Modern Financial Holding Companies

In the first 11 years of the twenty-first century, with fast economic development and intense competition inside the industry, overseas investment banks went through paradigm shifting changes. The organization forms of overseas investment banks can now be essentially divided into the publicly held company category and the financial holding company category. The financial holding company form has become the major trend among overseas investment banks. The Principles on Supervision of Financial Holding Companies was released in February 1992 by three major international financial supervisors: the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors. The document stated that a financial holding company refers to "a supervised entity that under the same right of control engages in at least two types of business in banking, securities, and insurance, with different levels required for each type of business." Specifically, a financial holding company is an organizational form for the financial industry to realize multiservice operation. It is also a form of capital operation aimed at capital investment optimization and capital profit maximization. In a financial holding group, the holding company may be considered the group company, and the other financial enterprises can be considered member enterprises. The group company and the member enterprises are connected with each other through property ownership or management relations. Each member enterprise is controlled and influenced by the group company but bears civil liability independently.

The replacement of separated operation by mixed operation in the financial industry is the theoretical basis for the development of financial holding companies. Whether a country adopts mixed operation or separate operation is influenced by the following four factors:

1. Stability, security, competition, and efficiency of the financial system

2. Specific historical and economic conditions

3. Credit culture and regulation

4. Financial competition between different countries

Progress made in the financial industry since the 1990s is the direct reason behind mixed financial operation, as shown by deregulation, scientific and technological advancement, industrial integration, securitization, globalization, and product innovation. This has created the opportunity for the appearance of the financial holding companies. The financial holding company model has become the major path for investment banks in developed Western countries such as the United States, Japan, and the United Kingdom to engage in cross-sector operation.

Relevant legislation passed overseas has also promoted the development of financial holding companies. For example, the U.S. Congress passed the Financial Services Modernization Act on November 12,1999. The act provided that financial holding companies could engage in a series of business sectors, including underwriting and brokerage of insurance and marketable securities, commercial bank business, and insurance company investment portfolio business. In addition, finance-related subsidiary business was also within the ratified scope of business. This act enabled every American to get one-stop financial services. Enterprises and consumers could go through all financial transactions within the same financial company. It was at that time that financial holding companies secured their legitimate status in the United States. After that, the U.S. Congress amended the Bank Holding Company Act and other laws in early 2000, which facilitated the transition from bank holding companies to financial holding companies. As long as a nonbank company had 85 percent or more of its total revenue from financial services and promised to strip away its nonfinance assets within 10 years, it could apply for a transformation into a financial holding company. Driven by these laws and regulations, financial holding companies developed very quickly in the United States. Some gigantic financial holding companies were incorporated, including Citigroup, Goldman Sachs Group, Bank of America, and J.P. Morgan Chase. In the United Kingdom, the financial "explosion" changed the separated operation system in the financial industry. It promoted the integration of commercial banking and stock brokerage and the combination of commercial banks and investment banks. This gave rise to well-rounded financial groups not restricted by business boundaries. They include HSBC, Lloyds TSB, Barclays, and NatWest Group.

Japan is no exception. In June 1997, Japan promulgated the Financial Reform Planning, which paved the way for the establishment of the financial holding company system. Later, in December 1997, the Banking Law was amended, and the Financial Holding Company Deregulation and Reorganization Law and the Bank Holding Company Incorporation Special Case Law were ratified. These changes allowed mixed operation and set forth regulations for internal governance of financial holding companies. Against this backdrop, a whole group of financial holding companies represented by Mizuho group appeared in Japan.

Evolution of Investment Bank Organizational Forms in Mature International Markets

FIGURE 8.1 Evolution of Investment Bank Organizational Forms in Mature International Markets

Figure 8.1 shows the evolution of the organizational forms of investment banks in mature overseas markets, based on this analysis. It also shows the overall development of investment banks in mature overseas markets, with specific reference to the four trends of concentration, public shareholding, formation of groups, and internationalization.

 
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