Mergers and Consolidation Between Banking and Financial Services Firms: Trends and Prospects

Publication Date: August 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

Competitive, legislative, and regulatory developments in financial services in the United States have all contributed to significant industry changes here. The landmark financial services legislation, the Gramm-Leach-Bliley Act (P. L. 106-102, GLBA) is speeding ongoing changes in the United States financial services industry. Overall, it allows providers flexibility in responding to economic trends. Global and especially technological advances continue to affect the financial services industry in ways yet unforeseen. Such factors are part of the larger picture reflected in recent mergers among large banking organizations in Europe, Japan, and the United States, and expanding or contracting product lines of domestic financial institutions.

Mergers of very large banking organizations in Europe and Japan move the size of single organizations to new heights. American providers of financial services are similarly growing through combinations, as exemplified by the fusion of J.P. Morgan into the Chase Manhattan companies, and the joining of Wachovia and First Union, not to mention the increasing span of Citigroup.

Increasing diversification of financial services offered within single entities in the United States is occurring through acquisitions and internal development of new businesses. GLBA allowed new forms of affiliations among banks, insurance, and securities firms and increased diversification within individual financial organizations. In response to this increased flexibility, many institutions have taking advantage of expanded organizational arrangements. Some have done so to marked advantage, while others have retreated from their diversifications.

Specific changes for policy consideration depend on the predominant ways in which the financial system unfolds. For now, observers will be watching to see how the marketplace continues to respond to the conditions resulting from GLBA, multinational financial integration, and volatile economic conditions around the world. GLBA clearly ended the isolation of the investment banking business from the commercial banking businesses, through its repeal of the Glass-Steagall Act of 1933. In the current financial climate, the financing of Enron, WorldCom, and other tarnished corporations through both securities and loans from prominent financial holding companies has called the commercial and investment banking combination of businesses into some question.

CRS will update this report as developments warrant. Further information on financial services issues of current interest to Congress appears in the CRS Electronic Briefing Book on Banking and Financial Services [http://www.congress.gov/brbk/html/ebfin1.shtml].