A brief overview of trends in the UK, US and Japanese Financial Markets

Focus on three market – The US – The UK – Japan Structural change in banking market around the world since 1980s. – Increased competition – New technology – Competition from new entrants – Deregulation – Increased diversification – Merger activity

The United Kingdom (UK) Structural change have impacted on the UK. Due to intense competition in corporate sector banking and international banking, UK banks maintain profitability by diversifying their business in late Bank diversified other areas of financial services. – Entered mortgage market to focus on domestic retail banking market(1981) – UK clearing banks entered into investment activities after ( 1986, Big Bang in London stock exchange) – Recently, UK banks have diversified into insurance: life insurance  bancassurance – Increased off-balance sheet activities.

Other financial institutions diversified areas of banks Following deregulation associated with building societies Act, building societies are allowed to provide: – Unsecured loans – Credit cards – Money transmission services – Life and general insurance – Unit trust,so on The recent building society act remove remaining restrictions. – Insurance companies, numbers of large super market and retailers also get banking licenses. High competition in UK financial market has led to mergers. – Lloyds Bank + Trustee Saving Bank – take over of NatWest Bank by Royal Bank of Scotland

The United State (US) Between 1980 and 1998, there were 8000 bank mergers ( $2.4 trillion in acquired asset) Total number of bank:  s _1990s – due to removal of previous intrastate and interstate banking restriction “Mega mergers” ( more than $ 1 billion in assets) Late 1990s, towards even larger scale mergers emerged_“Supermegamergers” ;(more than $100bil each) 9 out of 10 largest M&A in US history in (any industry) occurred during 1998.

Highest profile of supermegamergers- Citicorp and Travelers. – Total assets of about $700 billion. – Estimated customer base of over 100mil in 100countries. – As first truly “ Global Universal Bank”. Universal bank _bank which provides a full range of commercial banking,investment banking and insurance services. Significant feature of Citicorp –travelers merger – Merger was approved although it breached Glass-Stealgall Act(1933) – Glass-Steagall Act prohibited universal banking. Financial Services Modernization Act (1999) repeals the restriction of Section 20 and 32 of the Glass-Stealgall. Section 4 of the Bank Holding Company Act allows creation of new “ Financial Holding Companies” – Engage in statutorily provided list of financial services: insurance, underwriting securities and merchant banking activities. J.P.Morgan and Chase Manhattan is the third largest bank merger with $30billion.

Japan Poor performance of Japanese banks in recent years was caused by : Financial system focused on volume than profitability up to early 1990s. Assets quality problem following the collapse of the Japanese bubble economy in 1990.

Banking sector was used as an instrument of industrial policy government. – Recycle savings to provide Japanese Industry with very low cost investment funds. – Convey system : bank with financial difficulty rely on government to organize rescue  leads to moral hazard. – Banks ignore borrower’s credit quality. A large proportion of bank shares were owned by Japanese corporations who were also borrowers  little pressure to improve their profitability Banks has undertaken large amount of collateralized lending during 1990s. – Collapse of asset bubble  bankruptcy  collateral(fall)  asset quality problem – Profit (low)  unable to make adequate provisions against bad loans. Government pressure banking sector to increase profit. In March 1999, Japanese government injected capital totaling yen7.5trillion into 15 largest banks, repayable in 10years.

Banks take advantage of potential economies of scale to increase profitability  Mergers Under old regulatory regime, – Difficult to merge or to fail  overbanked Under new regulatory regime, – Encourage mergers of larger banks – Allow other banks to fail.