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Convergence in Financial Services Markets: Effects on Insurance Regulation
- Brookings Institution Press
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Convergence in financial services refers to two quite different developments, each of which is likely to have a different but cumulative effect on regulatory structure. The most obvious form of convergence is conglomeration among banks, securities firms, and insurance companies, an effect that is largely the result of banking organizations—freed to do so by the Gramm-Leach-Bliley Act of 1999 (GLBA)—acquiring insurance and securities affiliates. To a much lesser extent, insurance companies have acquired securities firms, and in even fewer transactions , securities firms and insurance companies have acquired banks. The second form of convergence is in products and services, in which industry members (banks, securities firms, and insurance companies) have developed products that directly compete with the products and services of the others.1 Moreover, all three industries are currently engaged in some part of the rapidly developing derivatives business, which is both increasing competition among them and driving them to behave in similar ways. Convergence in Financial Services Markets: Effects on Insurance Regulation Peter J. Wallison 167 7 1. The financial services industry is often described as consisting of four separate services: banking , securities, insurance, and futures. The futures industry, although growing, is still substantially smaller than the other three and is not covered in this chapter. As noted in this chapter, convergence in the financial services industry is frequently reported in academic and government studies but is seldom separated into its component parts or described in detail. Yet cross-industry competition—the most significant element of the convergence phenomenon—is extensive across a range of products and has a profound influence on the competitive behavior of financial services companies. Understanding the scope and scale of this competition is necessary for a full assessment of the likelihood that the regulation of insurance will change significantly and the direction that any change would take. Accordingly, this chapter attempts to describe some of the most significant areas of cross-industry competition and to assess how this competition will drive regulatory restructuring in the future. Although the implications of convergence have already resulted in major changes in regulatory structures in many developed and developing countries, the same is not true for the United States.2 Under the U.S. regulatory structure, banks, securities firms, and insurance companies are separately regulated. Banks and other depository institutions are chartered at both the state and federal levels and regulated at the federal level by four separate agencies. Securities firms are ordinary business corporations, chartered under state law but largely regulated at the federal level by the Securities and Exchange Commission (SEC). Insurance companies are solely state chartered and regulated.3 Combined, more than a hundred state and federal regulators have jurisdiction over one or more members of all three industries. Recently, the U.S. Treasury Department—citing industry convergence , among other things—recommended what it called an “optimal regulatory structure” for the future. The Treasury noted: The growing institutionalization of the capital markets has provided markets with liquidity, pricing efficiency, and risk dispersion and encouraged product innovation and complexity. At the same time, these institutions can employ significant degrees of leverage and more correlated trading strategies with the potential for broad market disruptions. Finally, the convergence of financial services providers and financial products has increased over the past 168 peter j. wallison 2. According to the Institute of International Bankers Global Survey (2001), by 2001 the following countries had established consolidated regulatory authorities for financial services: Australia, Canada, Colombia, Denmark, Ireland, Japan, Korea, Norway, Peru, Sweden, and the United Kingdom . According to the GAO, Germany should be added to this list. See U.S. Government Accountability Office (2004), p. 62. 3. A more complete summary of the current regulatory structure for financial services in the United States appears in Brown (2005), pp. 10–19. [34.230.68.214] Project MUSE (2024-03-28 10:48 GMT) decade. Financial intermediaries and trading platforms are converging. Financial products may have insurance, banking, securities, and futures components. These developments are pressuring the U.S. regulatory structure, exposing regulatory gaps as well as redundancies, and compelling market participants to do business in other jurisdictions with more efficient regulation. The U.S. regulatory structure reflects a system, much of it created over seventy years ago, struggling to keep pace with market evolutions and, given the increasing difficulties, to anticipate and prevent financial crises.4 The Treasury’s new structure (apart from an ill-defined role...