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Surveying through Bank Mergers in the 1990s Essay


Not only in the banking industry, mergers have skyrocketed significantly in the late 1990s and into the early 2000s. The primary reasons for the increase in the number of mergers are simply magnified on three things: globalization, deregulation, and technological change. More importantly, it was globalization that led to mergers because firms too advantage of the gains of instant foreign distribution networks and knowledge of local markets from these mergers. But putting aside the aspect of globalization, the changes in the structure of US banking and banking laws have been revolutionary that resulted in a drastic decline in the number of banks in the past years (Valdez 2003, p. 235).

It was between 1980 and 1997 when over 1,450 banks failed and about 7,000 mergers occurred, unexpectedly 3,600 new banks became operational that time. The result was a net decline in the number of banks from over 14,400 in 1980 to under 8,200 in mid-2001.  The culprit that has been identified is the breakdown of barriers to intra- and interstate branching that has resulted in increased competition in the financial services industry and considerable erosion in the domain and effectiveness of many long-standing financial regulations (Burton, Nesiba & Lombra 2003, p.

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Was this period beneficial to our banking industry and economy? Did these bank mergers benefit both banks that chose to strengthen themselves during this period? What are the lessons that could be drawn out from this experience? To realize this, we should then take a deep look at one of banking history’s biggest mergers.

Citigroup: the Mega-Merger of all Bank Mergers

No doubt that the largest bank holding company, which found themselves considering a mega-merger was the merger of Citicorp and Travelers Group. The new firm, Citigroup, is the biggest financial services firm in the world with over $950 billion in assets, outstanding stock valued at $82 billion, and 100 million customers in 100 countries. Now a global financial services company, Citigroup obtained the capacity to provide consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, insurance, securities brokerage, and asset management.

Major brand names under Citigroup’s trademark red umbrella include Citibank, CitiFinancial, Primerica, Smith Barney, Banamex, Travelers Life and Annuity, Citi Cards, CitiMortgage, CitiInsurance, Diners Club, Citigroup Asset Management, The Citigroup Private Bank, and CitiCapital. The 1998 merger of Travelers and Citicorp to form Citigroup was largely revenue-driven to take maximum advantage of the two firms’ strengths in products and distribution channels, as well as geographic coverage. In general, this is the basis of the European concept of Bancassurance or Allfinanz—that is, cross-selling, notably between banking and insurance services (Walter, 2004, p. 72).

A Business Week article (April 27, 1998) reported that the merger have realized a formulated $1 trillion sum concept that was hardly far-fetched. Citigroup, to be formed from a merger of Citicorp and Travelers Group in a deal, will have just under $700 billion in assets. To get to a trillion, Citigroup co-CEOs-to-be John Reed and Sanford Weill would only need to put together a deal half the size of the one they just assembled.

The combination of NationsBank Corp. and BankAmerica Corp., announced that they would create a $570 billion giant that promises to become the first truly national bank in the U.S., with red-white-and-blue BankAmerica signs dotting the landscape from California to Carolina. It could reach $1 trillion in assets in just four years if it grows 10 percent annually.

In the short run, Citigroup’s success could be spelled out from cost cutting mostly–about wringing efficiencies from traditional banking, now a slow-growth industry fraught with overcapacity and declining margins. In the long run, however, it’s about reinventing banks–following the lead of Citicorp and Travelers to create full-service companies that can market a slew of financial services to corporations and consumers (Business Week, April 27, 1998).

True enough in March 1999, the company announced three separate acquisitions designed to strengthen its position in the area of consumer lending. Firstly, it acquired Mellon Bank’s credit card business, including a portfolio of $1.9 billion in credit card receivables. It then signed an agreement to acquire a $558 million loan portfolio and 128 consumer finance branch offices from Associates First Capital, whilst also completing the acquisition of Santiago, Chile-based Financiero Atlas, a consumer finance company with 65 branches throughout Chile and $460 million in assets (Datamonitor, 11 February 2006).

The Aftermath of a Merger: Weaknesses and Threats

Although Citigroup has been one of Wall Street’s strongest performers over recent years, and has achieved strong shareholder value since its creation, its brand was severely tarnished in 2002 through the ongoing investigations into its banking practices, particularly in its investment banking subsidiary, Salomon Smith Barney. Regulators indicated there was wrong doings and the company was fined. Accusations that Citigroup had duped customers into taking out overly expensive loans also hit its reputation hard as well as the bottom line with a $240 million payout. Further bad publicity could harm the company’s reputation which would be very detrimental to earnings (Datamonitor, 11 February 2006).

In addition, while size and geographical spread bring strength and scale benefits to the merged Citigroup, there is also a flipside which can put the company in a weaker position. Its large size makes it vulnerable for potential maturity in terms of growth rates. Also, the far-flung nature of the enterprise creates greater potential for emerging problems to escape oversight, notwithstanding management focus, pervasive risk weighing culture, and the use of early-warning systems.

As continuing legal cases could still damage the Citigroup in months to come, investigations into Salomon Smith Barney and its senior staff could contain legal risks stemming from involvement with Enron and equity research improprieties which could still prove costly. In May 2004, Citigroup announced that it would be forced to settle a class-action lawsuit filed by shareholders of the bankrupt telecoms company, WorldCom, for $2.65 billion.

The company was sued by owners of WorldCom stock and bonds over its Salomon Smith Barney brokerage unit’s close relationship to WorldCom, which went bankrupt in 2002 after it was revealed that it had misstated earnings and engaged in a massive accounting fraud. Also, with an upturn in capital markets still not entirely apparent, Citigroup may struggle to continue to post strong financial results, with margins eroded by the dearth in merger and acquisition business and flat equity markets. A further threat lies in the unstable global economies.

The UK and US economies could weaken further. While things look fairly positive for both economies for the coming year there is always a margin of uncertainty and the financial service industry is always hit hard by downturns in the economy (Datamonitor, 11 February 2006)..

After merging, Citigroup seemed to outperform its rivals in both market share and shareholder value by a healthy margin. Their success seemed to show that the unmanageable could indeed be effectively managed through what proved to be a rather turbulent financial environment. One of the most effective strategies used by this successful multinational company is internal partnerships. According to Sandy Weill, chairman and CEO of Citigroup, their company gains a competitive advantage in the global marketplace by forming internal partnerships with the company’s employees.

The internal partnerships at Citigroup are based on Weill’s philosophy that employees should be paid well, but their pay should be based on performance. According to Weill, many companies make the mistake of failing to differentiate employee earnings based on performance.

Citigroup, on the other hand, makes the majority of an employee’s earnings contingent on his performance and the performance of his or her division within the company Weill started a program of stock option grants that allows employees to receive earnings in the form of stock. This strategy did more than just give the employees a more secure future or a better reason to continually improve performance it made them partners in the company. As a result of the stock-option program, employees at Citigroup are true partners in the success of their company (Neff and Citrin 2001, p. 333-338).

Prior Events that Triggered the Onslaught of Banking Mergers

Going through the US banking history, it was the Glass-Steagall Act that made the banking sector a highly regulated industry. Although the crisis in the Great Depression might suggest the need for some regulation, by the late 1970s, an alarming concern in the United States had shifted to the belief that the economy is being pulled downwards by over-regulation. This change led to calls for “deregulation” in many industries.

As deregulations were activated, some industries experienced severe stresses and bankruptcies, particularly in the 1980s. The financial services sector went through the collapse of the savings and loan (S&L) industry and the largest wave of bank failures since the Great Depression. This crisis triggered attempts at re-regulation and the thought that regulations needed to be overhauled.

Another potential regulatory effect on bank merger trends is the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991. FDICIA introduced mandatory procedures called prompt corrective actions (PCA), which require regulators to promptly close depository institutions when their capital falls below predetermined quantitative standards, thus eliminating the possibility of regulators providing special consideration to large banks because of the possible systemic impact of large bank failure. Therefore, the notion of “too-big-to-fail” should be less relevant since FDICIA. Observably, there was a steady increase of mega-mergers has been noticeable in the mid- to late-1990s (Brewer, Jackson, Jagtiani & Nguyen, 2000, p. 2).

In 1994, according to Brewer et al (2001), the Riegle-Neal Interstate Banking and Branching Efficiency Act allowed banks to branch interstate by consolidating existing out-of-state bank subsidiaries or by acquiring banks or individual branches through mergers and acquisitions. Prior to the Riegle-Neal Act, federal and state laws prevented banks from expanding across state lines. The Riegle-Neal Act permitted bank holding companies to acquire banks in any state, effective September 29, 1995, and allowed mergers between banks located in different states beginning June 1, 1997

As President Clinton signed on November 1999 the Financial Services Modernization Act (Gramm-Leach-Bliley Act), it allowed more banks to merge with securities firms and insurance companies within financial holding companies. Until 1999, the most significant piece of banking legislation in the twentieth century had been the Glass-Steagall Act of 1933, which separated investment and commercial banking, created the FDIC, and limited the range of assets and liabilities that a commercial bank could hold and issue.

After 67 years, the Glass-Steagall Act was eventually repealed with the passage of the Gramm-Leach-Bliley Act (GLBA). President Clinton effectuated a landmark legislation, which significantly imposed crucial impacts in the financial services industry. The GLBA has further expand the merger opportunities for banking organizations and may lead to a new wave of consolidation in banking and other sectors of the financial services industry (Heffernan 2005, p. 248).

Under the GLBA, bank holding companies, securities firms, insurance companies, and other financial institutions can affiliate under common ownership to form financial holding companies (FHC). To become a FHC, a bank holding company must file a declaration with the Fed certifying that all of its depository institutions are well capitalized and well managed and have a “satisfactory” or better rating under the Community Reinvestment Act. According to Burton, Nesiba & Lombra (2003, p. 281), as a financial holding company, banks can now offer its customers a complete range of financial services. The activities of a financial holding company include:

  • Securities underwriting and dealing
  • Insurance agency and underwriting activities
  • Merchant banking activities

The GLBA also prompted the Fed to take hold on any other activity that the Fed ascertains to be financial in nature or incidental to financial activities. Any nonfinancial activity that the Fed determines is complementary to the financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or to the financial system. The passage of the GLBA is expected to maintain or even accelerate the pace of change within the financial services industry as banks and other financial institutions become more integrated through the formation of financial holding companies.


As the expansion of bank activities helped to diversify these firms, it has not been problem-free because this created tensions between the relatively new traders and the banking side of the firm. For example, the brokerage head of Citigroup was caught claiming that the research produced by Salomon Smith Barney was ‘‘basically worthless’’. Mr Weill, the Chairman of Citigroup, had asked an analyst at Salomon Smith Barney to reconsider the advice given on AT&T.

There was a potential conflict of interest because the profits of the investment bank financed research departments. Thus, banks’ analysts were under pressure to support a particular company that was also giving underwriting, consulting other business to the banks’ investment banking division (Heffernan 2005, p. 19-20).

The GLBA was approved at a time when technology and other factors were eroding the boundary between commercial and investment banking. However, there are different motivations affecting mergers that the acquiring banks have in mind, other than the more lenient banking laws. In Citigroup’s case, it was both banks’ desire to become a global company. Ultimately, it is still the leadership of a financial firm, driven by strategic plans, who will find that the use of merging as a strategic tool that can be very rewarding. The tendency to do the right thing and to do it right in a “mergers and acquisitions” context tends to grow out of the basic way of how the banking business is ran. With this, success of attaining their goals could be achieved and everything else will follow from that.


Brewer I, E., Jackson I, W. E., Jagtiani, J. A., & Nguyen, T. 2000. The price of bank mergers in the 1990s. Economic Perspectives, 24(1), 2.

Burton, M., Nesiba, R.F., & Lombra, R.E. 2003. Introduction of financial markets and institutions. London: Thomson Learning.

Citigroup Inc. Company Profile. 2006, February 11. Datamonitor. UK: Marketline Business Information Center.

Citigroup. 2006. About Citigroup: Company Website. http://www.citigroup.com/citigroup/about/index.htm

Greising, D. et. al. 1998, April 27. Are megabanks–once unimaginable, now inevitable–better…for customers, the nation’s economy, or even for the banks? Business Week. New York, 3575: 32

Heffernan, S. 2005. Modern banking. New York: John Wiley & Sons

Neff, T. J. & Citrin, J.M. 2001. Lessons from the top. New York: Doubleday, 333–338.

Valdez, S. 2003. An introduction to global financial markets (4th ed.), London: Macmillan

Walter, I. 2004. Mergers and acquisitions in banking and finance: What works, what fails, and why. New York: Oxford University Press.

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