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Bank Consolidation and Monetary Policy(Vol.7 No.2)

연구조정실 (Tel: 02-759-5407) 2004.12.13 8761

Bank Consolidation and Monetary Policy(Vol.7 No.2)

Dong-Wook Yang

Head of Monetary Studies Team, Institute for Monetary and Economic Research, the Bank of Korea, 02-759-5402, dwyang@bok.or.kr

Seung-Je Hong

Monetary Studies Team, Institute for Monetary and Economic Research, the Bank of Korea, 02-759-5403, sjehong@bok.or.kr

Since the mid-1980's, the global financial industry has both expanded and been consolidated through mergers and enlargement. After the financial crisis financial consolidation developed rapidly also in Korea due to mergers and acquisitions for restructuring financial sector and enhancing competitiveness of financial institutions. It has been pointed that financial consolidation, in the form of reinforced market governing power and increased concentration in the financial market, might harm the efficiency of the conduct of monetary policy by central banks while it has beneficial effects such as enhancing efficiency and competitiveness of financial institutions. This paper surveys recent theories and studies on the effect of financial consolidation on monetary policy from three aspects, transmission channels, performance condition and the financial environment and then analyses the effectiveness of monetary policy. The results show that financial consolidation has had some adverse effects on monetary policy though these are not significant. In particular, the effectiveness of monetary policy through the interest rate channel has been reduced while the situation as regards its effectiveness through the banking loan and balance sheet channels seems ambiguous. The effect of increasing financial market concentration through increased systematic risk on circumstances of monetary policy is also found to be ambiguous. However, the difficulty in conducting monetary policy confronted with huge banks' bankruptcy seems to be increasing in the future. As a result, the effect of consolidation in financial industry on monetary policy needs careful attention, and, at the same time, financial regulation and system must be improved so that efficient performance of monetary policy would not be hindered by financial consolidation.

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