that U.S. financial firms have come to dominate various intermediation roles in the
financial markets—over half of global asset management mandates, over 77% of lead
manager positions in wholesale lending, two thirds of bookrunning mandates in
global debt and equity new issues, and almost 80% of advisory mandates (by value
of deal) in completed M&A transactions. Indeed, it is estimated that in 2000 U.S.-
based investment banks captured about 70% of the fee-income on European capital
markets and corporate finance transactions (see Smith and Walter, 2000a).
Why? The reasons include the size of the U.S. domestic financial market (ac-
counting for roughly two thirds of global capital-raising and M&A transactions in re-
cent years), early deregulation of markets (but not of institutions) dating back to the
mid-1970s, and performance pressure bearing on institutional investors, as well as
corporate and public-sector clients, leading to an undermining of client loyalty in
favor of best price and best execution. Perhaps as an unintended consequence of sep-
arated banking since 1933, institutions dominating disintermediated finance—the
U.S. full-service investment banks—evolved from close-knit partnerships with un-
limited liability to large securities firms under intense shareholder pressure to man-
age their risks well and extract maximum productivity from their available capital. At
the same time it was clear that, unlike the major commercial banks, regulatory
bailouts of investment banks in case of serious trouble were highly unlikely. Indeed,
major firms like Kidder Peabody and Drexel Burnham (at the time the seventh-largest
U.S. financial institution in terms of balance sheet size) were left to die by the regu-
lators. Subsequently, the capital-intensity and economic dynamics of the investment
banking business has caused most of the smaller and medium-size independent firms
in both the United States, the United Kingdom and elsewhere (e.g., Paribas in France
and MeesPierson in the Netherlands) to disappear into larger banking institutions.
It is interesting to speculate what the European matrix in Exhibit 2.12 will look
like in 10 or 20 years’ time. Some argue that the impact of size and scope is so pow-
erful that the financial industry will be dominated by large, complex financial insti-
tutions—not only for Europe but also for other markets. Others argue that a rich array
of players, stretching across a broad spectrum of strategic groups, will serve financial
systems better than a strategic monoculture based on massive universal banking or-
ganizations. Some argue that the disappearance of small community banks, inde-
pendent insurance companies in both the life and nonlife sectors, and a broad array
of financial specialists is probably not in the public interest, especially if, at the end
of the day, there are serious antitrust concerns in this key sector of the economy.
2.5 SUMMARY. Major parts of the financial services industry have become global-
ized over the years, linking borrowers and lenders, issuers and investors, risks and
risk takers around the world. In this chapter we have considered the generic processes
and linkages that comprise financial intermediation and the characteristics of high-
performance financial systems, and reviewed some of the structural changes that
have occurred in both national and global financial systems. We noted that financial
channels that exhibit greater static and dynamic efficiency have supplanted less effi-
cient ones as part of a generic process of financial evolution.
We then described a range of specific financial activities that have become most
heavily globalized, notably the “wholesale” end of the financial spectrum that links
end users through increasingly seamless global financial market structures. This was
followed by an examination of the consequences in terms of financial-sector recon-
figuration, both within and among the four major segments of the industry (commer-
2 • 24 GLOBALIZATION OF THE FINANCIAL SERVICES INDUSTRY