By James Langton

(January 25 – 12:30 ET) – The G-10 nations released its Study of Financial Sector Consolidation today in London, England.

Last September, the ministers and governors of the G-10 asked their deputies to conduct a study of the potential effects of consolidation in the financial sector, and possible necessary policy development.

The G-10 set up six task forces to study key aspects of financial consolidation. The task forces were made up of staff from the central banks and finance ministries of the G-10 countries, plus Australia and Spain, and representatives from other international agencies including the International Monetary Fund and the Organization for Economic Co-opertion and Development.

“It is my great pleasure to be here today to announce the publication of our study,” said U.S. Federal Reserve Board vice chairman Roger Ferguson Jr., “It is an important demonstration that the thinking of policymakers and the public policies they determine and administer are evolving along with the financial system.”

“[The study] concludes that financial consolidation is likely to continue, but the likelihood of specific future scenarios is impossible to assess with confidence,” added Ferguson.

He also noted that the study found that financial consolidation has not significantly affected either the conduct or the effectiveness of monetary policy and existing policies appear adequate to contain individual firm and systemic risks now and in the intermediate-term.

But the study explains that “if a large and complex financial institution becomes seriously distressed, consolidation and any attendant complexity may have increased the chances that the winding down of such an organization would be difficult and could be disorderly. The resulting risks to individual firms and the financial system could be reduced by stepped-up efforts in contingency planning for working out a large and complex financial institution.”

The study also concludes that bigger often isn’t better for financial firms. “With respect to the impact of consolidation on the operating efficiency of the combined financial institutions, the study concludes that although consolidation has some potential to improve operating efficiency, and has done so in some cases, the overall evidence in favor of efficiency gains is weak.”

It goes on to suggest, “that policymakers should carefully examine claims of substantial efficiency gains in proposed consolidations, especially in cases where a merger could raise significant issues of market power.”

The study also reviews the failed bank merger process in Canada from 1998. In part, it concludes, “The Canadian banking sector remains one of the most concentrated financial sectors in the world. The failure resolution issue will, therefore, continue to form a part of the government’s concerns in relation to any future consolidation in the financial sector. The extent of the problem posed by any particular merger proposals will depend on the size and number of parties involved as well as on the overall structure of the industry and the presence and position of other industry participants that are not involved in the merger.”