2 • 1

CHAPTER

2

GLOBALIZATION OF THE FINANCIAL

SERVICES INDUSTRY

Ingo Walter

New York University

CONTENTS

2.1 Introduction 1
2.2 Stylized Process of Financial
Intermediation 2
(a) Static and Dynamic Efficiency
Characteristics of Financial
Systems 4
(b) The Facts: Shifts in
Intermediary Market Shares 7
2.3 Globalized Banking Activities 8
(a) Wholesale Finance Market
Activity Segments 11
(i) Wholesale Lending 11
(ii) Securities Underwriting 11
(iii) Privatizations 12
(iv) Trading 12

(v) Brokerage 13

(vi) Investment Research 13

(vii) Hedging and Risk

Management 13

(viii) Advisory Services 13

(ix) Principal Investing 14

(x) Investment Management

and Investor Services 14

(xi) Infrastructure services 15

2.4 Consequences for Global

Institutional Competitive Advantage 15

2.5 Summary 24

SOURCES AND SUGGESTED

REFERENCES 25

2.1 INTRODUCTION. Few industries have encountered as much “strategic turbu-
lence” in recent years as has the financial services sector. In response to far-reaching
regulatory and technological change, together with important shifts in client behav-
ior and the de facto globalization of specific financial functions, the organizational
structure of the industry has been profoundly displaced and there remains a great deal
of uncertainty about the nature of any future equilibrium in the industry’s contours.
At the same time, a major part of the industry has been effectively globalized, link-
ing borrowers and lenders, issuers and investors, risks and risk takers around the
world. This chapter deals with the issue of globalization in the context of a coherent
analytical framework and spells out the key consequences for the strategic position-
ing and implementation for financial firms worldwide.
Section 2.2 considers the generic processes and linkages that comprise financial
intermediation—the basic “financial hydraulics” that ultimately drive efficiency and
innovation in the financial system and its impact on real-sector resource allocation
and economic growth. Maximum economic welfare demands a high-performance
financial system. What does this actually mean? We also document some of the
structural changes that have occurred in both national and global financial systems