Financial Services, Globalization and Domestic Policy Change
William D. Coleman
St. Martin's Press, New York, 1996.
Financial markets are going global. Policy makers are struggling to adjust. This book, by a Canadian political scientist, exams the policy response in five countries, the U.S., Canada, the UK, France, and Germany. As one might expect from a political scientist the emphasis is on how countries reach their decision on how to respond as much as on how countries actually responded.
The emphasis is on two industries, loan making and security trading, which at the start of the period discussed, the 1960's were generally viewed as separate industries, with separate firms in each (except in Germany). In many countries, the business of making loans was divided among different types of firms, with firms called banks specializing in loans to business firms, and other firms (saving and loans, building societies) specializing in residential lending, and a variety of other intermediaries meeting the needs of the lower income populations, the rural population, or small businesses. In most countries there was a breakdown in the barriers between these separate segments, and a move towards permitting banking firms to engage in any type of financing, including selling securities. This is referred to as universal banking. Much of this movement was driven by the concern that if domestic firms did not expand and internationalize, some of the business would be lost to more flexible foreign firms.
In security markets, the pressure was to lower the prices to users of the services and make the services more efficient. While in the U.S., the pressure for this seems to have been directed towards benefiting the consumers of financial services (here especially the institutional investors), in other countries the move seems to have been driven by a fear that the business would go abroad unless the domestic markets were highly efficient and provided services at a low price.
While the focus of the book is on the process by which change occurs, it may be most interesting for the readers of this journal to point out how large the changes are that various countries have undergone. For instance, France started the period in the sixties with a highly fragmented system with commercial banks, merchant banks, savings banks, and financial cooperative all operating under different rules, with special institutions handling lending to agriculture, to artisans, and to local governments. Only 15% of the financial needs of the economy came through security markets. The government owned the major banks and in addition had a highly intricate system of credit controls and allocation, with 70 different interest rate regimes covering 44% of lending. A traditional career path had top graduates from the Ecole Nationale de Administration move to the Grand Corps of the Inspection general des finances and from there to the Ministry of Finance. After a rapid rise through the ranks they were placed as senior executives in the nationalized banks. The whole system gave the government considerable power over how credit was allocated in the economy. It also permitted the control of the volume of credit by direct means, rather than through indirect means used elsewhere.
There was a monopoly on negotiating securities transactions held by stock exchange brokers (agents de change) with fixed commissions and low capitalizations. The individuals recognized as security brokers had their status changed to companies. They were permitted to expand into managing portfolios and to raise capital by selling stock to other financial firms. By the end of 1990, 80% of the firms had been purchased by banks, while insurance companies took over others. Few remained independent. France moved much more in the direction of the universal banking model in which banks participated in all aspects of the financing process, including selling securities. …