Order Code RL30516
CRS Report for Congress
Received through the CRS Web
Mergers and Consolidation Between Banking and
Financial Services Firms:
Trends and Prospects
Updated August 08, 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, WorldCom, 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.

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 . . . . . . . . . . . . . 2
Expanding Lines of Business for U.S. Financial Companies . . . . . . . . . . . . . . . . 4
Areas of Public Policy Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
For Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
List of Tables
Table 1. The World’s 15 Largest Publicly Held Financial Companies . . . . . . . . 3
Table 2. 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 some 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 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

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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.
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. 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. Some
observers of banking and commerce classify the diversified General Electric
Corporation among the largest businesses doing financial services as well.
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 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. This 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

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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.

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

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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.
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 a wave of 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. Securities-

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based investment bank holding companies, such as Merrill Lynch, have similar
potentials under Securities and Exchange Commission regulation.
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
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.
Industry analysts base the first post-GLBA acquisition of a FHC buying an insurance
company of any size, Banc One’s planned purchase of Zurich Life for late in 2003,
apparently as much on its distribution (selling agency) as its pathbreaking
underwriting aspects.

Insurance companies themselves have been moving slowly into the banking
field following the example of MetLife becoming a FHC 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 keep the attractiveness of federally insured
deposits as safe assets high in comparison with securities.
Competition measured as numbers of providers in the nation seems likely to
continue its decline. An overcapacity in financial businesses became reduced over
time before GLBA through consolidation. In sectors except securities, the top ten
firms have increased their share of assets since the mid-1990s while the number of
participants shrank. The number of commercial banks fell from about 25,000
before World War I to about 8,100 in 2001. Securities brokers and dealers numbered
more than 9,500 in 1987 and only 7,000 or so in 2001. Life insurance underwriters
fell from about 2,200 in 1985 to less than 1,600 in 2000. Today’s approximately
3,200 property-casualty insurers are generally expected to fall by perhaps one-third
in the near future. Most savings and loan associations vanished years ago, through
waves of supervisory mergers—like the Japanese mode that increasing size is a
defense against bad loans—as well as by ultimate collapse.

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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, with layoffs, has continued to date even as rising expectations for
economic activity have reemerged.
Simultaneously, nonfinancial providers offer new customer choices relating to
financial services. Consumers may use financial services through software products
offered by nonfinancial providers. While internet-only banking has not been 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 could have been 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, under a procedure legislated in
GLBA. They have not issued it. 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. The Office of the Comptroller
of the Currency has allowed a large national bank to initiate trading in energy
derivatives. The Federal Reserve has just allowed bank holding companies (and, thus
FHCs), to enter further into agricultural and energy-related commodities derivative
businesses. 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.
Rebounding from 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 shown renewed signs of life. Restructuring and also growth for its
own sake seems to characterize many transactions. Financial business transactions
remain prominent. Table 2 presents the year-to-date industry rankings of the ten
largest industry sectors involved in merger activity, in which financial (banking,
investment, insurance) industry deals are prominent.
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

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Table 2. Industry Merger and Acquisition Activity, Year to Date
2003, by Value of Deals
Classification
Number
Value of base
of Deals
equity price
offered, $Billion
Banking and Finance
216
$36.0
Computer Software, Supplies, and Services
745
28.3
Drugs, Medical Supplies and Equipment
167
22.1
Retail
182
16.6
Miscellaneous Services
428
13.6
Broadcasting
179
11.4
Brokerage, Investment, and Management Consulting
285
10.4
Oil and Gas
61
8.8
Insurance
179
8.6
Electric, Gas, Water, and Sanitary Services
91
8.0
Source: “Mergerstat Reports on Industry Rankings, Year to Date 8/6/2003,” on web site
[http://www.mergerstat.com/free_reports/free_reports_industry_rankings.asp], visited August 7, 2003.
competition and consumer protection might need revision as well. The 108th
Congress is addressing many of the latter as it reexamines the Fair Credit Reporting
Act. 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? Legislation includes the
Terrorism Risk Insurance Act of 2002, P.L. 107-297, and in the 108th Congress, S.
1373, the Insurance Consumer Protection Act of 2003.
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

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bypass domestic and international monetary policies? A measure known as the
United States Financial Policy Committee for Fair Capital Standards Act seeks to
address approaches to these questions in the current Congress.
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
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.
Especial interest in FHC and bank real estate activities has been shown in not only
banking, but also appropriations, measures in the 108th Congress. The Community
Choice in Real Estate Act, identical bills H.R. 111 and S.98, as well as an
Appropriations Committee amendment to the Treasury funding package, seek to fine-
tune GLBA.

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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 Issue Brief IB10106. Insurance regulation: background and issues, by
Baird Webel and Carolyn Cobb.
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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