The answer, as a 2 recent study by UBS Warburg has indicated, seems to be that sometimes mergers work and sometimes they do not. It depends to a large extent on management capability. It also seems to be the case that the benefits of mergers, in terms at least of securing economies of scale, may be relatively more easy to exploit in the case of smaller retail banks. This may be relevant to the situation in Hong Kong, to which I now turn. The situation in Hong Kong As I mentioned at the beginning of this speech, the local banking system in Hong Kong has stood somewhat aloof from the general trend towards consolidation. The emergence of HSBC as a truly global player over the last decade is of course an outstanding example of what can be achieved with the help of M&A. But this has happened outside Hong Kong. Until recently, at least, the situation within Hong Kong has been more static. The family ownership of a number of local banks is often cited as one of the reasons for this. It is true that family owners may be influenced by factors other than value maximisation, such as the desire to preserve the family heritage and to pass it on intact to the next generation. But an additional factor is that hitherto banks in Hong Kong have not been under economic pressure to merge because profitability has been satisfactory in absolute terms.
Finally, it is important that the world’s major private financial institutions run themselves with a sufficiently strong financial cushion, a cushion calibrated not just against the risks they confront in this uncertain world, but to the much more central role they play in many markets. Particularly for those institutions whose size and scope make them systemically important, capital, liquidity, and the overall risk management and control architecture need to be exceptionally strong, stronger than would be necessary and appropriate for smaller institutions. The consequence of size is not just that failure or the perceived risk of failure at one of these institutions has larger negative implications for the financial system today than would be the case in a less consolidated world. It is also the case that their greater relative size limits their ability to take actions that would reduce their exposure in the event of a shock without creating the risk of magnifying the shock. Let me conclude by noting the overwhelming significance of the economic policy decisions we make here in the United States to the world’s capacity to deal with these broader challenges. Our impact on global economic activity and on international financial stability is greater than simple measures of our share of GDP. When we are strong economically, the world can more easily tolerate economic weakness outside the United States. When we are less strong, the impact on the world economy is powerful. This has been true for some time.