WHAT IS A FINANCIAL CONGLOMERATE?

Banking, insurance, investments, securities. Once these were notable as disparate and distinct fields. Today, they seem to get confused, tangled, they overlap. Commercial banks do investment banking. Insurers offer banking products. Investment banks provide retail brokerage services. You go to your bank and you get your bills paid and your household insurance sorted out. Private pensions are offered by insurance companies and banks. And sometimes, one has the suspicion that what one is getting is not quite an asset management product, a bank account or an insurance policy but a combination of the three. At the same time, banks and insurance companies deal with all sort of clients: from retail investors to institutional pension funds, from the selfemployed to large corporates and multinationals, from the man on the street to small or medium companies. One has the impression that conglomeratisation is taken root everywhere.

This reports looks at the phenomenon of the complex financial organisations, often referred to as financial conglomerates (in this report, the terms will be used interchangeably). It looks at its sources, its development, and its likely evolution. It tries to answer a variety of questions: whether they will remain as the preferred industrial configuration, if they are the only way forward, and how changes in technology and new entrants will affect the future of the financial services industry as a whole and that of the players within it, not only conglomerates but also focused or specialised competitors. The focus of this report concentrates on retail financial services, especially in banking and insurance, and deals mostly with the European financial scene. However, where appropriate, references have been made to non-retail financial services areas such as reinsurance or investment banking, and numerous comparisons have been drawn with the US.

But before addressing the issues mentioned above, one needs to ask: what is a complex financial firm? The answers are varied.
The regulatory approach: a wide-encompassing definition
The issue of financial conglomerates has received a great deal of attention, especially in regulatory and supervisory circles since one of the key difficulties is how to supervise the risk undertaken in different lines of business. From this point of view, a financial conglomerate has been described, for instance by the Bank of International Settlements (BIS) as a group:

•  whose primary business is financial;

•  whose regulated entities engage to a significant extent in at least two of the activities of banking, insurance and securities business;

• and whose activities are not subject to uniform capital adequacy requirements.

This definition highlights the supervisors’ preoccupation with entities subject to their supervision, while the mention to capital adequacy requirements refers to the need for these entities to maintain a certain amount of capital to minimise and be able to respond to the risk associated with their  ctivities.
This definition, as we shall see further below, is so wide that it covers most of today’s financial organisations. At the same time, it ignores the fact that there are certain unregulated (and thus not subject to capital adequacy requirements) financial activities in which financial companies also engage, such as for instance leasing, factoring or reinsurance. Arguably, these could be included within the three fields listed above (banking, insurance or securities).

Finally, one can also cover the topic of mixed conglomerates, that is, organisations that combine both financial and non-financial operations. Examples of corporations that engage in a degree of financial activities include:

•  industrial companies that have created their own insurance or reinsurance captivefirm (e.g. BP, Electrolux) or have their own in-house insurance broker (as is the casein many German firms);

•  firms that engage in securities and trading activities, most notably those that deal with commodities and raw materials (e.g. oil companies, Cargill, Glencore);

• companies that provide financial services during the sale or as after-sales service,such as trade finance in the case of import-export firms. The most notable case,however, is that of auto manufacturers, where virtually every major player has itsown finance subsidiary: DaimlerChrysler (debis), Volkswagen (VW Financial Services), Renault (Renault Crédit International), Peugeot and Citröen (PSA),Nissan (Nissan Finance), General Motors (GMAC), and many more.

The financial component of a mixed conglomerate does not have to limit itself to a single financial activity and can be in itself a financial conglomerate. Perhaps the most famous example of this is GE (General Electric) of the US, whose GE Capital arm encompasses activities such as banking, credit cards, leasing, insurance and reinsurance to name just a few.