Group of Ten - Consolidation in the Financial Sector
The ongoing consolidation of financial institutions is one of the most notable contemporary features of the financial landscape both within and across many industrial countries. In recognition of this fact, and its potential implications for public policy in a variety of areas, in September 1999 Finance Ministers and central bank Governors of the Group of Ten asked their Deputies to conduct a study of financial consolidation and its potential effects. This Report presents the results of that study.
To conduct the study, a Working Party was established under the auspices of finance ministry and central bank deputies of the Group of Ten. From the beginning, it was recognised that the subject matter was substantial and that there was a need to utilise expertise from a wide range of sources. Thus, the Working Party was organised into six Task Forces, each of which was charged with addressing a key aspect of financial consolidation and its potential effects. These Task Forces addressed the patterns of financial consolidation observed in the 11 G10 nations plus Australia and Spain (the study nations), the causes of consolidation, and the potential effects of consolidation on financial risk, monetary policy, financial institution efficiency, competition and credit flows, and payment and settlement systems.
The Working Party sought to employ a broad definition of financial services, but also to limit the work's scope to manageable proportions. Thus, the definition of the financial services industry used here includes commercial banking, investment banking, insurance and, in some cases, asset management. Most other types of financial activity, such as exchanges and specialty finance, are excluded.
When attempting to understand and interpret this Report's findings and implications, it is critical to keep some general principles in mind. First, a core objective of the study is to identify the potential impacts of consolidation, not to judge whether consolidation in combination with other developments has led to a net change in, say, financial risk or the competitive environment. In practice, isolating such "partial" effects is extremely difficult. Consolidation is only one of several powerful forces causing change in the financial system, and each of these forces affects and is affected by the others. Nevertheless, a systematic attempt to focus on the possible effects of consolidation has, in the Working Party's judgement, significant value added. Second, it is well known that international comparisons are inherently difficult for many reasons. The current study certainly suffers from this complexity, and the study is organised along national lines in a number of places for precisely this reason. Still, financial consolidation and its close cousin financial globalisation are phenomena that cut across national boundaries in many dimensions. Thus, international comparisons are imperative, and a second core objective of the study is to identify common (but not necessarily identical or equally important) patterns, causes, and implications across the study nations.
Although it was not the Working Party's intention to develop specific policy recommendations, an important objective was to identify key areas in which financial consolidation supports the need for new or continued, and in some cases accelerated, policy development. These areas are discussed in some detail in this chapter and in the separate chapters written by the individual Task Forces.
Lastly, as indicated above, the study adopted a broad definition of financial services. However, as a practical matter, the predominant portion of existing research and to a great extent the available data are focused on the banking industry in all the study nations. Thus, the study is more bank-centric than was originally intended. This emphasis may not be too distorting because, as discussed below, most merger and acquisition activity in the financial sector during the 1990s involved banking firms. Nevertheless, one of the conclusions of the study is that in some cases more research and data collection would be helpful for non-bank financial service firms and markets. The remainder of this chapter proceeds as follows. Section 2 presents a brief listing of the study's key findings and policy implications. Little effort is made here to explain the reasoning and evidence behind the findings and implications identified by the Working Party. Section 3 is a more extended discussion of findings and policy implications that also summarises the analysis behind the Working Party's conclusions.
- Summary Report (35 pages, 231528 bytes)
The full report by chapters:
- Table of contents, Introduction and Summary of findings and policy implications (34 pages, 193714 bytes)
- Chapter I: Patterns of consolidation (33 pages, 202391 bytes)
- Chapter II: Fundamental causes of consolidation (60 pages, 364447 bytes)
- Chapter III: Effects of consolidation on financial risk (98 pages, 738762 bytes)
- Chapter IV: The impact of financial sector consolidation on monetary policy (24 pages, 150534 bytes)
- Chapter V: The effects of consolidation on efficiency, competition and credit flows (62 pages, 384520 bytes)
- Chapter VI: The effects of consolidation on payment and settlement systems (20 pages, 126320 bytes)
- The Working Party on Financial Sector Consolidation (3 pages, 17420 bytes)
- Data Annex A (Patterns in consolidation transactions) and Data Annex B (Patterns in the structure of the financial sector) (127 pages, 889396 bytes)