The Changing Landscape of the Financial Services Industry

1. The Changing Landscape of the Financial Services Industry R92723073李喬志 R92723042周東立

2. The Changing Landscape of the Financial Service Industry: What Lies Ahead? • Some of the potential consequences of the Gramm-Leach-Bliley Act for the structure of the U.S. financial services industry are the point of research of this paper: • U.S. Banking Industry and its consolidation over the past ten years. • Construction of hypothetical pro-forma mergers to test whether diversification post GLB can improve the risk-return trade-off faced by financial companies • Evolution of financial services industry in Europe

3. Expansion of the Powers Prior to Gramm-Leach-Bliley • Prior to 1933, US securities markets were largely self-regulated. The Banking Act of 1933 (known collectively as the Glass-Steagall Act), as a product of the U.S. market crash of 1929. • The Fed and the OCC began loosening restrictions on bank participation in investment banking and insurance in the mid-80s.

4. SomeImportant Dates Priortothe Passageof Gramm-Leach-Bliley

6. Recent Consolidation Trends • Several hundred bank mergers and acquisitions (M&As) have occurred each year over the past two decades. During the past decade megamergers have occurred much more frequently: Citicorp-Travelers, BankAmerica-NationsBank, Banc One-First Chicago, and Norwest-Wells. • Four key factors contributed to the fast pace of M&A activity. • The rapid M&A activity in U.S. between 1989-1999 has significantly affected the number of banks and banking organizations, and their share of total nationwide assets.

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8. SUMMARY OF THE GRAMM-LEACH-BLILEY FINANCIAL SERVICES MODERNIZATION ACT OF 1999

9. Why Did the Positive Reaction Occur? • Will mergers create more profitable firms? • Are there synergies between firms that can be taken advantage of? • Will these firms have a smaller risk of bankruptcy?

10. Previous Research • Boyd & Graham (1988)–exploring the risk-production potential of merging BHCs with other financial firms by simulating cross-industry mergers • Kwast (1989) • Sauders & Walter(1994) • Lang & Welzel (1998) • Kwan (1998) Santos (1998) Kwan & Laderman (1999) Berger,Demsetz,and Strahan(1999) • Morgan (2000) • Laderman(2000)

11. Methodology & Data • Constructing pro-forma mergers between the ten largest BHCs (banking holding company) and the ten largest firms in each of the other industry to prevent the outcome from being determined by the larger firm’s size • Annual year-end financial statement data of all publicly traded financial firms in Standard and Poor’s Compustat database over 1984-98 period

12. Measure of Profitability • Rate of return on average accounting equity :Net income after taxes :total equity

13. Measures of Risk--Standard deviation on the rate of return on equity • To consider whether there are diversification benefits :The mean of :the number of periods in which the firm is in the sample

14. Measures of Risk --Z score • An indicator of the probability of bankruptcy (bankruptcy arises when losses are sufficient to eliminate equity) :Total assets in period t :ROA in year t :estimated standard deviation of the ROA

15. Profitability and Risk Measures by Industry

16. Profitability and Risk Measures by Industry

17. Profitability and Risk Measures by Industry • 1984-98 Risky：BHCs＜life insurance＜property and casualty insurance＜securities and investment advice＜real estate • 1992-98 Few difference in relative profitability. No difference in relative risk ranking. Overall level of risk is lower than 1984-98 • 1971-84 Similar findings to 1984-98 Note

18. Profitability and risk measures if a BHC had merged with a non-bank financial firms

19. Profitability and Risk Measures if a BHC Had Merged with a Non-bank Financial Firms • Mergers between BHCs and life insurance firms are likely to produce firms with less risk than either of the two separate entities • Mergers with securities and property and casualty firms will raise BHC probability of bankruptcy modestly

20. Comparison to Boyd and Graham (1988)

21. Comparison to Boyd and Graham (1988)

22. Lessons from Europe • Recent data on M&A activity in Europe provide further insight into how the GLB Act might influence consolidation because most European countries permit banking, securities, and insurance to occur in the same company or holding company

23. Values of the Targets of Financial Institutions’ M&A Activity,1985-99 (in billions of dollars)

24. Values of the Targets of Financial Institutions’ M&A Activity,1985-99 • Consolidation across sectors has been fairly common in Europe but relatively uncommon in the United States (190.1billion vs. 151.6billion ; 24.5% vs. 17.4%) • Few legal barriers prevent European banks from entering the insurance business—bancassurance

25. European Financial Institutions’ M&A Activity by Industry Segment,1990-99

26. European Financial Institutions’ M&A Activity by Industry Segment,1990-99 • Combinations of banks and life insurance companies constituted more than 10% of the total M&A activity in financial services • Banks and property and casualty insurance companies almost never combined

27. Why Banks in Europe were Pulled Toward Life Insurance? • Industry’s rapid growth • Tax advantaged status • Cost advantages(BAI/BCG,1999) 1. sales personnel is less expensive than traditional sales agents 2. cost down of selling insurance      3. cost down of underwriting 4. banks need not add resources to generate and mail out premium notice   5. capitalizing on the trust

28. Successful Strategy of European Banks • Integrating banking operations with both insurance sales and underwriting • Developing simpler life insurance policies and procedures appropriate for a mass market

29. Conclusion • Both the event evidence and diversification effects discussed points most strongly to combination of banks and life insurance companies.

30. The Status Quo, United States • Consolidation is at a slower pace than in the late 1990s. • the number of deals and their value has declined in the securities and bank sectors from 2001 to 2002, • merger and acquisition activity has increased slightly or remained for the thrift and insurance sectors. • Specialty finance deals were up slightly but their value did not increase.

31. Number and Value of Announced Financial Services Mergers and Acquisitions, 1999-2002 ($ billions) Note: (1) Includes securities and investment companies, broker/dealers, and investment advisers. (2) Specialty finance firms range from small finance companies to major credit card operations. fell 59 %

32. Number of Announced Financial Services Mergers and Acquisitions, 1999-2002 Data source:http://financialservicefacts.org/financial2/

33. Value of Announced Financial ServicesMergers and Acquisitions, 1999-2002($ billions) Data source:http://financialservicefacts.org/financial2/

34. Top Ten Cross-Industry Acquisitions Announced in 2002, United States Data source:http://financialservicefacts.org/financial2/

35. Top Ten Cross-Industry Acquisitions Announced in 2002, United States Data source:http://financialservicefacts.org/financial2/

36. Selected Bank Products – Positioning Against Drivers of Sustainable Returns High Low Investment Advisory/Private Banking Mutual funds Manufacturing MNW Banking Production Differentiation Price Sensitivity/Buyer Power Credit Cards Corporate Treasury/Cash Management Life Insurance Unsecured Personal Loans Mutual Funds Distribution Mortgages Trade Finance Corporate Loans Brokerage Corporate Guarantees Low High Competency/Scale Barriers Low High Explanation by Characteristic of Bank Product Data source: citigroup

37. Thanks for your attention