Academic journal article Journal of Financial Management & Analysis

Do Universal Banks in Major European Countries Have a Better Performance Compared to Specialized Banks? an Empirical Investigation

Academic journal article Journal of Financial Management & Analysis

Do Universal Banks in Major European Countries Have a Better Performance Compared to Specialized Banks? an Empirical Investigation

Article excerpt


In response to the rapid changes in the international environment of financial systems, the Universal Banking System has recently attracted attention. A considerable amount of research on the nature, merit, and disadvantage of the Universal Banking System have been produced since the 1980s, when major countries started financial reforms. However, the univesal banks as an individual firm has not been sufficiently explored through scholarship. This study explores the univessal banks as a firm, particularly the performance of universal banks. Faced with radical changes in the international financial environment, every government is carrying out active deregulation to cope up with the situation. As we can see in France's new banking law of 1984, U.K.'s Big Bang in 1986 and Canada's amendment of banking law in 1987, leading countries in the world have already initiated financial reforms. In the 1990s, Japan and Korea began to reorganize their banking sectors and in the U.S.A. there has been debate on the universal banking system. In particular, leading countries seek to strength the competitiveness of their banking industry through deregulation regarding financial institutions' activities. There has also been some discussion about the universal banking system as an alternative.

We can classify the leading countries' financial systems into either universal banking system or specialized banking system, but recently, the trend has been moving toward universal banking system. None of the leading countries maintains a specialized banking system in its full meaning any longer. Countries which have traditionally stuck to specialized banking system such as U.S.A., Japan, and Korea are turning to the blended system which partly reflects the characteristics of the universal banking system. Therefore, the more important issue is when to follow which country's model at what speed in transforming to universal banking system. There have been relatively many studies pertaining to the nature of and the pros and cons of the universal banking system, but little has been studied about banks as a firm. Partly, it may have been caused by the difficulties of data collection and methodological problems. However, regarding the current situation in which the world's banking system is changing to universal banking system, the importance of studying bank as a firm is getting a high priority. From this viewpoint, this study focuses on universal banks, especially the performance of universal banks.

The purpose of this study is to raise questions and answer them as follows : Do universal banks have a performance premium? If so, what is the source of this premium? Numerous studies in the past have argued that universal banking can improve performance as a result of the economies of scale, but little has been proved empirically. In this study we intend to test empirically whether universal banks can surpass specialized banks in performance.

Universal Banking System and Universal Banks

The financial system is a framework which is comprised of a financial structure and is the concept that names all practices and systems of financial transactions. There are two types of financial systems: Universal Banking System and Specialized Banking System. Generally, these two can be divided by the criterion of whether a commercial bank can provide securities-related services. Many previous studies about universal banks have classified universal banks and specialized banks according to the parent country's financial system. If a country chooses the universal banking system, all the banks in that country would be considered as universal banks, But, this is not a good classification. For example, even Germany, a country with the most typical universal banking system, also has specialized banks* which carry limited activities. The reason that many studies have used incorrect criterion which depend on a country's financial system is because we do not have a conclusive definition for universal banks. …

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