Financial Holding Companies: A Global Perspective

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 7th International Financial Forum April 26-27, 2006, Seoul, Korea Asia-Pacific Financial Markets Research Center, University of Hawaii

2. 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 A Historical Overview of Financial Services Industry: Continental Europe Asia-Pacific Financial Markets Research Center, University of Hawaii

3. 1. Segmentation among banking, insurance, and securities businesses: Glass-Steagall Act of 1932 Bank Holding Company Act of 1956 2. The Gramm-Leach-Bliley (GLB) Act of 1999 Repealed Glass-Steagall Act and some provisions of Bank Holding Company Act Allowed financial holding company (FHC) structure A two-way street permitting banks,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 A Historical Overview of Financial Services Industry: United States Asia-Pacific Financial Markets Research Center, University of Hawaii

4. 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 Gradual regulatory reforms in 1980s and 1990s removed segmentation Universal banking structure 1986 Big Bang: Globalization of local, provincial financial sector A Historical Overview of Financial Services Industry: United Kingdom Asia-Pacific Financial Markets Research Center, University of Hawaii

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

6. Segmented financial services industry by historical development rather than regulation until 1980s 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 Services Reform Act of 2002: the Australian version of the US GLB Act of 1999. A Historical Overview of Financial Services Industry: Australia Asia-Pacific Financial Markets Research Center, University of Hawaii

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

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

9. Total Value of M&As by Industry (1990-1999) Total: US$1,623 billion 100% Asia-Pacific Financial Markets Research Center, University of Hawaii

10. Total Value of M&As by Region (1990-1999) 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 (1990-1999) Total: US$1,623 billion 100% Asia-Pacific Financial Markets Research Center, University of Hawaii

12. Total Value of M&As in Banking Industry (1990-1999) Asia-Pacific Financial Markets Research Center, University of Hawaii

13. Total Value of M&As in Securities Industry (1990-1999) Asia-Pacific Financial Markets Research Center, University of Hawaii

14. Total Value of M&As in Insurance Industry (1990-1999) Asia-Pacific Financial Markets Research Center, University of Hawaii

15. Total Value of M&As by Industry (1990-1999): United States US$ Billion Asia-Pacific Financial Markets Research Center, University of Hawaii

16. Total Value of M&As by Industry (1990-1999): United Kingdom US Billion Asia-Pacific Financial Markets Research Center, University of Hawaii

17. Total Value of M&As by Industry (1990-1999): Japan Asia-Pacific Financial Markets Research Center, University of Hawaii

18. Total Value of M&As by Industry (1990-1999): Germany US$ billion Asia-Pacific Financial Markets Research Center, University of Hawaii

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

20. U.S. Financial Holding Companies (FHCs) (I) GLB Act allows FHCs to engage in: • securities underwriting and dealing • insurance underwriting • insurance agency activities • 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) Source: Federal Reserve System and US Department of Treasury Asia-Pacific Financial Markets Research Center, University of Hawaii

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

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

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

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

26. Some Thoughts on Implications for Korea 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 Asia-Pacific Financial Markets Research Center, University of Hawaii

27. Mahalo for You Attention!