22 - Chapter Twenty Two Geographic Diversification:...

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Chapter Twenty Two Geographic Diversification: Domestic Chapter Outline Introduction Domestic Expansions Regulatory Factors Impacting Geographic Expansion Insurance Companies Thrifts Commercial Banks Cost and Revenue Synergies Impacting Geographic Expansion by Merger or Acquisition Cost Synergies Revenue Synergies Other Market- and Firm-Specific Factors Impacting Geographic Expansion Decisions The Success of Geographic Expansions Investor Reaction Postmerger Performance Summary 8
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Solutions for End-of-Chapter Questions and Problems: Chapter Twenty Two 1. How do limitations on geographic diversification affect an FI’s profitability? Limitations on geographic diversification increase FI profitability by creating locally uncompetitive markets. FIs in these markets earn monopoly rents that are protected by limitations on geographic expansion by potential competitors. Limitations on geographic diversification reduce FI profitability by preventing the FI from exploiting any economies of scale and/or scope or revenue synergies that may be available. 2. How are insurance companies able to offer services in states beyond their state of incorporation? Insurance companies are state-regulated firms that are not prohibited from establishing subsidiaries and offices in other states. Further, the capital requirements are kept low by state regulators. 3. In what way did the Garn-St Germain Act and FIRREA provide incentives for the expansion of interstate branching? Both legislative acts provided for sound banks and thrifts to acquire failing banks and thrifts across state lines. These acquisitions could be operated either as separate subsidiaries or as branches of the acquiring institution. 4. Why were unit and money center banks opposed to bank branching in the early 1900s? Smaller unit banks were afraid of losing retail business to the larger branching banks, and the larger money center banks were afraid of losing correspondent business such as check clearing and other payment services. 5. In what ways did the banking industry continuously succeed in maintaining interstate banking activities during the 50-year period beginning in the early 1930s? What legislative efforts did regulators use to respond to each foray by banks into previously prohibited banking and commercial activities? The McFadden Act of 1927 restricted the branching activity of nationally chartered banks to the same extent allowed for state-chartered banks that generally were disallowed from such activity. As a result, the banking industry attempted to circumvent the prohibition of interstate banking by establishing subsidiaries rather than branches under the holding company organizational form. The Douglas Amendment to the Bank Holding Company Act restricted the acquisition of
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22 - Chapter Twenty Two Geographic Diversification:...

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