Economic Drivers of Structural Change in the Global Financial Services Industry

Abstract

Consolidation has been a fact of life in the financial services sector in recent years, and these structural changes in the industry have created the ample strategic turbulence that has confronted senior management teams and boards of banks, insurance companies, asset managers and securities firms. The drivers include advances in transaction and information technologies, regulatory changes, geographic shifts in growth opportunities, and the rapid evolution of client requirements, which have obliged most financial firms to rethink their roles as intermediaries. Many have been acquired, while others have become consolidators, sometimes damaging their own shareholders' interests in the process. Financial sector reconfiguration is likely to accelerate as a result of the global market turbulence that began in 2007, with governments either forcing or encouraging combinations of stronger and weaker banks in an effort to stem the crisis. In the process, financial firms that are ‘systemic’ in nature and had a major role in creating the crisis are likely to come out of it with even larger market shares – a development that is not likely to be healthy for the financial system going forward. Given the levels of socialization of risk represented by the widespread use of public guarantees to firms judged too big or too interconnected to be allowed to fail, how will the associated risk of moral hazard be addressed, and by what types and levels of regulation? What will be the effects - for the shareholder, and for society as a whole? And can a version of ‘the polluter pays’ principle, developed to counter environmental market failure, be employed to promote financial market stability going forward? Through it all, the underlying drivers of global financial intermediation remain basically unchanged, and will reassert themselves once the hurricane has passed. The purpose of this article is to provide a helicopter overview of the key strategic issues that drive strategic successes and failures, and of the empirical evidence available so far, with the aim of answering some key questions. Has consolidation represented a wise choice for the industry? Has bigger - or broader - turned out to be better? Or has it merely served to create a bigger, broader crisis? Along the way, the article provides some sensible frameworks, or roadmaps, of financial intermediation economics that firms can apply in thinking through their own strategic positioning and execution.