The changing borders of banking: trends and implications

BIS Economic Papers No 43
December 1994


Imagine that a banker, economist or policy-maker had been away from civilisation for the last fifteen years or so and finally returned. Would he recognise the financial industry that he saw? No doubt our fictitious observer's answer would depend on his specific perspective and on whether he was looking at the industry on a global scale or at a particular sector or country. Yet there is little doubt that the changes in the structure and workings of the industry that have occurred over the period, and those in prospect, have profoundly altered the performance, risks and opportunities of individual enterprises and of the system as a whole in all countries.

The present paper considers these changes from an international perspective. The focus is primarily on the nature of banks' activities, with particular reference to the evolution of institutional linkages between commercial and investment banking, on the one hand, and insurance and non-financial business, on the other. The analytical questions tackled concern the case for and against closer integration between these activities and the implications for prudential regulation and supervision. The emphasis is on the wood, not on the trees. The intention is to provide a general framework and a cross-country background against which the interrelations between the various policy issues can be highlighted. The perspective is that of an economist, rather than of a banker or supervisor. Section 1 outlines the evolution of the financial industry over the last fifteen years or so. Particular attention is paid to the characteristics of the deregulatory process, to the common threads and differences across countries. Section 2 discusses the pros and cons of integration between banking, insurance and non-financial business activities and considers the available evidence. The third section addresses the implications of the linkages between these activities for prudential regulation and supervision, identifying some key issues. The conclusion summarises some of the main points made.