Page 511 - Introduction to Business

CHAPTER 14 Understanding the Financial System, Money, and Banking 485

Third, regulators conduct on-site exams of institutions to evaluate their safety
and soundness. Examiners visit institutions, talk with employees, evaluate credit
records and other financial activities, and obtain firsthand information about their
performance. Institutions identified as relatively risky can have sanctions drawn
against them in the form of restrictions on risky activities. For example, a bank
could be forced to sell risky securities or certain loans.
Fourth, and last, regulators can establish rules concerning permissible activities
of financial institutions. After the Great Depression, strict regulations were put into
place in the United States that essentially separated banks, securities firms, and
insurance companies. By restricting their asset powers, competition between dif-
ferent kinds of financial institutions was reduced, and this decreased the number of
financial institution failures.
However, regulatory barriers among banks, securities firms, and insurance
companies have gradually eroded over time. Each type of financial firm found
ways to get around restrictions. For example, banks began offering securities
services outside the United States and, therefore, avoided U.S. regulations pro-
hibiting such services. Securities firms started offering short-term, money market
accounts to their customers that were similar to deposit accounts at banks.
Another force for change was rising competition among financial institutions
on a global level. These changes eventually led to the deregulation of financial
institutions’ asset powers. In the European Union, recent financial deregulation
under the Second Banking Coordination Directive of 1988 and the establishment
of the single market for financial services in 1993 allow individual institutions
to offer a full menu of financial services, including bank deposits and loans as well
as securities and insurance services. In the United States, the Financial Services Financial Services Modernization Act
Modernization Act of 1999 similarly deregulated the financial services powers Legislation passed in 1999 that allows
banks, securities firms, and insurance
of banking institutions to include securities and insurance activities. Moreover,
companies to freely compete with one
due to economic and financial crises in the 1990s, the Japanese Big Bang led another
to deregulation that likewise allowed the formation of financial supermarkets
comprising banks, securities firms, and insurance companies. A financial institu-
tion that offers all three types of financial services is known as a financial holding financial holding company A
company. conglomerate financial services firm
that can offer its customers banking,
Structural reforms due to financial deregulation around the world in the 1990s
securities, and insurance services
continue today and are transforming financial systems. One implication of these
changes is the ability of financial institutions to take new financial risks and earn
higher returns. Another implication is that institutions are more diversified than in
the past in the sense of offering a wider variety of financial services to customers.
Finally, another important change is the formation of mega-institutions that are
extremely large in size. As noted in the opening vignette, in 1999 three large Japan-
ese banks merged to form the world’s first trillion-dollar bank, named Mizuho Hold-
ings. With $1.2 trillion in total assets, Mizuho exceeded Deutsche Bank’s $735 billion
in assets in that year. Large mergers are also occurring in the United States and
Europe.
Most of the consolidation movement in financial institutions is taking place on consolidation movement The wave of
a continental basis in the United States, Europe, and Asia. Intercontinental, or mergers and acquisitions among
financial institutions that has been
across-the-water, consolidation has been limited so far. However, certainly the next
sweeping the world in recent years
merger wave will involve the formation of international institutions that are truly
global in nature.
reality Is the bank in which you have deposits insured by the government?
CH ECK Why should you check this?

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