Ch 21 fully revised 2011

Ch 21 fully revised - 1 Chapter 21 Product and Geographic Diversification 2 Overview First half of chapter Product Diversification Analyze the

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Chapter 21 Product and Geographic Diversification 1
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Overview First half of chapter: Product Diversification. Analyze the problems and risks arising as a result of the restrictions that force FIs to restrict activities to a narrowly defined financial services sector. Explore the potential benefits to greater product expansion. Identify the potential effects of universal banking. Second half of chapter: Geographic Diversification. Benefits to geographic diversification available in the domestic market and reasons underlying the merger wave in the U.S. Evidence on the cost and revenue synergies and other factors affecting geographic expansion. 2
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Introduction Universal FI structure in Germany, Switzerland, and UK. Citicorp/Travelers merger in 1998 was a clear indication of the rapidly eroding regulatory barriers separating FI types. Financial Services Modernization Act of 1999 (Gramm, Leach, Bliley Act) has accelerated the reduction in barriers among FIs. 3
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Product Segmentation in the U.S. Historically there was a separation of commercial and investment banking via Glass-Steagall Act of 1933. Over time, exemptions for: Treasury Securities. Municipal General Obligation bonds. Private placements. After various challenges, in 1987 the Fed allowed BHCs to establish Section 20 affiliates as investment banks to underwrite commercial debt and equity. The revenues from restricted securities underwriting activities had to be less than 5% of total revenue of the Section 20 affiliates (later raised to 25%). 4
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Erosion of Glass-Steagall Permissible activities of BHCs expanded by Federal Reserve and OCC in 1997. Fed allowed direct acquisition of investment banks rather than establishing Section 20 subsidiaries. investment banks in 1997 through 2000. i UBS/Paine Webber i CFSB/ Donaldson Lufkin Jenrette i Deutsche Bank/Banker’s Trust preceded by Banker’s Trust acquisition of Alex Brown i Citicorp/Travelers i NationsBank/Montgomery Securities 5
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Banking and Insurance Prior to Financial Services Modernization Act of 1999: Barriers to banks and insurance companies entering one another's lines of business. Citicorp/Travelers merger as a catalyst. 1986: Banks began selling annuities, but traditionally banks were prevented from entering insurance business. Restricted to agency activities, offering credit-related products in small towns. Garn-St. Germain Act of 1982 specified restrictions on BHCs establishing insurance affiliates. 6
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Banking and Insurance (continued) Delaware: Liberal laws allowing state-chartered banks Nonbank
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This note was uploaded on 07/02/2011 for the course FINA 465 taught by Professor Berger during the Spring '11 term at South Carolina.

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Ch 21 fully revised - 1 Chapter 21 Product and Geographic Diversification 2 Overview First half of chapter Product Diversification Analyze the

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