The crises in the global financial markets have produced a flurry of bank mergers, acquisitions and full or partial state take over not witnessed for decades with implications for Gulf banking structures. In the UAE, several mergers amongst major financial and banking firms are rumoured to be at advanced stages, with the Amlak Finance and Tamweel planned merger leading the way. The global credit crunch has raised the spectre of some Gulf Cooperation Council (GCC) bank mergers to withstand external shocks and to be able to compete more effectively against the new global alliances now taking shape. This could be important for Gulf institutions to withstand both a credit crunch liquidity squeeze and to compete for some of the mega projects now underway in the region which require larger capitalization and now dominated by international banks. The recent developments of the US sub prime fuelled crises have dramatically reshaped both the US, and by extension, the world's banking scene. Lehman Brothers ceased to exist and its North American investment banking business was acquired by Barclays; Bank of America acquired Merrill Lynch, Mitsubishi UFJ acquired a 20% stake in Morgan Stanley for $8.4 billion, while Lloyds ISB was given the green light to takeover HBOS in the UK. Wachovia, the fourth largest US bank, at first opted for Citigroup's advances, but decided to seek a merger with Wells Fargo following a better offer from that bank, the outcome to be decided by regulators and the courts. The spate of takeovers and mergers has also moved to the state sector, with governments across the world taking control of banks in distress to restore public confidence, but with intent to "de-nationalise" them at a future date once their fortunes turned around. And what a few weeks it has been, with the Benelux banking giant Fortis partly nationalized by the Dutch ,Belgian, and Luxembourg governments; and Iceland taking over the country's third largest bank, Glitnir, after it faced short term funding problems. The UK, not to be outdone in the nationalization league, took over Northern Rock and then mortgage lender Bradford & Bingley (B&B) after agreeing to sell B&B's savings unit and branches to Spain's Santander. In the USA, who could forget the firesale of Bear Stearns to JP Morgan Chase (which later took over mortgage lender Washington Mutual), an action which triggered the sharp fall in banking confidence worldwide. However, even in happier times, the thirst to merge was evident on a mega scale as illustrated by the 70 billion Euro purchase of the Dutch bank ABN-Amro by Britain's Royal Bank of Scotland, Spain's Santander and guess who-- Benelux's Fortis bank. Why do banks go on a merger spree? What are the benefits to banks and their consumers to justify such actions? Is it merely a matter of ego, in terms of world bank ranking? Banks making bids for rivals have to justify their action to shareholders - in the final analysis they are the ones paying the price, either in terms of borrowed money to fund the acquisition, or through a further sale of shares which could dilute dividend yields into the future. Once a friendly or hostile bid is announced, PR machines goes into overdrive for both the suitor and the courted parties. This is a financial marriage after all, and the best foot has to be put forward for the financial bride and groom. The PR tells us that the benefits are many, resulting in efficient competition, economies of size, expansion of business lines, a lower probability of bank failure of the merged organization due to more diversified portfolios, and finally contented consumers all around. But what of the cost of mergers? Do they all end blissfully happy-wed ever after? Just like marriages, some end up on the rocks, with more PR to announce "spin-offs" and demergers this time. By then, those that had arranged the original mergers had either quietly retired, or been poached by rival companies, and only bewildered shareholders are left behind. The elimination of banks can sometimes lead to higher costs, as those now dominating the industry can indirectly collude to maintain charges at higher levels than previously. Small businesses could suffer, as lending to this sector is often of a lesser priority for mega banks that might opt for "big-ticket" items in line with their increased capitalization and market power. Finally, some of these larger merged banks may enter into new areas and take increased risks and fail, forcing regulators and society to pick up the price from bailouts. It is ironic that, the bigger a financial institution, the more likely it might take risks based on the premise of "too-big-to-fail" syndrome- that regulators will not allow the largest banks to fail, simply because this causes financial panic in the whole system. The upshot of all these financial marriages and divorces is that global banking players are becoming larger and larger. Traditional bailouts might not be an option for these mega banks in the future, as the nationalization, by stealth, of recent financial institutions has shown that some governments are now ready to take a more active ownership role then before, and some banks do not wish to have government management oversight. Whatever the merits of government bailouts, the fact remains that there is not a single Arab financial institution amongst the top 20 largest capitalized banks in the world, with the largest in terms of Tier 1 capital being Bank of America/Merrill Lynch at over $115 billion and Rabobank in 20th .position with $ 42 billion. The largest Arab bank in terms of capitalization is still under the $10 billion mark, and the Amlak /Tamweel merger places them at around $7.5 billion. Why should this worry Gulf banks then? Some will argue that unlike their international peers, Gulf banks have demonstrated prudence in their investment portfolios and conservative lending policies and they are not affected by the credit crunch. On the surface this might be true, but there are indications that the flight of some foreign capital from the Gulf, and continuing strong demand for real estate lending, has driven inter-bank lending rates higher, possibly explaining the unprecedented move by the UAE Central Bank that it stands ready to pump $ 13.6 billion into the banking sector to prevent a global credit crunch contagion in the Gulf. This is a welcome move in the short term, but it points out the limitations of current UAE banks balance sheets and one way out is for regional mergers. The UAE's decision, however, lays the seed of an inflationary bout, but the alternative, of not doing anything, could cause interbank lending to slow down. Again, some would argue that a Gulf slowdown, especially in real estate asset valuation, could reduce the possibility of a sharp burst in the real-estate bubble later on, and so avoid a US type financial and real estate sector problem getting out of control? Dr. Mohamed Ramady is a former banker and a Visiting Associate Professor, Finance and Economics Dept at King Fahd University of Petroleum and Minerals