Question

As economies of scale are achieved with increasing size, bank mergers should be encouraged by regulators as larger banks are safer and thus the financial system is safer. True or false?

Answer 1

False

Even though economies of scale are achieved with increasing size because of mergers they should not be encouraged above a certain. In case of few small banks are merged, it will help boost the confidence in people for a particular bank and also help the bank achieve economy of scale. Big mergers would create Monopoly in the economy. Such monopolies would be disadvantages for the customers and hence are not encouraged.

Hence, even though economy of scale are achieved with increasing size, bank merger should be encouraged by regulator only to a certain level as they may create a monopoly.

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