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The Expansion of Corporate Groups in the Financial Services Industry: Trends in Financial Conglomeration in Major Industrial Countries

  • The original Japanese-language version of this paper was released in April 2005 by the former Financial Systems Department.

December 28, 2005
Financial Systems and Bank Examination Department
Bank of Japan

Click on ron0512b.pdf (754KB) to download the full text.

Summary

In recent years, a growing number of financial services companies in major industrial countries have begun to make inroads into each other's sectors, spurred by changing financial needs, innovations in financial engineering, deregulation, and a variety of other trends and developments. These companies include banks, securities companies, insurers, and even consumer finance and asset management/advisory firms. Among the most significant developments is the expansion of financial conglomerates, groups of financial institutions and firms that offer a wide range of services. Financial conglomerates have become notable in recent years for their growing size and the increasingly global nature of their operations.

Financial conglomeration raises new issues in terms of the stability and efficiency of financial systems. Many of the new issues raised by financial conglomeration stem from the fundamental nature of financial conglomerates themselves, which is the fact that they handle a wide range of financial services within a single corporate grouping.

As traditional regulation has divided financial services providers more or less along strict sectoral lines, financial conglomeration, which allows single groups to offer an increasingly diverse range of services, has brought significant changes, especially to their risk management practices, and thus has prompted financial authorities and safety net administrators to respond to these changes.

Financial conglomerates do not provide a single model for financial services providers seeking to expand their range of business. They vary greatly in terms of the scope and structure of their business, depending on factors such as the management strategies of their core financial services providers and the financial systems of the countries in which they operate. In addition, all of these factors change over time.

However, financial authorities and relevant parties need to be aware that conglomeration will likely remain a strong option for financial services providers. When financial services providers choose to expand their business by conglomeration, the financial authorities and relevant parties need to pursue dual objectives of maintaining the soundness of the financial system and allowing financial services providers to operate smoothly.

There is no set of universal guidelines for dealing with financial conglomeration in place around the world. Nonetheless, on the regulatory side, financial conglomeration has been the subject of active discussions in international settings, and a common awareness is being formed regarding the need to monitor what is occurring in the financial conglomerate as a whole and the importance of making active use of market discipline.

A movement toward financial conglomeration has also been taking place in Japan. Financial conglomeration has emerged and expanded since the 1990s, when banks and securities companies were allowed to enter each other's sectors. The years since 2000 have seen a series of mergers and integrations among the major banks that has led to the formation of "mega-bank" groups.

Further financial conglomeration will likely occur in Japan under current economic conditions. Japanese banks are now laying the groundwork for more forward-looking business development with their progress in the cleanup of nonperforming loans and reduction of their excessive equity holdings. They are also becoming aware that strengthening their profitability is an increasingly important task. Deregulation is moving forward as well. As this trend will likely grow, financial authorities need to closely monitor not only domestic financial conglomerates but also foreign financial conglomerates that operate in Japan.

The Bank of Japan, as a central bank, will respond to financial conglomeration to effectively carry out the Bank's operations, including current account deposits and other transactions with financial institutions, bank examinations and monitoring, as well as the "lender of last resort" function. Of special importance from the perspective of avoiding systemic risks will be accurately grasping conditions in individual groups, focusing particularly on the flow of funds and integrated risk management.