Economic uncertainty creates is a prime time for merger and acquisition (M&A) deals in the banking industry, said an industry expert.

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The world has witnessed many recent M&A deals, which can take place within a country or across international borders, among financial institutions and banks of various scales, Dinh Tuan Minh of the Center for Economic Research and Policy told Tuoi Tre.

"A common characteristic is that this activity seems to become more robust and occur on a larger scale in periods of increasing economic difficulties."

For example, in the U.S., during the economic crisis, there was a series of big mergers, like the $50 billion deal between Bank of America and Merrill Lynch, in which the former acquired the latter.

"Locally, we have recently witnessed M&A deals related to Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank), the merger of the Hanoi Housing Commercial Joint Stock Bank to Saigon-Hanoi Commercial Joint Stock Bank, and the merger of three banks, Ficombank, TinNghiaBank and Saigon Commercial Bank (SCB) into a new one bearing the name of the last one."

As long as M&A activities are in accordance with law and regulations, they should be encouraged, argues Minh.

"However, such actions are harmful if the acquirers are groups of bankers allying with each other to allow their banks to dominate the financial market later on."

"They can then manipulate currency trading, interest rates, and exchange rates. For example, they can ask their banks to hoard foreign currencies on a large scale to create scarcity, thus driving up prices."

"Even worse, if those groups of banker alliances are the men behind other business groups, they can prioritize cheap and subprime credit for their own corporate groups."

"When that happens, it can lead to many different types of risk to the economy."

The national law on credit institutions currently regulates a limit on the percentage share of ownership to minimize such unhealthy activities and prevent any individual or organizations from obtaining the right to govern a bank.

It states that an individual shareholder may not own more than 5 percent of the charter capital of a credit institution, while institutional shareholders may not own more than 15 percent of the charter capital of a credit institution, except in some special cases.

In addition, shareholders and their relevant individuals may not own over 20 percent of the charter capital of a credit institution.

"Thus, violations in banking acquisitions occur when individuals or organizations circumvent the provisions of the cap on share ownership percentage."

Intricate relationships

The current state of cross-ownership among banks is becoming very complicated.

"In some cases one person is both the owner of a bank and a number of enterprises, and these enterprises contribute capital to the bank."

"Moreover, there are also group of shareholders owning banks; and those banks belong to one or many in their groups."

"As a result, one or a group of individuals and organizations can, through their “backyard” companies, both directly and indirectly own shares/charter capital in a bank, so the circumvention in ownership percentage is often hidden behind crisscross ownership relationships."

In confronting the situation, state agencies should promote M&A in the banking sector in accordance with the law, as well as the national scheme in restructuring the banking system.

"Cross-ownership should be ceded to an independent intermediary or prioritized for foreign investment from overseas financial institutions and international banks."

In addition to solving the problem of cross-ownership, state agencies should further improve existing regulations related to M&A activities and banking takeovers, including regulations limiting share ownership percentage.

Such regulations can help eliminate the tactic of using "backyard" companies to hold bank shares in excess of the allowed limit.

Of course, it is difficult for laws to take all the existing practices on banking M&A into account, so state agencies need to further strengthen market discipline through regulation on information disclosure, enhanced monitoring of large shareholders, and increased intensity in sanctions for violators.