The New World of Banking

• Author: Tomás J.T. Baliño and Angel Ubide
• Position: Senior Advisor in the IMF's Monetary and Exchange Affairs Department/Economist in the IMF's European I Department

Four trends are fundamentally altering the financial world: consolidation of institutions, globalization of operations, development of new technologies, and universalization of banking. Each of these poses challenges for the effective supervision and regulation of the financial sector.

Financial institutions around the world are consolidating at a rapid pace. The number of institutions is declining, their average size is increasing, and it is a rare week when no new bank merger or acquisition is announced. Indeed, the last two years have witnessed the creation of the world's largest banking groups through several mergers (see chart). In the United States, the lifting of interstate banking restrictions in 1994 triggered a wave of mergers, and European integration has intensified consolidation in Europe-which the introduction of the euro in January 1999 has further encouraged. In many emerging markets, such as Argentina, Brazil, and Korea, consolidation is also well under way as banks seek to become more efficient and more resilient with respect to shocks.

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Nor has consolidation been confined by national borders. In a drive that has created powerful "national champions" in many industrial countries, financial institutions have not waited for opportunities for growth and increased profitability to be exhausted domestically before transcending national frontiers. This process of globalization has been dominated by industrial country banking groups' exploitation of the growth potential in emerging markets, as witnessed by the expansion of Spanish banks in Latin America, German banks in Eastern Europe, and U.S. banks in East Asia. At a somewhat slower pace, cross-border consolidation is also taking place between industrial countries, initially in the form of strategic alliances that offer some of the benefits of diversification without the costs of merging different business cultures.

Developments in technology, and especially the impressive growth of Internet banking and brokerage services, have allowed globalization to go beyond the ownership structure of financial conglomerates and to reach the retail markets. In fact, many banks are using their online operations to expand into foreign markets, avoiding the costly process of building retail brick-and-mortar networks of branches. Moreover, the emergence of alliances between major banks and telecommunications conglomerates suggests that, in the future, competition in the electronic marketplace will be fierce. In addition, the appearance of virtual banks and the development of electronic money for the global Internet market have created the possibility for the growth of nonbank (and, possibly, largely unregulated) institutions that provide credit to, and collect funds from, the public. Faster communications require faster reactions from both markets and policymakers but also quickly make information obsolete.

The final vehicle for this transformation of the financial sector is the universalization of banking, which is increasingly blurring the boundary between bank and nonbank financial services. This trend is already well developed in certain European countries-as exemplified by the widespread distribution of insurance products through bank branches, a phenomenon known as bancassurance-and presages the formation...