1 Financial Holding Companies: A Global Perspective S. Ghon Rhee, K. J. Luke Distinguished Professor of International Finance and Banking University of Hawai’i The 7 th International Financial Forum April 26-27, 2006, Seoul, Korea Asia-Pacific Financial Markets Research Center, University of Hawaii

2 A Historical Overview of Financial Services Industry: Continental Europe 1.Universal Banking Principle a.Banks conduct a full range of securities business b.Cross shareholding and strategic alliance between banks and insurers are common practice 2.Bank-based rather than capital market-based financial system 3.High level of government involvement in financial services industry 4.Limited role of institutional investors Asia-Pacific Financial Markets Research Center, University of Hawaii

3 A Historical Overview of Financial Services Industry: United States 1.Segmentation among banking, insurance, and securities businesses: Glass-Steagall Act of 1932 Bank Holding Company Act of The Gramm-Leach-Bliley (GLB) Act of 1999  Repealed Glass-Steagall Act and some provisions of Bank Holding Company Act  Allowed financial holding company (FHC) structure A two-way street permitting banks, securities firms, and insurers to affiliate with each other Asia-Pacific Financial Markets Research Center, University of Hawaii

4 A Historical Overview of Financial Services Industry: United Kingdom UK financial sector : In 1980s, dominated by UK financial sector : In 1980s, dominated by a.small number of large banks b.large number of building societies, insurers, credit unions and friendly societies in 1980 Segmentation among banks, insurers, and securities firms Segmentation among banks, insurers, and securities firms Gradual regulatory reforms in 1980s and 1990s removed segmentation Gradual regulatory reforms in 1980s and 1990s removed segmentation Universal banking structure 1986 Big Bang : 1986 Big Bang : Globalization of local, provincial financial sector Asia-Pacific Financial Markets Research Center, University of Hawaii

5 A Historical Overview of Financial Services Industry: Japan Segmented financial services industry Segmented financial services industry Industry consolidation: Industry consolidation: Largely driven by bank balance sheet deterioration rather than economies of scale Financial conglomerates: Financial conglomerates: a. Under study by the Financial System Council in Financial Services Agency b. No tangible reforms yet Asia-Pacific Financial Markets Research Center, University of Hawaii

6 A Historical Overview of Financial Services Industry: Australia Segmented financial services industry by historical development rather than regulation until 1980s Segmented financial services industry by historical development rather than regulation until 1980s Four Pillars Policy: Four Pillars Policy: Government policy ruled out mergers among four major banks (Commonwealth Bank, ANZ, Westpac and National Australia Bank) Financial deregulation and the opening of the banking industry to foreign competition in 1992 expanded the financial sector Financial deregulation and the opening of the banking industry to foreign competition in 1992 expanded the financial sector Financial Services Reform Act of 2002: Financial Services Reform Act of 2002: the Australian version of the US GLB Act of Asia-Pacific Financial Markets Research Center, University of Hawaii

7 Changing Financial Sector Landscape in the 1990s: Financial Consolidation Increasing M&A activities among financial institutions in the 1990s Increasing M&A activities among financial institutions in the 1990s Increasing Joint ventures and strategic alliances among financial institutions Increasing Joint ventures and strategic alliances among financial institutions Asia-Pacific Financial Markets Research Center, University of Hawaii

8 Total Value of M&A Activities in G10 + Spain & Australia in 1990s Asia-Pacific Financial Markets Research Center, University of Hawaii US$ Billion

9 Total Value of M&As by Industry ( ) Total: US$1,623 billion 100% Asia-Pacific Financial Markets Research Center, University of Hawaii

10 Total Value of M&As by Region ( ) Total: US$1,623 billion 100% Asia-Pacific Financial Markets Research Center, University of Hawaii

11 Total Value of M&As Intra- and Inter-Industry ( ) Total: US$1,623 billion 100% Asia-Pacific Financial Markets Research Center, University of Hawaii

12 Total Value of M&As in Banking Industry ( ) Asia-Pacific Financial Markets Research Center, University of Hawaii

13 Total Value of M&As in Securities Industry ( ) Asia-Pacific Financial Markets Research Center, University of Hawaii

14 Total Value of M&As in Insurance Industry ( ) Asia-Pacific Financial Markets Research Center, University of Hawaii

15 Total Value of M&As by Industry ( ): United States Asia-Pacific Financial Markets Research Center, University of Hawaii US$ Billion

16 Total Value of M&As by Industry ( ): United Kingdom Asia-Pacific Financial Markets Research Center, University of Hawaii US Billion

17 Total Value of M&As by Industry ( ): Japan Asia-Pacific Financial Markets Research Center, University of Hawaii

18 Total Value of M&As by Industry ( ): Germany Asia-Pacific Financial Markets Research Center, University of Hawaii US$ billion

19 Underlying Causes of Global Financial Consolidation Cost Savings and Revenue Enhancements Cost Savings and Revenue Enhancements Financial Deregulation and Globalization Financial Deregulation and Globalization  Banks are no longer lenders and deposit-takers  Technological and financial innovation Changing Consumer Demand Changing Consumer Demand  New products: mutual funds, annuities, pension products Corporate and institutional demand Corporate and institutional demand  increasing demand for customized OTC derivatives Shareholder Pressure on Financial Performance Shareholder Pressure on Financial Performance Asia-Pacific Financial Markets Research Center, University of Hawaii Sources: G-10 Report (2001) and Olson (2003)

20 U.S. Financial Holding Companies (FHCs) (I) GLB Act allows FHCs to engage in: securities underwriting and dealing securities underwriting and dealing insurance underwriting insurance underwriting insurance agency activities insurance agency activities merchant banking merchant banking Bank Holding Companies (BHCs) may elect to become FHCs Asia-Pacific Financial Markets Research Center, University of Hawaii

21 U.S. Financial Holding Companies (FHCs) (II) Asia-Pacific Financial Markets Research Center, University of Hawaii Source: Federal Reserve System and US Department of Treasury

22 The Impact of FHCs on Market Concentration (I) Asia-Pacific Financial Markets Research Center, University of Hawaii A. Market Share of Largest Domestic FHCs in Securities Underwriting and Dealing Source: Federal Reserve System and US Department of Treasury

23 The Impact of FHCs on Market Concentration (II) Asia-Pacific Financial Markets Research Center, University of Hawaii B. Market Share of Largest Foreign FHCs in Securities Underwriting and Dealing Source: Federal Reserve System and US Department of Treasury

24 The Impact of FHCs on Market Concentration (III) Asia-Pacific Financial Markets Research Center, University of Hawaii C. Concentration Indexes for Property- Casualty Insurance Source: Federal Reserve System and US Department of Treasury

25 The Impact of FHCs on Market Concentration (IV) Asia-Pacific Financial Markets Research Center, University of Hawaii D. Concentration Indexes for Life and Health Insurance Source: Federal Reserve System and US Department of Treasury

26 Some Thoughts on Implications for Korea Asia-Pacific Financial Markets Research Center, University of Hawaii 1.Supervisory and Regulatory Structure Korea’s centralized regulatory structure is a big advantage 2.Risks Posed by Commercial Activities of FHCs a. Korea faces a high risk due to chaebols’ direct ownership over insurers and securities companies b. The GLB Act maintains separation of financial and commercial activities

27 Mahalo for You Attention!