What Financial History Can Teach Advisors

May 4, 2015

What Financial History Can Teach Advisors

By Kenneth Silber, Research Magazine

In their ambitious new book, Genealogy of American Finance, historians Robert E. Wright and Richard Sylla trace the histories of the 50 largest financial institutions in the United States. The lavishly illustrated book's narratives and detailed “family trees” trace the evolution of a variety of financial companies from their institutional ancestors.

Wright holds the Nef Family Chair of Political Economy at Augustana College in Sioux Falls, South Dakota, and Sylla is the Henry Kaufman Professor of the History of Financial Institutions and Markets and Professor of Economics at New York University.

Research: Your book, Genealogy of American Finance, delves into a long history of financial institutions merging with and acquiring each other. Will such transformations be similarly common in the financial sector's future?

Wright: Mergers likely will always be with us here in the U.S. but they will wax and wane in importance. Mergers tend to come in “waves” associated with regulatory changes and/or macroeconomic shocks. An example of the first was loosening intrastate branching restrictions and of the latter the Panic of 2008. Local or regional shocks, from natural disasters or other causes, will injure small banks, the more unlucky and poorly managed of which regulators will force to merge with bigger banks. Technological change could also induce a merger wave, though it could also potentially spur spinoffs, breakups and other types of downsizing by reducing economies of scale or scope.

Sylla: I would not expect more mergers of the very largest banks/financial holding companies [FHCs], which have been identified or pilloried as being too big to fail, and also with some concerns that they are too big to manage. In fact, some of them (e.g., Citi, General Electric) are slimming down on their own, and others may follow as a result of Dodd-Frank and other regulatory moves that may saddle the biggest banks/FHCs with higher capital requirements than other institutions have. But some of the smaller institutions among our 50 might undertake mergers, perhaps with others in the top 50.

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