Order Code RL30516
Report for Congress
Received through the CRS Web
Mergers and Consolidation Between Banking and
Financial Services Firms:
Trends and Prospects
Updated October 15, 2002
William D. Jackson
Specialist in Financial Institutions
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Mergers and Consolidation Between Banking and
Financial Services Firms: Trends and Prospects
Summary
Competitive, legislative, and regulatory developments in financial services in
the United States have all contributed to significant industry changes here. The
landmark financial services legislation, the Gramm-Leach-Bliley Act (P. L. 106-102,
GLBA) is speeding ongoing changes in the United States financial services industry.
Overall, it allows providers flexibility in responding to economic trends. Global and
especially technological advances are likely to affect the financial services industry
in ways yet unforeseen. Such factors are part of the larger picture reflected in recent
mergers among large banking organizations in Europe, Japan, and the United States,
and expanding product lines of domestic financial institutions.
Mergers of very large banking organizations in Europe and Japan move the size
of single organizations to new heights. American providers of financial services are
similarly growing through combinations, as exemplified by the fusion of J.P. Morgan
into the Chase Manhattan companies, and the joining of Wachovia and First Union.

Increasing diversification of financial services offered within single entities in
the United States is occurring through acquisitions and internal development of new
businesses. GLBA allowed new forms of affiliations among banks, insurance, and
securities firms and increased diversification within individual financial
organizations. In response to this increased flexibility, many institutions are taking
advantage of the newly authorized organizational arrangements.
Specific changes for policy consideration depend on the predominant ways in
which the financial system unfolds. Policymakers can evaluate policy issues better
once global economies have gained some experience with the new dynamics in the
financial system. For now, observers will be watching to see how the marketplace
continues to respond to the new conditions resulting GLBA, multinational financial
integration, and volatile economic conditions around the world. GLBA clearly ended
the isolation of the investment banking business from the commercial banking
businesses, through its repeal of the Glass-Steagall Act of 1933. In the current
financial climate, the financing of Enron Corporation and other tarnished
corporations through both securities and loans from prominent financial holding
companies has called the commercial and investment banking combination of
businesses into some question, in Congress as well as in the financial press.

CRS will update this report as developments warrant. Further information on
financial services issues of current interest to Congress appears in the CRS Electronic
B r i e f i n g B o o k o n B a n k i n g a n d F i n a n c i a l S e r v i c e s
[http://www.congress.gov/brbk/html/ebfin1.shtml].

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Contents
Consolidation Worldwide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Biggest Mergers Worldwide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Mergers of Large Financial Institutions in the United States . . . . . . . . . . . . . 3
Expanding Lines of Business for U.S. Financial Companies . . . . . . . . . . . . . . . . 4
Areas of Public Policy Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
For Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
List of Tables
Table 1. The World’s 15 Largest Publicly Held Financial Companies . . . . . . . . . 2
Table 2. Number of Financial Service Businesses, Selected Years 1985-1999 . . 6
Table 3. Greatest Merger and Acquisition Activity, by Value of Industry
Rankings, Year to Date 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

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Mergers and Consolidation Between
Banking and Financial Services Firms:
Trends and Prospects
Two types of structural trends affecting banking and financial services firms
have been prominent. First, there have been amalgamations of financial companies,
including banks, into ever-larger entities generally within the same industries.
Second, there has been increasing diversification of financial services offered within
single entities, whether through acquisitions or internal development of new
businesses, crossing traditional industry lines. Ultimately, these size and product
changes will shape the performance of the domestic and international financial
systems. As nations gain experience with these changes, legislative and regulatory
bodies in the U.S. and elsewhere will be maintaining oversight to evaluate possible
effects. Volatility in the insurance and securities sectors adds impetus to changes in
financial acquisitions as well. Fallout from problems of corporate governance in
nonfinancial sectors may also come to have a large role in the evolution of financial
companies. (For example, banking companies have taken over financial and even
some nonfinancial operations of Enron and Polaroid in 2002.)
Consolidation Worldwide
Consolidation is occurring not only in the United States, but worldwide. Varied
factors are contributing. In Japan, a dominant factor is the belief that the nation
requires larger institutions to ease recovery from serious financial difficulties. In
Europe, the dominant business philosophy is that cross-boundary transactions are
increasing within the European Union, now with a largely common monetary system
and set of business practices, and with former communist countries. The belief
driving change in the United States is that organizations containing diversified
financial services should have a place alongside compartmentalized financial services
firms. Much of the change, not only domestically but worldwide, is taking place
through holding companies, which “hold” controlling stock positions in banks and
other financial companies through two forms of absorption: merger and/or
acquisition. Technically the term “merger” denotes one corporation purchasing
another and absorbing it entirely into its own structure, while “acquisition” means
one (holding) company buying another to “control” it. In this country, most financial
fusions of large size take the form of an acquisition. Canada, too, has moved toward
a holding company-based framework of financial firms’ acquisitions. In the
increasingly international financial economies of a computerized world, new
institutions spring up while existing institutions, feeling threatened, assemble
together in defensive reaction. Prominent observers believe that large bricks-and-
mortar providers of services and small, niche providers are the most likely to survive
the onslaught of their new and more nimble competitors. Those in the middle, in size
or technology, might seem less likely to succeed in a volatile world.

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The Biggest Mergers Worldwide
The government-sponsored fusion of Dai-Ichi Kangyo Bank, Fuji Bank, and the
Industrial Bank of Japan made the resulting trillion-dollar group the largest banking
organization in the world. Table 1 shows how it and another Japanese firm created
by merger as an alternative to collapse, Mitsubishi Tokyo, have kept that nation’s
institutions at the top of the ranks. Both Japanese super-giants, and the European
ones to a lesser extent, have emerged as the result not of strength but of weakness.
(Japanese banks, in particular, keep vast quantities of severely overvalued bad loans
and investments on their books, thereby calling into question their actual asset sizes.)
Three American institutions resulting from acquisitions are among the world’s
largest, as they were years ago. The U.S. companies Fannie Mae and Freddie Mac
have grown to dominate the mortgage market without major acquisitions, however.
Table 1. The World’s 15 Largest Publicly Held Financial
Companies
Company
Country
Assets, $Trillions
Mizuho Holdings
Japan
$1.15
Citigroup.
U.S.
1.05
Allianz
Germany
0.84
Sumitomo Mitsui Banking
Japan
0.82
Deutsche Bank
Germany
0.81
Fannie Mae
U.S.
0.80
Mitsubishi Tokyo Financial Group
Japan
0.76
UBS
Switzerland
0.75
BNP Paribas
France
0.73
HSBC Holdings
U.K.
0.69
J.P. Morgan Chase
U.S.
0.69
Bayerische Hypo Bank
Germany
0.65
ING Group
Netherlands
0.63
Bank of America
U.S.
0.62
Freddie Mac
U.S.
0.62
Source: “The World’s 100 Largest Public Financial Companies,” Wall Street Journal, Oct. 14, 2002,
p. R11. Data are based on each company’s fiscal 2001 results (fiscal 2002 for Japanese companies.)
Fluctuations in exchange rates, affecting the value of the U. S. dollar in which these institutions are
measured, may change rankings. A falling dollar, resulting in fewer yen or euros per dollar, will raise
the dollar sizes of foreign entities while lowering those of U.S. firms.

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Not all mergers succeed. One prominent example, called off before it happened,
was of Deutsche Bank and Dresdner Bank in Germany. That proposed merger would
have created a banking organization that then would then have become the largest
anywhere. Dresdner instead sold itself to the Allianz insurance firm in mid-2001,
in a transaction that weakened the new buyer by mid-2002. Other mergers, here as
well as abroad, which observers had anticipated would become successful also have
not worked out as planned. Such marketplace downside phenomena do not raise
public policy questions if bankers accomplish the mergers within acceptable
guidelines and potential difficulties do not become national or international economic
problems. Should institutions grow so large as to become instruments of national
policy, or pose systemic risks to their economies, however, they are considered to
be “too-big-to-fail”: governmental intervention will almost certainly occur to assure
their survival in the event of difficulty.
Mergers of Large Financial Institutions in the United States
As for banking-based entities, fusions of U.S. institutions beginning in the mid-
1990s significantly changed the country’s financial institutions both in size and
diversification of services. The buoyant economic environment, with its richly
valued stock prices, encouraged corporate deals of all kinds, including in finance.
U.S. banking law changed to encourage large amalgamations by market
extension across America, coast-to-coast or regionally. Major financial legislation:
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (P.L. 103-
328) envisioned these mergers. That Act provided the statutory authority and set the
framework for bank holding companies to acquire banks outside their home states
and for banks to secure branches on an interstate basis. As a result, the share of
industry assets of the ten largest U.S. banking organizations essentially doubled in
the decade ending in 1999, the latest reported time frame, although financial
industries are much less concentrated than others such as railroads.
In terms of notable deals, the most prominent was clearly the process forming
Citigroup, which uniquely mixed domestic and international financial services of
many kinds. It anticipated P.L. 106-102, discussed in more detail below, in its
combination of banking, securities, and insurance businesses into one holding
company. Its formation predated enactment of that law that would ratify all of its
deals, because it had received a special regulatory exemption from the Federal
Reserve. Citigroup continues to expand by acquisition along traditional lines,
including recent deals for European American Bank, Golden State Bancorp in
California, and Banamex in Mexico. The complex formation of J.P. Morgan Chase
included the former Chemical taking over Chase Manhattan, several securities
businesses, and then J.P. Morgan before changing its name. Name change also
occurred after Wachovia absorbed First Union, the latter having been on a value-
destroying path of multiple acquisitions culminating in its unlucky acquisition of the
large CoreStates. Insurance companies, too, are engaging in mega-mergers, most
notably the acquisition of American General Corp. by American International Group
and that of Lincoln Re (Lincoln National) by Swiss Reinsurance Co. of Zurich.
Such mergers are important steps in the deregulation of the traditionally tightly
limited commercial banking and insurance industries, even while finance began

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shifting away from bank loans and deposits to securities throughout America.
Investment banking and other securities firms have become perhaps even more
important than traditional commercial banking to acquirers. Antitrust concerns over
geographic concentration of traditional banking products remain, however: the
Justice Department has required divestiture of branches as a condition of some recent
banking fusions. Antitrust concerns embody societal views that banks should
provide customer services in an atmosphere of some competition: customers ought
not to be charged much more for or be discouraged from loans, deposits, and other
financial services because of declines in numbers of providers. Many believe that
individuals and small businesses become disadvantaged from the creation of large,
complex financial organizations lacking a community orientation. Securities and
insurance companies, lacking any equivalent of the Community Reinvestment Act
which requires banking companies to consider the financial needs of low-to-
moderate-income people and other worthwhile entities in their areas of operation,
might siphon funds away from localities even further, in that view.
Expanding Lines of Business for U.S. Financial
Companies
Industry observers expected further growth and diversification among United
States institutions following ongoing application of legislation enacted in 1999: the
Gramm-Leach-Bliley Act (P.L. 106-102, GLBA). That law eases affiliations among
banking, insurance, and securities firms in the U. S. and increases diversification
within individual financial organizations. Responding to the increased flexibility in
GLBA, institutions had been rapidly making new organizational arrangements.
GLBA has several provisions easing diversification by financial services
companies. Thus, whether through mergers and acquisitions or through startups,
changes are likely to occur. Structurally, companies subject to bank regulation may
expand their array of financial products through several options. GLBA provides for
a financial holding company option and a financial subsidiary option. A new
mechanism is also in place for the Federal Reserve (the Fed) and the U.S.
Department of the Treasury to decide what is an appropriate financial activity,
besides activities authorized by statute in GLBA.
Companies wishing to expand services through a holding company framework
have more latitude to do so post-GLBA. In that measure, Congress repealed
provisions of the 1933 Glass-Steagall Act that had long precluded the affiliations of
banks and securities firms, and provisions of the 1956 Bank Holding Company Act
that formerly precluded affiliations of banks and insurance underwriters. Bank
holding companies wishing to become financial holding companies (FHCs) file
notice of their election to choose new status with the Fed, as do foreign banks under
a modified procedure. FHCs have since grown to prominence. As of October 2002,
635 domestic and foreign financial firms of all sizes have become FHCs.
Another way for commercial banks wishing to expand product lines directly is
through the creation of financial subsidiaries (FS). This arrangement allows banks
to own companies performing financial activities that the banks may perform,
directly, or more significantly, activities that banks may not otherwise engage in

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directly. Banks wishing to do so follow the certification and notification procedures
prescribed by their primary federal regulator, most prominently the Office of the
Comptroller of the Currency, which charters and regulates national banks. The
Federal Reserve and the Federal Deposit Insurance Corporation govern FS of state
banks. An institution’s chartering authority, whether the OCC or a state, must also
permit contemplated activities. Many FS have been insurance agency subsidiaries.
An unforeseen aspect is that despite GLBA’s encouragement, fusions of
insurance and banking companies have not been going on rapidly in the U. S.
Volatile, often low, returns on many lines of insurance underwriting (policy-writing)
and investments deter bankers from becoming buyers. The property-casualty sector
in particular remains unattractive for most FHCs not only following the events of
September 2001, but also because it lacks a nationally uniform system of regulation
such as depository institutions enjoy. The prototype FHC, Citigroup, plans to exit
much of the property-casualty underwriting business it had avidly sought, by
divesting almost all of Travelers Insurance. Citigroup sold 23% of Travelers to
investors as an Initial Public Offering in March 2002, and plans to retain only 9% of
it while spinning off the rest to its own stockholders. In contrast, profits in the
insurance field are generally greater and more predictable in the sales or agency
capacity that banks often undertake directly or through subsidiaries, because policy
losses do not negatively affect the resulting sales commissions.
Insurance companies themselves have been moving slowly into the banking
field following the example of MetLife in 2001. Securities firms are taking on full-
service banking, especially Merrill Lynch, which has come to have major deposits
in the banks it controls under authorization in GLBA. Momentum may be gathering
for both nonbanking industries to increasingly fold banks into their operations,
especially if economic uncertainties increase the attractiveness of federally insured
deposits as safe assets in comparison with securities.
Competition measured as numbers of providers in the nation may continue to
decline. That has been the direction for many years in both banking and other
financial sectors. Table 2 indicates that even prior to GLBA, the number of financial
organizations was declining over time. Only mutual fund complexes (firms running
increasingly popular professionally managed investment companies) increased. Their
number remained small in comparison with the other industries(and apparently has
fallen since the collapse of the stock market bubble.) Table 2 suggests that
overcapacity in financial businesses became reduced prior to GLBA through
consolidation. Customers generally believe that there are still enough providers to
serve them, at least for entities willing to transact business across political boundaries
such as many insurance and securities companies have historically done. Even for
mortgages, the historical major and locationally limited products of savings and loan
associations, a national market developed through brokers and other parties for this
financial product—even though the number of associations shrank sharply because
of losses and failures of firms. After the financial markets peaked in 2000, shrinkage
of financial firms has continued, with layoffs becoming industry practice.
Simultaneously, nonfinancial providers offer new customer choices relating to
financial services. Consumers may access financial services through software
products offered by nonfinancial providers. While internet-only banking has not

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Table 2. Number of Financial Service Businesses, Selected
Years 1985-1999
Businesses
1985
1990
1995
1999
Commercial Banks
14,430
12,347
9,910
8,580
Savings and Loan
3,640
2,358
2,030
1,640
Associations
Life Insurance Companies
2,261
2,195
2,079
1,512
Investment Banking and
6,300
5,800
5,400
5,100
Brokerage Firms
Mutual Fund Complexes
220
361
370
433
Source: Zabihollah Rezaee, Financial Institutions, Valuations, Mergers, and Acquisitions: The Fair
Value Approach (New York, John Wiley, 2001), p. 4.
proven a great success to date, offerings of on-line access of bricks-and-mortar
financial institutions have proven viable. Various kinds of businesses are also
linking their products to other services, directly for advertising revenues or for a slice
of transactions as “agents.” Such new products are increasing competition for
business in this broader sense. A significant possibility along these lines is the
attempt of banking interests to have the Federal Reserve and the Treasury issue a
regulation allowing FHCs to become real estate brokers and property managers,
whose consideration under a procedure legislated in GLBA has been postponed until
2003. Under the same procedure, FHCs have become allowed to become “finders,”
bringing parties to a contract for purchase and sale of many goods and services
together. FHC finders are not allowed to engage in any process requiring a real
estate license, however. In other expansions into e-commerce and non-traditional
businesses, banking companies have taken on trading in the kinds of derivatives that
Enron marketed. UBS Warburg, a unit of diversified banking company UBS of
Switzerland, beat out Citgroup to take on Enron’s trading operations, while the
Office of the Comptroller of the Currency has just allowed a large national bank to
initiate trading in energy derivatives. Using a provision of GLBA known as
“merchant banking,” which allows FHCs to invest in nonfinancial businesses, Bank
One acquired the camera and imaging businesses of the failed Polaroid Corporation.
Yet with the sharp decline in stocks beginning in 2000, the events of September
2001, and weakening in the economy generally, the pace of corporate deal-making
has slowed. Restructuring rather than growth for its own sake seems to characterize
many transactions. The peak in mergers and acquisitions in all industries of 1999-
2000 has subsided, as has activity of this nature in financial services. A few
prominent deals achieve headlines, even while many other firms are selling off pieces
of themselves without fanfare, or for several prominent failed businesses, with
publicity to their creditors. Nonetheless, in the low-key deal environment of 2002,
investment, banking and financial, and insurance transactions remain prominent.
Table 3 presents the year-to-date industry rankings of the ten largest industry sectors
involved in merger activity, in which financial industry deals are important; the
insurance industry’s deals are ranked 16 by its classification.

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Table 3. Greatest Merger and Acquisition Activity, by Value of
Industry Rankings, Year to Date 2002
Classification
Number Value,
$Billion
Drugs, Medical Supplies and Equipment
194
$68.5
Banking and Finance
239
26.1
Computer Software, Supplies, and Services
1072
22.7
Brokerage, Investment, and Management
350
22.4
Consultants
Communications
185
21.1
Electric, Gas, Water, and Sanitary Services
116
17.8
Miscellaneous Services
631
17.3
Printing and Publishing
150
12.1
Broadcasting
129
11.2
Food Processing
79
10.7
Source: “Mergerstat Reports on Industry Rankings, Year to Date 10/14/2002,” on web site
[http://www.mergerstat.com/free_reports/free_reports_industry_rankings.asp], visited Oct. 15, 2002.
Areas of Public Policy Interest
The kinds of government oversight required, particularly to maintain the
integrity of the store of value and means of payment known as money, may be subject
to reexamination as the financial system changes. Rules governing fairness in
competition and consumer protection might need to be revised as well. Antitrust
standards especially may have to become revised. Specific changes for policy
consideration will depend on the ways in which the financial system unfolds. Some
questions that could become subjects of public policy debate include the following.
What may be the effect of the consolidation and diversification of individual
financial services companies? Will the new conglomerates result in efficiencies and
increased profits? Will access to, and the cost of, financial services be improved?
How will changes in the volatile insurance sector affect financial activities,
safety, and, so, financial consolidation? How might greater federal involvement in
property-casualty insurance, in chartering and terrorism reinsurance through federal
funds, affect interindustry relations and fusions?
Will regulators be able to track what is going on? How is industry concentration
likely to be viewed, in contrast to the bankcentric system that existed previously?
Will capital mechanisms built into new laws and international agreements be
appropriate to risk-taking? Will international mechanisms work to coordinate
supervision of multinational enterprises? Will product diversifications overwhelm

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managers and regulators of large, complex banking organizations? How will the
complex financial companies of the future prevent and be prevented from internal
self-dealings? What happens if a gigantic financial institution experiences severe
financial distress? Might gigantic financial enterprises circumvent domestic and
international monetary policies?
Are new regulatory standards, agencies, or tools needed to detect problems and
maintain a sound financial system? Is the Federal Reserve the proper super-regulator
of the integrity of the entire financial system, or should a new federal body have
jurisdiction over all financial firms: banking, insurance, securities, and other
businesses? Might simultaneous investment banking (securities, derivatives) and
commercial banking (loans) activities within the same corporate FHC be generally
viewed as unsafe, anti-competitive conflicts of interest, as they were during the Great
Depression? Did bankers lower their lending standards to get investment, advisory,
and other nontraditional revenues from Enron and other collapsed businesses
including Global Crossing, Adelphia, and WorldCom?
How will local communities and low-and moderate-income individuals and
small businesses be affected by changes leading toward a new system? Should the
obligations of depository institutions to serve the needs of low-to-moderate income
members of their communities be applied to financial conglomerates who do not
offer deposit services to identifiable communities?
These are the kinds of questions that observers can evaluate better once America
has gained more experience with the new dynamics. Observers are still watching to
see how the marketplace responds to the new opportunities offered in GLBA, the
trend toward multinational financial integration, and volatile economic conditions
worldwide. Regulators are already implementing a mode of containment of risks that
may arise from new financial activities, such as limits on direct investments of
banking companies via merchant banking. That practice involves taking a direct
equity position in businesses as part of financing them, a Wall Street/venture capital
practice allowed for FHCs in GLBA. Similarly, the Fed’s proposed clarification of
“firewalls” that define proper transactions inside FHCs that banks can make with
riskier nonbank parts of the same organization, in the form of a proposed
“Regulation W,” may restrain both risks and returns from diversification within
FHCs. GLBA’s bank insurance sales provisions have been contested in court filings
recently, while other parts of the law, including other insurance provisions and
interactions between depository institutions and commercial firms remain open.
Congress will continue to monitor its consequences for financial and nonfinancial
businesses, including interindustry consolidations and resulting business practices.

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For Further Reading
CRS Report RL31459. The Canadian financial system, by Barbara L. Miles.
CRS Report RS20197. Community Reinvestment Act: regulation and legislation, by
William D. Jackson.
CRS Report RS21188. Enron’s banking relationships and congressional repeal of
statues separating bank lending from investment banking, by William D. Jackson
CRS Report RS20724. Federal deposit and share insurance: proposals for change,
by William D. Jackson.
CRS Report RL31045. Financial risk: an overview of market and policy
considerations, by Mark Jickling.
CRS Report RL30891. Global markets: evaluating some risks the U.S. may face, by
Craig K. Elwell.
CRS Report RS20804. Largest mergers and acquisitions by corporations: 2001,
by John Williamson.
CRS Report RS21147. Largest mergers and acquisitions by corporations: 2002,
by John Williamson.
CRS Report RL30375. Major financial services legislation, the Gramm-Leach-
Bliley Act (P.L. 106-102): an overview, by F. Jean Wells and William D. Jackson
CRS Report RS21104. Merchant banking: mixing banking and commerce under
the Gramm-Leach-Bliley Act, by William D. Jackson and Gary W. Shorter.
CRS Report RS21153. Optional federal chartering for insurers: legislation and
viewpoints, by S. Roy Woodall.
CRS Report RS21134. Should banking powers expand into real estate brokerage
and management?, by William D. Jackson.

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