Banking Would the Challenges When an Insurance

Banking

Would the challenges when an insurance firm acquires an investment bank be the same as the challenges encountered in melding organizations when a commercial bank acquires an investment bank? Why? Give sample of successful merging and acquisition of each case. Give any global economic event or any international banking event that relate to the case.

Commercial banks have an extraordinarily difficult time when trying to merge investment banks to their enterprise. In fact, some observers state that mergence is impossible since they share different cultures.

With the repeal of the Glass-Stiegel Act in 1999, security banks and investment companies were allowed to purchase banks. However, mergence of commercial banks with investment banks have stymied expected synergy.

This may be due to the fact that investment banks are relatively good at risk tolerance for the main reason that they are not financial intermediaries in that they take out and distribute deposits. They help institutions with securities such as stocks an bonds, receive immediate compensation when doing so, and do not face the issue of default risk. Since their receipt of revenue is also independent of performance of the companies that loan from them, the reputation of the investment banks is not contingent on the performance of the companies as that of the commercial bank is. Commercial banks too are greatly dependent on default risks and they are greatly risk averse since their profit results from the interests accusing from their loans. With loans not repaid, commercial banks can slide into bankruptcy.

Sometimes commercial banks and investment banks try a faltering period of mergence, but according to LaRoche, their very different cultures prohibit them from ever successfully intermarrying.

JP Morgan and Chase Manhattan Bank is an example of a mergence between a commercial bank and an investment bank that occurred in 2000. Most were optimistic about the mergence since both had a large client portfolio. However, at the time of this writing the venture has failed.

Mergence between insurance firms and investment banks seems to be even less assured and have no future whatsoever -- at least in swathes of Europe.

Macey (2002) reports that fewer differences exist between commercial banks and investment banks since they at least partially share the same language and therefore mergence occurs more successfully than it does between insurance firms and investment banks where culture may be utterly distinct.

Some European countries even require structural or project separation between the two entities because of their very differences. Regulations, for instance initiating from the European Union, and effecting Greece, Norway, and the Netherlands require that insurance and banking companies exist as separate corporate entities. In these countries, full integration can never be achieved.

Taking this into consideration, we may argue that mergence between an insurance firm and an investment bank may be far more impossible to achieve in Europe than is mergence between a commercial bank and an investment bank, although mergence between both entities may be self-destructive to either.