Central Hispano, Royal Bank of Scotland, the Dutch banks ING and
                    ABN Amro Holding, the U.K. banking organizations Barclay and HSBC
                    Holdings, and France’s BNP Paribas. In Japan the government mandated the
                    consolidation of 21 large banks and many insurance and brokerage firms into
                    only seven financial-holding companies. In 1999 the largest bank in the world
                    was created by the merger of the Industrial Bank of Japan, Dai-ichi Kangyo
                    Bank, and Fuji Bank—it has over one trillion dollars in assets!
                       What will be the impact of this bank merger wave on the world financial
                    system? Will it have good or bad effects on business firms, consumers, and
                    investors? How will it affect the development of different countries? These are
                    intriguing questions, but the answers will take some time to be fully revealed.
                    One thing is certain: the next few decades are going to be an interesting and
                    challenging period in the history of the financial world.


                     Introduction




                 Smoothly functioning financial systems are a prerequisite to a productive economy
                 with profitable firms, good employment opportunities, and wages and salaries that
                 allow people to enjoy a decent standard of living. Payments for goods and services
                 are efficiently handled. Savings of the public are channeled to profitable invest-
                 ments. The growth of savings from profitable investments creates new wealth. It is
                 obvious that for a nation to be prosperous, a competitive financial system is
                 needed.
                    The Great Depression in the United States in the 1930s made it painfully clear
                 that no country can afford not to protect the safety and soundness of its financial
                 system. So many financial institutions failed and so much turmoil existed in finan-
                 cial markets that people lost confidence in the financial system altogether. The
                 breakdown of financial systems around the world at that time destroyed the pay-
                 ments system and access to credit funds. The result was widespread business fail-
                 ures, millions of lost jobs, and societal upheaval.
                    Throughout the twentieth century, countries sought to foster safe and sound
                 financial systems. However, overly regulated financial systems did not lead to


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