Order Code RL30516
Report for Congress
Received through the CRS Web
Mergers and Consolidation Between Banking and
Financial Services Firms:
Trends and Prospects
Updated May 15, 2003
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 continue 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 or contracting 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,
not to mention the increasing span of Citigroup.

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 have taking
advantage of expanded organizational arrangements. Some have done so to marked
advantage, while others have retreated from their diversifications.
Specific changes for policy consideration depend on the predominant ways in
which the financial system unfolds. For now, observers will be watching to see how
the marketplace continues to respond to the conditions resulting from 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 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 and 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
For Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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. Industry Merger and Acquisition Activity, Year to Date 2003,
by Value of Deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 absorbed 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 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 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, 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. Other mergers, here and abroad, which
observers had anticipated would become successful also have not worked out. 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 “too-big-to-fail”: governmental intervention will
almost certainly occur to assure their survival in case of difficulty. Such is the
financial situation of Japan. Its government has propped up enormous bad loans and
investments in the financial system, yet still encourages mergers of banks and other
financial companies through deposit insurance, tax, and regulatory mechanisms.
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, before GLBA, although financial industries are much less
concentrated than many others.
In notable deals, the most prominent was the formation of 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
expanded by acquisition along traditional lines, including recent deals for European
American Bank, Golden State Bancorp in California, and Banamex in Mexico, and
into the securities and insurance businesses. 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. Insurance companies, too, are engaging in
mega-mergers, most notably the acquisition of American General by American
International Group and of Lincoln Re (Lincoln National) by Swiss Reinsurance Co.
.

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Such mergers are important steps in the evolving deregulation of the
traditionally tightly limited commercial banking and insurance industries, even while
finance began 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
financial fusions have disadvantaged individuals and small businesses upon creation
of large, complex financial organizations lacking a community orientation.
Securities and insurance companies, 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., including those owned by
foreign parties, and increases diversification within individual financial
organizations. Responding to the increased flexibility in GLBA, institutions have
been rapidly making new organizational arrangements.
GLBA has several provisions easing diversification by financial services
companies. 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 and the Department of the Treasury to decide what
is an appropriate financial activity, besides activities authorized by name 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 parts 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. More than 600
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 doing financial activities that the banks may do, directly, or more
significantly, activities that banks may not otherwise engage in directly. Banks
wishing to do so follow the certification and notification procedures prescribed by

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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 are insurance agency subsidiaries.
An unforeseen aspect is that despite GLBA’s encouragement, fusions of
insurance and banking companies have not been going on rapidly Volatile, often
low, returns on many lines of insurance underwriting (policy-writing) and
investments deter bankers. 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, reversed its course to exit the
property-casualty underwriting business it had avidly sought, by divesting Travelers
Insurance. In contrast, profits in the insurance field are generally greater and more
predictable in the sales or agency capacity that banks often undertake through
subsidiaries, because policy losses do not negatively affect 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 GLBA. Momentum may be gathering for both
nonbanking industries increasingly to 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 shows that even before 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 before 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
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

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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.
slice of transactions as “agents.” Such new products are increasing competition for
business in this broader sense. A significant possibility like that 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. 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. The Federal
Reserve has not allowed FHC finders 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 failed trading operations, while the
Office of the Comptroller of the Currency has 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 pieces
of themselves without fanfare, or for several prominent failed businesses, with
publicity to their creditors. Nonetheless, in the low-key deal environment of 2003,
banking and financial transactions remain prominent. Table 3 presents the year-to-
date industry rankings of the largest industry sectors involved in merger activity, in
which financial (banking, investment sectors) industry deals are important by value;
although the insurance industry’s many smaller deals are ranked 28th collectively by
its classification.

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Table 3. Industry Merger and Acquisition Activity, Year to Date 2003,
by Value of Deals
Classification
Number of
Value of base equity
Deals
price offered,
$Billion
Banking and Finance
115
$20.1
Miscellaneous Services
211
10.9
Broadcasting
131
9.7
Computer Software, Supplies, and Services
409
8.5
Oil and Gas
32
6.6
Drugs, Medical Supplies and Equipment
99
6.5
Toiletries and Cosmetics
10
6.0
Electric, Gas, Water, and Sanitary Services
60
5.1
Paper
20
3.2
Electrical Equipment
87
2.8
Brokerage, Investment, and Management Consulting
168
2.7
Leisure and Entertainment
93
2.6
Chemicals, Paints, and Coatings
46
2.6
Instruments and Photographic Equipment
34
2.4
Wholesale and Distribution
115
2.4
Real Estate
31
2.4
Transportation
33
2.4
Food Processing
36
2.1
Mining and Minerals
16
1.9
Communications
80
1.9
Primary Metal Processing
23
1.8
Printing and Publishing
59
1.7
Automotive Products and Accessories
23
1.4
Apparel
19
1.4
Beverages
11
1.2
Construction Contractors and Engineering Services
79
1.2
Retail
82
1.2
Insurance
104
1.0
Source: “Mergerstat Reports on Industry Rankings, Year to Date 5/13/2003,” on web site
[http://www.mergerstat.com/free_reports/free_reports_industry_rankings.asp], visited May 13, 2003..

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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?
Will weaknesses in securities markets persist, leading to further reversals of
diversification into securities brokerage and merchant banking?
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, potentially in chartering and as legislated for terrorism
reinsurance through federal funds, affect interindustry relations and fusions?
Will capital mechanisms built into new laws and international agreements such
as the proposed “Basel II standards” be appropriate to risk-taking? Will international
mechanisms work to coordinate supervision of multinational enterprises? Will
product diversifications overwhelm managers and regulators of large, complex
banking organizations? How will regulators fully prevent the complex financial
companies from internal self-dealings? What happens if a gigantic financial
institution experiences severe financial distress? Might gigantic financial enterprises
bypass 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 financial firms: banking, insurance, securities, and other
businesses? Since American finance now resembles that of European countries so
much more, should this nation adopt some of their arrangements including the
separation of monetary policy from financial regulation? Might simultaneous
investment banking (securities, derivatives) and commercial banking (loans)
activities within the same corporate FHC become generally viewed as unsafe, anti-
competitive conflicts of interest, as they were during the Great Depression? In this
vein, did bankers lower their lending standards to get investment, advisory, and other
nontraditional revenues from Enron and other collapsed businesses such as 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 (“Community Reinvestment Act”) be applied to
financial conglomerates who do not offer services to identifiable communities?
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

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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 Federal Reserve’s clarification of
“firewalls” that define proper transactions inside FHCs that banks can make with
riskier nonbank parts of the same organization, in “Regulation W,” may restrain both
risks and returns from diversification within FHCs. Insurance interests have
contested GLBA’s bank insurance sales provisions in court filings recently, while
other insurance provisions and interactions between depository institutions and
commercial firms remain open. In the broad context of restraining risks similar to
the terrorist attacks of 2001, regulators and representatives of the largest financial
firms are taking steps to safeguard their operational and financial viability. Congress
will continue to monitor consequences of financial developments, including
interindustry consolidations and resulting business practices, in a regulatory context.

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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 RL31348. Enron and stock analyst objectivity, by Gary Shorter.
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 RL30514. Global capital market integration, by Craig K. Elwell.
CRS Report 31873, Homeland security: banking and financial infrastructure
continuity, by William D. Jackson.
.
CRS Report RS21147. Largest mergers and acquisitions by corporations: 2002,
by John Williamson.
CRS Report RS21415. Largest mergers and acquisitions by corporations: 2003,
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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