Question

As we know that Bank of America and other financial institutions has pursued the acquisitions of many failed banks because they see potential benefits. What kind of benefits they see, what do you think?

Answer 1

Before answering this question, let's understand why does a bank fail.

A bank fails if market value of its assets goes below the market value of its liability. An acquirer of the failed bank gets access to the customers, assets, branches, network, scale and reach of the failed bank.

Let's now address the main question.

Acquirers of the failed banks see many potential benefits from the acquisition:

1. Potential growth opportunity - The acquirer gets access to the branches, network, assets and customer base of the failed bank. With some improvement in efficiency, the acquirer gets an asset at a relatively cheaper price that can fuel its growth. The acquirer bank would have to otherwise invest more time and resources to achieve this growth organically and from within.
2. Acquirer gets access to the entire loan book of the failed bank. It can then turn it around and convert it back into a good asset.
3. The acquirer may get access to those geographies where probably it was not present but the failed bank was present. The growth through inorganic route takes place quickly at a reasonable spend.
4. The acquirer prevents the downward spiral effect of failed banks on the world economy at large and thus helps in reducing the contagion effect and brings in economic stability and order.