Chapter 12 Financial Conglomerates
- International Monetary Fund
- Published Date:
- August 1999
12A. Financial Conglomerates: Securities Industry Perspective
This paper is written from the perspective of the securities industry.1 Less than seven months ago my perspective would have been appropriately limited. Then I was the General Counsel of Salomon Inc., a company engaged principally in the securities business, with some operations in the trading of physical commodities and in development of oil properties in Siberia. The securities business of the Salomon group was conducted by various operating subsidiaries bearing the name “Salomon Brothers.” The business included an investment bank, which provided financial advice to companies and governments, including advice on mergers and privatizations, and underwrote new offerings of securities, as well as a securities dealer making secondary markets in a wide range of fixed income and equity instruments. The dealing operation included activities in swaps and other derivatives, as well as foreign exchange. Salomon’s client base was almost exclusively limited to institutional investors, with no direct marketing to retail customers. We had begun to address this gap in our distribution capabilities through a special arrangement with Fidelity Investments. We also had a separate and successful business trading financial instruments for the firm’s own account, based on a variety of arbitrage strategies. Our proprietary trading business produced widely variable results on a quarter-to-quarter basis but tended to be highly profitable over time. Finally, we had a relatively small but growing asset management business, including both mutual funds and separately advised accounts.
Neither the investment bank nor the equity sales and trading business consistently earned profits on a global basis during the 1990s. Both businesses were burdened by the need to invest heavily to build a global business. In addition, Salomon had not adequately penetrated the bracket of firms that consistently led the largest and most lucrative investment banking deals. As a consequence Salomon’s overall corporate profitability tended to turn on the success of fixed income trading and the results of the proprietary trading business. Quarterly performance was relatively volatile. Since 1994 Salomon’s debt had been rated BBB by the major rating agencies, while our principal competitors achieved ratings of A or better. This rating differential increased our cost of financing inventory and made us less attractive as a counterparty to credit-sensitive transactions, such as interest rate swaps. It probably also had a negative and reinforcing effect on our ability to win mandates for public offerings and privatizations.
These difficulties made Salomon receptive to an appropriate combination. On September 24, 1997, Salomon and Travelers Group announced that Salomon would merge with Smith Barney, a subsidiary of Travelers, to form Salomon Smith Barney. The merger closed on November 28, 1997. While Salomon Smith Barney is the largest single component of Travelers Group, the group also includes significant operations in the underwriting of both life and property/casualty insurance, a consumer finance company, and a retail marketing company that concentrates on selling life insurance products and long-term investments, such as annuities and mutual funds.
The creation of Salomon Smith Barney under the Travelers umbrella was attractive from at least three points of view. First, Salomon and Smith Barney had complementary strengths as securities companies. As noted earlier, Salomon Brothers was an industry leader in the trading and underwriting of fixed income securities, in providing financial advice to governments and corporations with respect to mergers, acquisitions, and privatizations, and in trading a wide range of financial instruments for the firm’s own account. In addition, Salomon had substantial operations in London, Tokyo, Hong Kong SAR, and Frankfurt and offices in 24 countries. It was a recognized global firm. Smith Barney was a leading participant in the business of trading and underwriting equity securities, ranking number one as a market maker in the United States over-thecounter equities market. Smith Barney was the second largest retail broker in the United States, with over 10,000 financial consultants generating over $3 billion in annual commission revenue for the company. It also had a significant presence in asset management, with over $150 billion under management, generating over $1 billion in annual advisory fee revenues. Finally, Smith Barney was the largest underwriter of state and municipal securities in the United States, a business from which Salomon Brothers had withdrawn ten years earlier. By combining the two operations Salomon Smith Barney became capable of providing a full menu of services to its clients, at both the wholesale and retail level.
Second, the combination should achieve outright cost savings or realize economies of scale. When the merger was announced, we projected we could reduce head count for the combined firm by at least 1,500 people, and that reduction has effectively been achieved. In addition, necessary expenditures would be spread over a larger revenue stream. For example, the costs of getting ready for Year 2000 and EMU will be significant for every large global financial intermediary. These expenditures should be more affordable for large-scale organizations. Economies of scale should also be available for the proliferating electronic trading systems. A similar analysis should also apply to the risk management systems needed to support the accelerating development of new financial instruments.
Third, by joining the Travelers family of companies, Salomon gained the stability of a much larger organization, with a more diversified mix of business. Approximately two-thirds of the Travelers Group’s net income for 1997 derived from its insurance and consumer finance operations, rather than from Salomon Smith Barney’s investment services. This larger scale and greater balance offer shareholders a less volatile stream of earnings and creditors a lower overall risk profile and a larger capital base. As a consequence, Travelers and Salomon Smith Barney enjoy a higher credit rating (AA- and A, respectively) than Salomon. The combined Travelers Group, including Salomon, had 1997 revenue of $37.6 billion, net income of $3.1 billion, and at the end of the year had total assets of $386 billion and stockholders’ equity of over $20 billion.
The task of implementing the merger was still in progress when, on April 6, 1998, Sandy Weill and John Reed announced an agreement to merge Travelers Group and Citicorp to form Citigroup. The announcement came only six weeks after Weill and Reed first met to discuss the possibility of such a merger. The rapidity of the agreement and the very small group participating in the merger discussions precluded detailed decisions on how the combined enterprise would operate. The primary strategic theme underlying this transaction is distribution. The thesis is that there is a huge opportunity to enhance combined revenues by using the superb distribution channels of both groups to sell the wide range of products created by both groups. For example, Citibank’s vast network of over 1,000 branches located in more than 40 countries around the world could be helpful in distributing the annuities, mutual funds, and other investment vehicles sponsored by various Travelers Group companies. Or Citibank could offer student loans through Primerica, a Travelers subsidiary, and mortgage loans through the Financial Consultants of Salomon Smith Barney. The aim is to create a consumer franchise based on a universally recognized brand name, creating intrinsic value for the distribution of consumer financial products comparable to that achieved by consumer products companies, such as Procter & Gamble or Gillette. To serve Salomon Smith Barney’s institutional-investment banking clientele, there are exciting opportunities to enhance advice and assistance in executing capital markets transactions with the ability to provide credit directly as a principal. As with the Salomon-Travelers combination, significant cost savings through economies of scale may occur. Further, the portfolio of business lines will grow, providing increased stability through diversification of risk. The new combination will be the largest financial services company in the world and a leading participant in all three of the business categories addressed in today’s discussion.
The Citigroup transaction, which combines banking, securities, and insurance activities under one corporate umbrella, is undertaken under U.S. laws that regard banking, insurance, and securities as essentially separate activities. For example, normally U.S. bank-holding companies are not permitted to acquire insurance underwriters. As a result, the Travelers-Citicorp merger cannot be structured as an acquisition of Travelers Group by Citicorp. However, a company that becomes a bank-holding company by acquiring a bank is afforded a grace period of two years, which can be extended by up to three additional years, to divest any insurance underwriting activities it carries on at the time it acquires the bank. Accordingly, Travelers proposes to acquire Citicorp and become a bank-holding company, and proposes to divest its insurance underwriting activities within the prescribed period, unless of course the law is changed in the interim to make that divestiture unnecessary.
Legal barriers between banking and securities activities have also existed since the 1930s, but under current law these barriers are lower than they were. Securities firms affiliated with banking-holding companies are not permitted to be engaged principally in the business of underwriting or dealing in securities issued by nongovernmental (and certain governmental) entities. In 1996, the Federal Reserve Board increased 25 percent (from 10 percent) the percentage of a dealing affiliate’s revenues that could be derived from these “ineligible” sources without violating the “principally engaged” requirement. It also defined as “eligible” revenues interest income on most corporate and all public securities. These changes seem to make it possible for even the largest U.S. securities firms to become affiliates of a bank-holding company without significantly changing their sources of revenues. U.S. bank-holding companies are subject to dollar limits on their equity holdings in non-U.S. companies, both affiliates and portfolio investments. The Fed has proposed to replace these fixed dollar limits with limits based on percentages of capital.
The Citigroup transaction provides a substantial impetus for U.S. policymakers once again to address reform of the legal framework governing financial institutions. The transaction builds on developments in the capital markets and the business operations of financial institutions. It seeks to capture significant economic benefits made available by such developments. Absent legislative reform, some of those benefits may not be realized.
Why are we seeing so many combinations of large financial institutions, including an increasing number of combinations that cross the lines between these three categories? Why did Citicorp and Travelers come to view these three businesses as complementary and as belonging in one corporate family? Although in the United States we are used to thinking of banking, securities, and insurance as three separate lines of business (each with its own regulatory scheme), the lines between these businesses are rapidly blurring. Indeed, these three businesses are rapidly converging. Labeling firms as securities dealers, commercial banks, or insurance companies is increasingly a construct based on legal definitions and regulatory agency jurisdiction, as opposed to reflecting economic reality.
Financial institutions perform essentially four functions:
the direct transfer of value through the payment system;
the accumulation of savings for investment;
the allocation of those savings to investment opportunities; and
the transfer of risks, including actuarial, natural, and financial risks.
Traditionally, commercial banks dominated the first three of these activities. Insurance dominated the fourth, or risk-shifting role. Securities firms helped provide a bridge between the second and third function, employing the mechanism of securities offerings to match savings available for investment with those corporate and governmental entities needing capital. At a rapid and accelerating pace, however, all three types of institutions have become increasingly involved in all four activities. I would like to elaborate on this central point.
First, we have seen an increasing functional equivalence between the various categories of financial instruments created and marketed by the three types of institutions. One example is the competition between bank-issued certificates of deposit and short-term corporate debt securities. Bank deposits have been displaced to a substantial extent by money market funds, particularly after such funds were enhanced through marriage to a checking account. Variable annuities have become an increasingly important alternative to mutual funds as a vehicle for pooled investment in equity and debt securities. Other hybrid investments have been created, such as instruments in which return of principal may be promised but interest payments are tied to the return of an equity index.
Second, many functions previously performed in private transactions by commercial banks are now performed through the public capital markets. Competition from the capital markets has created tremendous new business opportunities for securities firms. Mortgage-backed securities, for example, have greatly reduced the role of banks as holders of mortgage debt and produced a new and quite liquid alternative investment opportunity for those fixed income investors prepared to master the complexities of prepayment risk. The securitization phenomenon has spread from mortgages to auto loans, credit card portfolios, and a wide variety of other receivables arising from financing arrangements and other obligations. This secular shift towards capital market activity has helped fuel the globalization of financial markets, enhancing liquidity and permitting greater diversification of risk for investors across product types and risk categories.
Third, the blurring of traditional lines between functions served by financial institutions is hastened by the explosion of over-the-counter transactions in contractual derivative products. These instruments can serve as synthetic assets and liabilities, thereby encouraging the bank disintermediation described above. Alternatively, derivatives can be efficient mechanisms for shifting risk. When used for this purpose, they can displace the role played by insurance companies. For example, credit-linked notes provide a capital markets mechanism for transferring credit risk, competing with a service provided by credit insurance policies. In other cases derivatives do not replace an existing service provided by another type of institution, but create an entirely new mechanism for transferring risks previously absorbed by industrial companies to financial institutions better able to hedge and otherwise manage those risks. Thus, manufacturing companies have used interest rate swaps to shift the risk of changes in the cost of financing their plants and equipment, and companies with multinational operations have hedged their foreign exchange rate risk through currency swaps and forward contracts in foreign exchange.
Not so long ago banks were dominant among financial institutions. However, today commercial banks hold only about 22 percent of all financial assets in the United States. The creativity and energy of securities firms in competing against bank business probably accounts for a substantial part of the decline in the position of banks. Elsewhere in the world, banks are still dominant holders of financial assets. In the United Kingdom, banks hold 56 percent of financial assets, but the percentage is falling. Although banks in the rest of Europe, Japan, and the emerging markets still hold a greater percentage of financial assets, their share can also be expected to decline. Securities firms, on the other hand, have become increasingly important players in the financial services business and increasingly essential components in the formation of successful financial conglomerates.
What are the broader implications of this business convergence and the resulting institutional combinations?
First, the way in which the three types of business are managed is also converging. All three types of institutions have learned the critical importance of a vital compliance culture, with the tone set at the top. Just as important, all major financial service institutions now recognize the importance of installing an independent and sophisticated risk management function and strong internal controls. An essential element of control is a clear identification and separation of responsibilities between and within production and support areas.
One driving force behind these developments has been the growth of derivatives, which particularly demand disciplined risk management. The Group of Thirty enunciated fundamental principles for the prudent conduct of a derivatives-dealing operation in 1993, and those concepts have proven equally apposite to the conduct of dealing operations in all types of financial instruments.
Second, the manner in which institutions in each category are supervised has also converged. Bank supervisory agencies have shown increasing interest in the appropriateness of investment offerings for various types of bank clients, at least where marketing practices could give rise to significant legal claims that could imperil the safety and soundness of the bank. In so doing, the bank regulatory agenda comes to resemble more closely the consumer protection orientation of securities market regulators. As the economic function of credit extension moves from a private lending activity to a capital markets setting, we have seen a corresponding evolution in the supervisory focus for bank regulation from traditional credit risk concerns to market risk management. This is reflected in the development, through the Basle Committee and individual central banks, of new capital adequacy standards tied to market risk exposures.
Conversely, the Securities and Exchange Commission (SEC) and other securities dealer supervisors have had to think about the largest firms they supervise in terms of safety and soundness and the potential for systemic risk. Examinations of securities firms by U.S. and U.K. regulators have become increasingly focused on a detailed review of internal control systems and procedures and of supervisory structures. There is an increased expectation that control mechanisms will be expressed in written documentation. The approach is increasingly similar, at least in spirit, to the demands made by bank regulatory agencies. However, the SEC’s statutory authority does not permit it to adopt full consolidated supervision or accept the concept of home country responsibility for capital soundness typical in the bank regulatory community. The SEC traditionally focused its attention on the U.S. broker-dealer alone. However, informal supervision of dealer affiliates has progressed steadily in the last decade. The first step was the Market Reform Act of 1990, which empowered the SEC to require information from material affiliates of U.S. broker-dealers regarding their activities and exposures. The SEC has implemented this authority through rules that require five Salomon affiliates engaged in derivatives and foreign exchange activity to file quarterly financial information with the SEC. Salomon’s broker-dealer affiliates in the United Kingdom and Japan and our bank in Germany are required to file with the SEC copies of financial reports they make periodically to their local regulatory agency.
In 1995 the leading firms engaged in derivatives trading activities through affiliates agreed to provide more detailed information regarding the risk profile of those operations through the Derivatives Policy Group (DPG) Voluntary Framework. Recently the SEC has proposed creating a new category of broker-dealer dedicated to dealing primarily in derivatives, including derivatives considered to be securities under U.S. law. These firms would be subject to a special regime designed to impose a lighter regulatory structure than that applied to a full-service broker-dealer. The initiative is designed to create incentives for U.S.-based firms to conduct in a U.S.-based and SEC-regulated entity business now conducted in other often unregulated entities. This initiative includes an SEC modification of its approach to the capital charges imposed on unsecured extensions of credit made by a U.S. registered broker-dealer. The SEC approach is similar to that being taken by many bank supervisory bodies.
Third, the rapid pace of product innovation and the accelerating development of new risk management techniques should place an increasing reliance on self-regulation by the financial services industry. At their best, self-regulatory initiatives take the form of cooperative arrangements between financial institutions and their supervisors to develop appropriately dynamic supervisory mechanisms. One successful example of this process is the previously mentioned DPG Voluntary Framework for the supervision of derivatives-dealing affiliates of securities firms. The DPG consisted of six securities firms, including Salomon, that together conducted over 90 percent of the derivatives transactions effected by affiliates of U.S.-based securities dealers. The Voluntary Framework provided for internal management controls, enhanced reporting of credit and market risk information, periodic quantifications of participating firms’ credit and market risks for evaluation in relation to their capital, and guidelines for the relationships between dealing firms and their nonprofessional counterparties. The approach is dynamic in the sense that it is based on the regulatory agency and the firm’s own auditors reviewing and validating the firm’s evolving internal mechanisms for managing the risks of its derivatives business. The mechanism for measuring risk for capital purposes is based on the value at risk of the entire derivatives portfolio. Thus, new products can be created and incorporated into the computation by each firm without intervention by the regulatory agency. This approach to capital regulation is similar to the formulation for market risk authorized by the Basle Committee for implementation in 1997 by banking supervisors in the Group of Ten countries.
The convergence between the activities of insurance companies, banks, and securities firms and between the approaches of bank and securities regulators contrasts with the continued boundaries and complexity of the regulatory scheme existing in the United States. Securities firms are regulated by the SEC, but most examination and enforcement activities are conducted on its behalf by the stock exchanges and the National Association of Securities Dealers. The 50 states also have their own securities regulatory bodies. Certain products traded by securities firms are separately regulated as commodities by the Commodity Futures Trading Commission. The bank regulatory structure includes the Federal Reserve Board for bank-holding companies, the Comptroller of the Currency (an agency of the United States Treasury) for nationally chartered banks, state bank supervisors for state chartered banks, and the Federal Deposit Insurance Corporation for all banks that accept federally insured deposits. Although most of the potential overlaps between the bank regulatory agencies have been resolved through interagency supervisory agreements, banks must still be aware of the requirements of several different supervisory bodies. Those banks organized as savings and loan associations are subject to a separate scheme of supervision, also involving both state and federal agencies. Insurance companies are regulated at the state level. And, of course, firms with global operations are subject to regulatory requirements and supervisory structures almost everywhere they do business.
Some people argue that the present U.S. approach to financial institution regulation (complex and history-bound as it is) works pretty well because it stimulates some competition among regulators and thus allows a firm to choose a regulatory regime that it believes leaves room for the continued development of new products and new lines of business, while preserving a degree of supervision that permits the relevant public to feel protected. Others would opt for redrawing legislation so that it is more in tune with the convergence of activity among financial institutions and the increasingly transborder nature of financial activity. Although the latter approach seems more satisfactory to me, the U.S. experience typically reflects a congressional unwillingness to make more than modest changes in the governing framework unless there is no opposition or there is a crisis or some other defining event.
12B. Financial Conglomerates: Trends in Regulation
The accelerating development of markets associated with globalization and internationalization, coupled with the accelerating blur between products and services that used to fit nicely into one financial services sector or another, has overtaken existing systems of regulation. That is true both in developed and developing nations. We have not been immune to this phenomenon in the United States, as evidenced by the recent flurry of articles speculating on the regulatory treatment of the proposed Citibank-Travelers merger.
Old rules and principles simply do not work in this new environment. The new products and services—indeed, the whole new marketplace—requires a new regulatory perspective and different regulatory treatment.
And the burden of that regulatory evolution falls upon us as lawyers. We sit at the center of a fast-moving process: the markets do not want to wait, the economies cannot wait, but it is difficult to keep up with these complex economic and business changes and make our regulatory systems change and respond appropriately.
Nevertheless, as lawyers and as regulators, this is our task. At our best, we can be the facilitators of the new economic reality, while maintaining vital protections for the public.
The Global Trend in Deregulation
For the most part, deregulation has become a universally attractive political program, particularly with respect to opening up domestic markets to foreign competitors. Policymakers are increasingly aware of the valuable role performed by foreign financial service providers in enhancing domestic economic growth. In many countries, opening competition to global participants is correctly viewed as an essential element of a successful development strategy.
Deregulation promises economic benefits without increasing government spending. Deregulation offers the prospect of cutting, or at least controlling, administrative costs.
It has been argued that, by implementing deregulation and strengthening market forces, governments lose their power and their ability to govern. But stronger markets, with international competition, do not necessarily mean weaker governments.
Those who argue that globalization undermines local regulation are looking in the wrong place for an explanation. In practice, radical advances in technology have undermined traditional regulation. Technology has created the demand for innovative risk-management products and has enabled financial services firms to offer “hybrid” products that combine various lines of finance and blur the distinctions between banking, brokerage, and insurance.
Regulations based on traditional distinctions between those lines of finance simply cannot address these new products effectively. And there is a danger to regulators if they stand still and fail to adapt to new market realities.
Even minor regulatory distortions can substantially dampen demand and stunt growth in any of the financial services sectors. This is particularly true now that products and services offered by financial services companies begin to cross traditional lines from banking to insurance to investment banking and brokerage.
That same technological revolution that created the new hybrid products and services has also increased the mobility of capital, goods, services, and even firms. Countries that do not adapt their regulatory schemes to accommodate the new economic realities run the risk of their capital base moving to countries with more favorable regulations.
According to a recent study by three economists, economic growth is directly dependent on economic freedom—the more freedom, the more economic growth. The deregulation movement is an important factor in providing economic freedom.
Analysts argue persuasively that what we have witnessed in recent years is not deregulation, but reregulation. Many of us who have lived through deregulation in our own countries would agree that we are dealing with more rules, not fewer rules, in the new economic order. However, the nature of regulation has changed. The trend is away from direct interference with domestic economies. The new role of governments, increasingly, is to establish the rules of the game and leave the players (competitors) as much market freedom as possible within those rules.
Reregulation of the Insurance Sector
How does this trend affect the increasingly global insurance business? The insurance industry has traditionally been highly regulated, relative to other industries, because of its perceived association with the public interest.
The essential role played by the insurance industry in a nation’s economy is widely recognized. In addition to providing risk-management and loss-control capabilities, insurance companies facilitate the pooling of investment capital and foster the creation of financial institutions that enable national economic growth.
In a comprehensive cost/benefit analysis of the role of foreign insurers in the development process, one of America’s foremost insurance experts offers seven conclusions on the contributions of foreign insurers to local economic development. He concluded that foreign insurers operating in local markets can
promote financial stability;
reduce the role of government in providing social services;
facilitate trade and commerce;
mobilize savings that foster investment, productivity, and growth;
foster efficient management of risk;
reduce economic losses through risk management; and
promote efficient allocation of capital among lenders and investors and innovation in products offered.
Countries that maintain market access barriers and that fail to extend national treatment to foreign-owned insurers likely are doing their citizens, businesses and national economies a disservice.1
A study by the World Bank came to similar conclusions with respect to financial services generally, suggesting that “… countries could substantially benefit from accelerating the opening up of their financial services systems …”2
With operations in approximately 130 jurisdictions, the findings of these studies are readily supported by American International Group’s experience.
In a keynote speech during the 1996 Asia-Pacific Economic Cooperation meeting in Manila, American International Group’s chairman, Maurice R. Greenberg, outlined the conditions needed to attract public and private as well as foreign and domestic investment in Asian infrastructure projects. He gave a number of examples as to how ready access to capital unleashes a whole array of entrepreneurial creativity and provides the fuel that feeds economic growth, productivity, and new employment opportunities.
Looking at Southeast Asia alone, as of 1997, American International Group’s companies had invested nearly $8 billion in local currency assets such as host-country infrastructure projects, housing projects, bond markets, and other manufacturing entities with long-term payouts. We call this “patient capital,” because it is necessary in order to develop the local assets to cover long-term liabilities, such as life insurance policies, that have payouts over 30 to 40 or more years. Through the provision of life insurance, large pools of capital are accumulated from small individual contributors (businesses and families). That capital is then invested into local currency projects with long-term payouts.
This activity is fundamental to nation building. By applying the best practices, marketing strategies, and products drawn from our operations worldwide, we are able to upgrade constantly the expertise of our local sales force, underwriters, actuaries, accountants, adjusters, and investment professionals. By upgrading and injecting new management practices, high-quality jobs have been created in each of our U.S. and non-U.S. locations, which substantially enhance the quality of life for our more than 100,000 employees and agents worldwide.
Enhancing Economic Growth with Rational Regulation
Insurance regulation, on the most general level, is aimed at ensuring the stability and financial soundness of insurers, to protect prospective and existing policyholders and beneficiaries. But on a more specific level, that can translate into myriad rules governing price and product approvals, reserving practices, expenses, valuation of assets, quality and allocation of investments, periodic reporting obligations, liquidation of insolvent insurers, agent licensing, sales practices, market access by nondomestic insurers, the operation of national reinsurance entities, and protection of the local insurance industry.
The extent to which local insurance regulators are involved in the day-to-day operations of insurers operating under their jurisdiction varies, as does opinion on what level of regulatory intervention is appropriate. In terms of deregulation and reregulation, individual insurance markets around the world are showing disparate developments. This may be explained by the fact that the term “deregulation” has different meanings in different countries because of differing levels of regulatory intensity and specific areas of regulatory focus that vary from country to country based on their own specific experiences and history.
But there isn’t any question that the worldwide deregulation—or reregulation—movement is as much in evidence in the insurance sector as it is in other financial services sectors.
In the insurance sector, we increasingly see the relaxing or elimination of strict licensing requirements and rigid price and products regulation. But those structures are not merely abandoned without any substitute to prevent a regulatory vacuum. Instead, those rigid structures are being replaced by a more demanding form of supervision, such as solvency provisions.
I call these provisions more demanding because they require the regulators to understand more intimately the financial underpinnings of the insurance business and that, as you all know well, can be quite complex. But in the end, it is the policyholders and beneficiaries who benefit. And it is those parties for whom insurance regulations are promulgated and enforced.
It is possible to regulate well by combining capital adequacy rules with enhanced disclosure requirements. This two-pronged regulatory approach obviates the need for micro-regulation or for so-called merit regulation wherein regulators pass on the benefits or bona fides of a particular product or service.
This two-pronged approach, coupled with solid anti-fraud regulations, protects policyholders, beneficiaries, and investors while permitting industry innovation.
How Can Regulators Succeed in Reregulation?
The first goal should be to adopt what might be called a Hippocratic Oath for financial services reregulation. That is, first, to do no harm. This entails grandfathering the existing, acquired rights that foreign insurers have already established in critical markets.
In addition, insurers would like to see what one of my colleagues has called the Four Freedoms:
Freedom to establish a commercial presence in a foreign market
Freedom to choose the mode of delivering a service, whether by branch, subsidiary, or joint venture
Freedom to own up to 100 percent of any operation
Freedom to reinsure, without mandatory cessions to monopolies or controlled markets
U.S. insurers believe that grandfathering protections combined with the Four Freedoms are essential ingredients of any acceptable system. We also accept the validity of transitional commitments for some countries, to be achieved by a certain date, perhaps over a period of three to five years.
One of the critical lessons learned in the last few years is that international capital transfers, whether they be short or long term in nature, have never been more sensitive to properly regulated, open, and hospitable climates. The slightest indication that a government may be tempted to interject protectionist measures, control capital, limit licenses, or to introduce discriminatory treatment between foreigners and domestic companies can lead to massive shifts in capital, to the detriment of the host economy.
There has never been a higher premium on proper regulation and on policies that foster competition.
All of us are in a challenging environment. It is always difficult for countries, particularly those that are moving quickly through the development process, to bind themselves to any level of treatment—thus eliminating the option to go backward in the future. This can be said as well for developed countries like the United States, where the walls between insurance, securities, and banking activities are constantly evolving but still provide no clear pattern as to how they will evolve in the future.
But for the United States and other developed countries to grant access to their markets on a nondiscriminatory basis forever more, it will be necessary for a “critical mass” of commercially significant countries to make meaningful strides in opening their economies and their regulatory schemes.
What constitutes critical mass is in the eye of the beholder. For some, it is perhaps as few as three or four countries; for others, it might be closer to 40. Whatever the number, a collective decision will have to be made by the affected industries within each of the developed countries, as well as among them.
12C. Financial Conglomerates: Banking Industry Perspective
The transformation of the global financial services industry has been occurring so rapidly and so massively that it raises the basic issue of whether government regulation of that industry must likewise undergo a transformation. My answer to that question is a qualified “yes.” The key qualifier is that a regulatory transformation that is done improperly would be worse than no transformation at all.
I will first provide some background on this industry transformation and then relate it to the issue of regulatory change. I will be approaching these issues from the perspective of the banking industry in the United States.
There has been a powerful, long-term trend toward consolidation of the U.S. banking industry. In recent months, this trend has accelerated almost exponentially. Moreover, because this trend is principally the product of powerful economic forces, it is likely to continue absent a retardant imposed by external factors.
These economic forces are principally a function of increased competition. For many years, the U.S. banking industry operated in what was largely a competitive cocoon. There were no money market mutual funds siphoning off tens of billions of dollars of deposits. There were no “category killer” monolines, such as MBNA and Countrywide, dominating key segments of the banking business. There were no major nonbank financial institutions, such as American Express, Merrill Lynch, and General Electric Credit, that were leaders in loans and other services to small businesses and middle-market companies. And finally, there were no out-of-market banks competing through nontraditional delivery systems.
The new competition from these and other sources has constrained bank loan growth. It has placed pressure on net interest margins. It has retarded growth in services that produced fee income and placed pressure on the amount of fees. Macroeconomic data, such as the percentage of financial assets or commercial loans held by banks, indicate a drastic decline in the banking industry’s market share.
The natural ability of banks to respond to these competitive pressures has been severely constrained by an archaic legislative structure and a conservative regulatory approach. Until quite recently, banks were placed in both a product and a geographic straitjacket.
It appears that little conceptual thought was given to the interrelationship between the basic legislative compromise that had been forged during the 1913–70 period and the subsequent economic and technological developments that have rendered this compromise unworkable. In effect, the major banking legislation during this period—the Federal Reserve Act, the McFadden Act, the Glass-Steagall Act, and the Bank Holding Company Act—had developed a compromise based on a double insulation scheme. Banks were insulated from competition, but they were also insulated against competing beyond very limited product and geographic boundaries. When external forces largely stripped away the insulation that protected banks from competition, there was no legislative or immediate regulatory response to remove the insulation that restricted banks from competing.
In this environment, consolidation within the banking industry was compelled to respond to these economic forces that remained unrelieved by legislative action. If banks could not sufficiently expand their revenue base, increased income could only be derived from a reduction in expenses. And while some significant expense reduction can be accomplished on a stand-alone basis, only consolidation offers the ability to achieve truly meaningful cost savings. In a merger there are two of virtually everything—operations centers, audit departments, credit administration departments, legal departments, and, depending on the locations of the two institutions, branches serving the same communities.
It is commonplace for in-market mergers to project 40–55 percent cost reductions. Even for market-extension mergers, expense reductions of 15–20 percent, or even higher, are projected.
Because banks are high-cost producers, these expense reductions produce sharp increases in net income. If my math is correct, an in-market merger that produces a 50 percent reduction in the expenses of a bank that has a 60 percent efficiency ratio creates a 75 percent increase in pretax net income. Even a market-extension merger that produces a 20 percent expense reduction creates a 30 percent increase in pre-tax net income.
The powerful economic impact of these competitive forces on consolidation has been increased in recent years by technological advances. These advances have in themselves increased competition by enabling banking to be conducted without branches. Even more important, they have forced banks to confront substantial technological expenses. A key to efficient use of this technology is the ability to spread the costs over the broadest possible customer base. Another factor in efficient use of technology is likely to be the ability to customize it, and customization is not truly possible without a large customer base.
In recent years, consolidation within the banking sector of the financial services industry has been joined by cross-sector consolidation. This cross-sector consolidation has been a product of the same economic and technological factors that produced consolidation within the banking industry, as well as two other key factors: the increased homogenization of financial products and services and the desire for diversification. Cross-sector consolidation has also been a product of the recognition by U.S. bank regulators that U.S. banks require broader powers in order to compete more effectively.
Let me describe this development in the context of the four principal sectors of the financial services industry: commercial banking, investment banking, insurance, and asset management. Starting in the early 1980s, the Federal Reserve and the Comptroller began to liberalize the limits on banks’ management of pooled assets. This culminated in the Comptroller’s approval of the Mellon-Dreyfus transaction, which removed virtually all the practical obstacles between the banking and asset management sectors.
Starting at about the same time, the regulators began to remove the barriers to bank involvement in securities brokerage—the agency segment of the investment banking sector. In the late 1980s, the Federal Reserve began to lay the groundwork for the removal of the remaining barriers between the commercial and investment banking sectors. The dismantling was substantially completed in 1996, when the so-called “engaged principally” test in Section 20 of the Glass-Steagall Act was reinterpreted by the Federal Reserve, and relief was provided from a number of other regulatory restraints.
These 1996 regulatory changes revolutionized the relationship between commercial and investment banking in the United States. Previously, no significant combination between a commercial bank and an investment bank was possible. The new regulatory scheme made feasible virtually any combination between a commercial bank and an investment bank.
There is only one investment banking area where the regulatory barriers have remained—merchant banking. To date, the Federal Reserve has provided only limited relief from the tight restraints it imposed in the 1970s on principal investments by bank holding companies.
Turning to the insurance sector, regulatory relief from the barriers between commercial banking and insurance has been far more limited. This has occurred in large part because the legislative restrictions were more carefully constructed. The Comptroller has enabled banks to engage in insurance agency activities without any practical limitations. But there has been no real relaxation with respect to insurance underwriting.
Recent events amply illustrate this consolidation process. Recently, the two largest bank mergers in U.S. history were announced: NationsBank-Bank America and BancOne-First Chicago. These followed by only several months the two previous “largest ever” transactions: NationsBank-Barnett and First Union-CoreStates.
In addition, the largest merger ever in the financial services industry was announced this year: Citicorp-Travelers. Much of the commentary on that merger focused on its sheer size and on the combination of banking and insurance. But its true importance may instead be that it represents the first combination of a major bank and a so-called bulge bracket underwriter. It is also perhaps the largest combination of a bank and an asset management business. The insurance aspect may be “one-off.” Although my remarks have concentrated on the United States, consolidation is a global phenomenon. Within the past year, there have been announced mergers of two of the three largest Swiss banks and four of the five largest Canadian banks. There have been a number of bank-insurance alliances and mergers in Europe, and the largest Italian bank has announced plans to merge with one of the two major Italian merchant banks.
As I mentioned earlier, I believe that this strong consolidation trend, both within and across industry sectors, is likely to continue. The drivers remain. Competition is likely to increase rather than abate. Technological advances and the related costs are likely to accelerate rather than decelerate. In addition, as certain financial services companies grow ever larger and are able to provide an increasing range of services, there will be pressure on the other companies to match this size and range of services. And sooner or later, the barriers between banks and insurance will fall.
There may well be a hiatus in this consolidation process as all financial institutions are forced to focus on Year 2000 issues. Potential acquirors will be concerned about inheriting problems that they cannot fix in time or that integration will be delayed. Outside vendors may not have the capacity to deal with large mergers. Finally, although the regulators may not flatly prohibit large transactions, they may put in place enough caution flags to discourage them.
But once again, we are talking about a hiatus and not a reversal.
What should be the regulatory response to this consolidation phenomenon? In analyzing this question, it may be helpful to focus on three distinct aspects of the consolidation process: the sheer size of the combined companies, the cross-sector nature of certain of the mergers, and the cross-geography nature of certain of the mergers.
I cannot credibly argue that the sheer size of the new financial institutions does not create additional regulatory problems or call for new regulatory approaches. The examination process that was effective for a $100 billion institution is unlikely to be adequate for a $250 billion institution, much less a $500 billion or even larger institution. Moreover, additional size is likely to create more complexity.
However, having said that a revised regulatory approach is probably necessary, it is essential that the objective of such an approach be understood. It should be to deal more effectively with larger institutions rather than to restrict their growth. As events have demonstrated throughout economic history, the Luddite approach to change is self-defeating. Basic economic forces will ultimately prevail. They can be diverted or delayed, but not defeated.
It is particularly important that anti-trust laws not be interpreted to prevent growth. Let me spend just a few moments discussing my concerns about anti-trust enforcement as it is playing out in the United States. Several months ago, the Federal Reserve made one of its rare policy statements on competitive issues in the context of a decision on an application. Although written with Central Bank elliptical grace, the message quickly became clear. The Federal Reserve was going to apply a more stringent standard than it had in the past. And this in turn encouraged our Department of Justice to become more stringent.
A more stringent standard is, however, inconsistent with actual competitive conditions. The current standard U.S. quantitative test for antitrust analysis was formulated for a small town in Mississippi in 1985. As we have discussed, competition has sharply intensified during the intervening years. This increased competition argues strongly for a liberalization of the 1985 standards rather than any constriction.
It is noteworthy that outside the United States the bank regulatory authorities have permitted mergers on a scale far beyond what is considered feasible in this country. The Netherlands permitted two of its three largest banks to merge. The same result is expected shortly in Switzerland. Even before the current financial difficulties, Japan authorized major bank mergers. The response of the Canadian authorities remains to be seen, but I would suggest that the two currently proposed Canadian mergers would have been unthinkable only two years ago.
These decisions outside the United States implicitly recognize three key points. (i) Absolute size does not preclude effective regulation. (ii) Larger institutions do not have an adverse impact on the banking public. (iii) Size is highly important, and quite possibly essential, to compete in an increasingly global financial services industry and economy.
Just one final comment on this issue. Any concern about dominance by one or more U.S. banks is misplaced in view of the 10 percent nationwide deposit cap. Such a limit is well below that already reached in numerous other countries.
Another possible regulatory response to the size issue is higher capital requirements. I would suggest that this approach is also ill-advised. Increased capital requirements come with a significant cost. Investors are highly focused on return on their investments. Because higher capital almost always translates into lower returns, an increased capital requirement is likely to produce less investment in the banking sector.
Moreover, there is an understandable effort by banks to maintain their return (R) on equity (E) ratios. If E is increased, banks will seek to increase R. And I would suggest that a principal component of increasing R in such circumstances is to increase another R—risk.
An increase in capital requirements is also dubious because of the relative insensitivity of the current requirements to actual risk and the lack of international comparability. For so long as all loans, other than home mortgages, have the same capital requirements, the current capital scheme will remain a very imprecise means of evaluating capital adequacy. And for so long as there are different accounting standards applied internationally, particularly in the area of loan charge-offs, nonaccruals, and reserves, there will be no international capital comparability.
It is always easier to criticize potential solutions to a problem than to develop one’s own solutions. Nonetheless, let me plunge ahead. I believe that the bank regulators can best deal with the larger and more diversified banks by focusing on the bank’s internal risk-measurement policies and procedures. Bank management’s response to the entire range of risks—credit, payment, operations, investment, funding, audit, legal, and so forth—should be carefully scrutinized. Comprehensive auditing and accurate, timely, and transparent internal reports should be required. Bank regulators have an excellent laboratory—the risk management process at a wide variety of banks. If one bank is an outlier in that its risk management processes are less thorough, it should be strongly criticized. Even if there is just a significant difference, the bank should be cautioned.
In an era of consolidation, an inability to consolidate is perhaps the most serious regulatory sanction. If a bank’s risk management processes fail to capture a material risk that results in a material loss, the penalty—absent extenuating circumstances—should be a prohibition on acquisitions for a defined, or perhaps undefined, period. The regulators should not, however, be required to wait for a loss actually to occur. If a bank is criticized for its risk management processes and fails to correct those processes, it should also be placed in the consolidation penalty box.
It is my understanding that the major accounting firms are increasingly focusing on the risk management processes of their clients. It may be a helpful exercise for the regulators and accountants to compare notes periodically.
A second set of problems relates to the wider variety of financial services being offered by commercial banking organizations. When a bank offered only traditional banking services, there was little concern about the regulators’ ability to regulate those services. When, however, banks began to offer securities, asset management, and insurance services, a legitimate question emerged whether the bank regulators have sufficient expertise to regulate these new services.
Let me pause here to distinguish between a legitimate question on the one hand and demagoguery and misinformation on the other. The U.S. bank regulators have recently been harshly criticized by several Congressmen and a major business periodical because of their failure to police abuses in securities sales by NationsBank. What these critics have failed to understand, or at least failed to acknowledge, was that the abuses did not occur in the bank. Rather, they occurred in a registered broker-dealer subsidiary that is regulated by the Securities and Exchange Commission (SEC). In other words, there was a failure of regulators, but not of the regulatory system.
An often-proposed panacea for dealing with the broader array of services offered by U.S. banks is functional regulation. In other words, the bank regulators should cede the regulation of securities activities and possibly asset management to the SEC, insurance to the state insurance regulators, and presumably derivatives to the Commodities Futures Trading Commission (CFTC).
If there are separate regulatory bodies for each financial services sector, functional regulation may be appropriate. But I want to add two cautionary notes. First, functional regulation will not necessarily be effective. I am particularly concerned about submitting banks to 40 or 50 different state insurance regulators with widely varying degrees of expertise. The largely historical decision to treat insurance differently from the other financial service sectors, and not adopt a federal regulatory structure, raises legitimate questions about functional regulation.
Second, perhaps the greatest danger with functional regulation is that it will leave no one regulator in charge. In my view, there must be a single regulator with the ability to oversee the entire operations of a major financial services company and to make the ultimate decisions based on a full range of knowledge. This in turn means very close cooperation among the various functional regulators. Not only do functions overlap, but regulatory problems tend to be cumulative rather than isolated.
My remaining concern about functional regulation is its inherent inefficiency. Why should five or six regulators—or for that matter 45 or 46—review a financial services company if one could perform a satisfactory job?
With respect to geographic expansion, the concern focuses on foreign branches. In my view, it is not an accident that the Barings and Daiwa situations—and numerous other examples of losses in derivatives, foreign exchange, and securities trading—occurred in foreign branches. These branches are typically small and, it is argued by the banks, could not bear the cost of an on-site risk-management infrastructure. From a regulatory perspective, the foreign branch may not fall entirely off the radar screen, but it may not be a high priority for either the home country regulator, because of the distance, or the host country regulator, because of the size.
In my view, unless this situation is dealt with and dealt with promptly and effectively, there is another Barings just waiting to happen. What can be done? Banks should be required to use their technology to manage risk from a distance. Furthermore, if the branch is sufficiently large to be able to take very large positions, it is sufficiently large to afford on-site monitoring. With respect to direct regulatory involvement, the key is close cooperation between the home and host regulators to ensure that nothing falls between the cracks.
I want to deal briefly with four other issues relating to Central Bank regulation of a consolidating financial services industry.
The first issue relates to the structure of financial conglomerates. The three basic models are the universal bank, the bank and subsidiaries, and the holding company. The argument in favor of the holding company model is based on both safety and soundness considerations and a concern about an anti-competitive bank subsidy.
As at least a theoretical matter, the holding company provides more protection for the bank from the contagion of a serious problem in another area. In particular the bank’s capital is not directly at risk. It remains to be seen, however, whether a bank can survive the financial collapse of an affiliate.
Even assuming that a bank subsidy exists, there are two sides to the competitive equality issue. Such a subsidy may provide a competitive advantage to banks as compared to nonbank financial institutions. But if banks in some countries gain this subsidy through a universal or subsidiary structure and banks in other countries do not have this subsidy because of a mandated holding-company structure, banks in the latter countries will be placed at a competitive disadvantage as against other banks.
The second issue is also structural. There are two principal differences between the regulation of banks on the one hand and regulation of securities and insurance firms on the other. The first is the question of limits on the activities of affiliates of the basic regulated entity. The second is the regulation of affiliates.
I would suggest that neither model is correct. Some regulation is necessary of affiliates, but it should be with a very light hand.
The third issue revolves around what is known as the “too big to fail” doctrine. The concern is expressed that financial consolidation creates a new group of institutions that are so large and so essential to a country’s economy that they cannot be permitted to fail.
There are two aspects of this concern. The first is that an implicit too big to fail approach creates a subsidy and an unfair competitive advantage for very large banks. But once again, if some banks benefit from the too big to fail approach and others do not, another type of competitive disparity occurs. In my view, in most countries there has been a too big to fail approach even before the current wave of consolidation.
The second concern is that this approach removes market discipline and encourages undue risk taking. I will not challenge the economic theory, but I believe that this concern will lack credibility until it can be supported with specific examples.
Finally, there is a natural regulatory inclination to respond to change with a more intrusive regulatory process. There is an understandable concern that regulators should understand the implications of change before it is permitted to occur. I would, however, close with a plea that regulators attempt to balance this tendency with other considerations. If regulation precludes change that is driven by economic and technological forces, the result will not be to prevent change, but rather to distort it. The most likely result will be the increased financial power of those least susceptible to regulation. And that is the ultimate defeat for a sound regulatory structure.
JOHN D. HAWKE, JR.
I think that Mr. Cohen was correct in his characterization of what financial regulation has been like in the United States for most of this century. Our financial regulatory legislation has been characterized by market segmentation—in effect, a legislatively mandated division of markets among strong competitors in financial services. Banking markets have been segregated from insurance and securities markets, and there has been significant segmentation in other respects.
Segmentation has frequently been justified on the basis of safety and soundness, but safety and soundness probably have very little to do with the real reasons for market segmentation. In my judgment, market segmentation, whether geographic or by product, has been driven by market participants themselves. It has been perpetuated by those who reap the benefits of being protected from competition by a legislatively mandated division of markets. Only in recent years have participants come to realize that their own self-interest may be better served by abandoning market segmentation. We saw that clearly during the 1980s, as the states began to experiment with interstate banking, pushed by important interests within their states who sought to advance their own interests by expanding beyond state boundaries.
Interstate banking has always been an enormously controversial subject as far as federal legislation is concerned. Congress and the banking agencies at the federal level essentially were bystanders in bringing about interstate banking, as this market dynamic worked effectively at the state level to bring about eradication of constraints on geographic expansion. When there was very little left to do in the way of eliminating barriers, Congress finally stepped in and took the last remaining steps—at a time when it was sufficiently noncontroversial that federal legislation could be achieved with little political pain.
Much the same thing is happening with respect to product segmentation. The different elements of the financial services industry have come to recognize that they have to offer a full range of financial products and services; that far from drawing distinctions based on regulatory market divisions, consumers value the ability to buy products from a single source irrespective of how those different products may be regulated; and that advances in technology are eradicating the relevance of these differences, as, for example, it becomes easier to sell insurance and banking services electronically or over the Internet.
So, as in the case of geographic constraints, it is the market that is driving the move to eliminate constraints on competition in product and service. Competitors, however, have still not become completely selfless in this process. Some still see it as desirable to maintain certain of the advantages inherent in legislatively mandated market segmentation. One of the biggest difficulties that we face today in trying to get legislation that rationalizes the regulatory framework is an unwillingness on the part of some industry participants to give up the last vestiges of the protection.
Another factor is presently having a significant impact in the United States on the ability to get legislation: differences of view among various governmental agencies about how changes in the structure of regulation might affect their own interests. These are sometimes dismissed rather contemptuously as battles over “turf,” that is, over regulatory jurisdiction, but I think the issues are much more serious and much more profound than this makes them sound. We have a regulatory structure in this country that nobody would invent if he tried to develop a sensible structure of financial regulation. The structure is something that can be explained only as a consequence of historical development and historical accretion. But it has worked amazingly well. Over the past 30 years or so, different observers have proposed different ways of rationalizing this structure; those efforts have always failed. Under President Bush’s administration, a strong effort was made to alter the structure of regulation in a way that would have been very disadvantageous to the Federal Reserve, and that foundered. Early in the Clinton administration, a similar effort was made and it foundered for many of the same reasons.
We also have the dynamic of the dual banking system—that is, the system under which both the states and the federal government charter financial institutions. Considerations of the dual system have also worked against the rationalization of the regulatory structure because state interests have traditionally felt that homogenization of regulation at the federal level would make the holding of a state charter significantly less attractive and would thus threaten the viability of state banking systems.
These issues have been intractable and are relevant today. One of the principal hindrances to getting legislation through the Congress during the current session has been a significant difference between the Federal Reserve and the administration over the structure in which new financial activities will be permitted. I think a couple of the speakers have alluded to this issue. Basically, the view of the Federal Reserve is that all new activities should be performed only in holding companies. The administration view is that institutions should have the choice of whether to engage in new activities through holding companies or through subsidiaries of the bank. I won’t go into the arguments, but suffice it to say that I think the underlying fears—putting aside the rhetoric and the technical arguments—are quite important.
The Federal Reserve is concerned about the possible erosion of its role as regulator of bank holding companies and the relationship of its monetary policy functions to its role as a bank regulator if new activities are permitted any place other than in the holding company. The administration is concerned about the role of the executive branch of government in the formulation of financial institutions policy if new activities can be done only under the jurisdiction of the Federal Reserve.
Mr. Cohen also focused on the relationship of capital to expanded authority for banking organizations. I would completely concur that the expansion of activities should not be permitted at the cost of decreased levels of capital in banking organizations. The level of capital is much less relevant, in my judgment, however, than issues of how the regulators deal with the maintenance of whatever level of capital is prescribed, and how capital is measured.
Seven years ago, Congress took an entirely new approach to capital regulation in the Federal Deposit Insurance Corporation Improvement Act. It brought to bear a new regime that is generally referred to as “prompt corrective action”—a requirement that banks maintain their capital at specified levels and that regulators intervene promptly when capital begins to fall. The basic precept is that as capital erodes, regulators must intervene and force recapitalization or merger before real economic capital disappears completely. Much of our problem with financial institutions in the last 20 years has stemmed from the fact that we have not intervened before the point of insolvency. We traditionally have come to grips with problem institutions only after they have become insolvent (although we usually do not admit they are insolvent), at which time the options the government has are extremely limited. The concept of prompt corrective action is that if recapitalization can be forced prior to the expiration of real capital—which requires that capital be measured as accurately and timely as possible—one can afford to be less concerned about the range of activities that banks or their affiliates or subsidiaries engage in.
In other words, with a focus on maintaining appropriate levels of capital and with mandates to assure that those levels are maintained, we should have the strongest protection for institutions from whatever risks may be involved in expanded activities. From our point of view, that is the guiding star of financial modernization legislation.
The paper was written in close collaboration with my colleague, Zack Snow, a Managing Director of Salomon Smith Barney.
Harold D. Skipper, Jr., Foreign Insurers in Emerging Markets: Issues and Concerns, Occasional Paper #1 (International Insurance Foundation, 1997).
Stijne Claessens and Thomas Glaessner, Are Financial Sector Weaknesses Undermining the East Asia Miracle? (World Bank, 1997).