Academic journal article Academy of Banking Studies Journal

U.S. Financial Services Integration: An Evidence in Banking and Insurance

Academic journal article Academy of Banking Studies Journal

U.S. Financial Services Integration: An Evidence in Banking and Insurance

Article excerpt


The enactment of the Financial Services Modernization Act (1) of 1999 (known as the Gramm-Leach-Bliley Act) promised the most fundamental reform in the U.S. financial services regulation in more than half century. The Gramm-Leach-Bliley Act (GLB) repealed the depression era laws and reflected the policy views of many competing political and business constituencies. GLB intensified competition in financial services industry by eliminating legal and regulatory barriers among different types of financial institutions. GLB permitted affiliations among financial entities and allowed banks, insurers, securities firms and other financial services institutions to engage in a complete set of financial activities, including commercial banking, insurance underwriting, securities issuance, merchant banking, brokerage, etc. With the same kind of choices as they do in other industries, financial services consumers could take advantage of GLB and benefit from one-stop shopping convenience.

When GLB was passed after a decade debate, almost no one doubted the potential for GLB to have a profound impact on U.S. financial markets. As the end of 2003--under the GLB Act--more than 600 companies operated as Financial Holding Companies (FHC) representing 78 percent of the total assets of all Bank Holding Companies (BHC). In addition, more than 1,300 FHCs/BHCs became engaged in insurance agency or underwriting business and more than 2,500 insurance companies, either through agents or risk bearing underwriters, were affiliated with commercial banks and thrift institutions (BHC Statutory Financial Report multiple years and Federal Reserve Report to Congress, 2003).

GLB opened the door for further consolidation and it was expected to spur waves of cross-sector mergers and acquisitions (M&As). However, massive cross-sector M&As did not occur. Instead, banks bought specialized securities firms and acquired insurance agencies and brokerages rather than acquiring insurance underwriting companies as had been predicted. Banks now control some of the largest insurance brokerages companies. Insurance companies applied for new thrift charters instead of commercial bank charters. (2)

GLB represents a sharp break with traditional policy in the U.S., and it has already produced radical changes in banking and insurance industry, and more is in prospect. However, the specific ways in which GLB has affected the financial system are still widely open to question, especially the extent to which formerly separate sectors of the financial services industries have combined to take advantage of the newly permissive activities under GLB through the integration across sectors.

The research questions we investigate are as follows: 1) How were insurers involved in banking, and how were banks involved in insurance prior to GLB? 2) What is the impact of GLB on banks entering insurance and vise versa? 3) To what extent have firms in the banking and insurance industries combined to proceed into each other's traditional lines of business under GLB? 4) What are the characteristics and performance of the firms that have chosen to go beyond their traditional product lines? The answers to questions like these will be invaluable to a variety of constituents as they will the need to make policy recommendations based almost solely upon anecdotal stories and survey data following passage of GLB.

The remainder of this paper is organized as follows: Section 2 discusses the history of U.S. financial integration and reviews GLB and its effects on banking and insurance industries. Section 3 reviews the literature and Section 4 describes the construction of dataset. In Section 5 we identify the domestic assurbanks and bancassurers. Sections 6 and 7 present the market analysis and discuss the results. Section 8 concludes the study.


Prior to 1999, U. …

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