The Determinants Of Success In the New Financial Services Environment: Now That Firms Can Do Everything, What Should They Do And Why Should Regulators Care?

The United States government enacted the Banking Act of 1933, commonly known as the Glass-Steagall Act, at least partially in an effort to calm fears stemming from bank failures during the Great Depression. While there has been a recent debate concerning the historic realism of characterizing the banking industry structure as the cause of the financial crisis (Benston, 1990), the perception of bank activities in the financial market as risky (Puri, 1994), and the motivation of the legislators (Benston, 1996), the historical outcome of this legislation is clear. Glass-Steagall placed a heavy regulatory burden on commercial banks by limiting their product array, the prices they could charge, and the types of firms with whom they may affiliate. It short, it restricted the activities in which banks may participate. During the ensuing sixty-five years, this landmark piece of regulation slowly has become both outdated and untenable. Technological innovation, regulatory circumvention, and new delivery mechanisms all have conspired to make the restrictions of the Act increasingly irrelevant. The first force of change, technology, permitted firms to create and recreate products and services in different ways than had been envisioned decades ago. The most obvious example is the transformation of the local mortgage loan market into the global securities giant of today. However, one could equally cite the explosive growth of both derivatives and trading activity as areas where technology has transformed the very core of financial services (Allen and Santomero, 1997). Because of regulation, however, individual financial firms were still limited in the scope of the activities that was permissible. Commercial banks could not offer the full range of security investment services; investment firms could not offer demand deposits; and, insurance firms were limited in offering services beyond their own "appropriate" products as well. Many firms responded by circumventing regulation, either explicitly or implicitly (Kane, 1999, Kaufman, 1996). Some more aggressive members of the fraternity simply acted in a manner not allowed by regulation in hopes of either an innovative interpretation of the law, e.g., NOW accounts, or money funds, or formal regulatory relief, e.g., Citigroup. The results were, almost always, regulatory accommodation or capitulation. These decisions, at times, made economic sense, e.g., the decisions on private placement activity, or advisory services, but at other times they stretched the credibility of the rules, if not the English language, e.g., non-bank banks, the facilitation of commercial paper placement, and mutual funds distribution. Yet, through this mechanism of regulatory evolution the industry progressed. Banks were granted greater latitude in product mix, as well as permitted to form holding companies that expanded their operations further. At the same time, competition increased as the rules permitted new entrants who flourished in focused areas, e.g., GE Capital. Today, a myriad of financial services firms, operating under different regulatory charters are competing in the broad financial marketplace. The final force of change is the continual evolution of the delivery channels through which financial services are offered. This has occurred in many ways and in several stages. First, the use of postal services substituted for physical market presence; this was followed by increased use of telephones for both customer service and outbound marketing; and now, personal computers and the web have altered the very balance of the financial industry. Throughout this period the application of technology has disrupted the industry's delivery paradigms and the traditional channels of service distribution. The combined use of new technology, conduits of distribution, and financial innovation have broadened the product offerings of all firms beyond their historic core business. Nonetheless, by law, financial service firms of specific types continued to be expressly limited in their activities. Finally, the Financial Modernization Act of 1999 (FMA), introduced on January 6, 1999 in the House of Representatives as H.R.10, has become law under the name the Gramm-Leach-Bliley Act. The bill's stated purpose was "[t]o enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, and other financial service providers, and for other purposes." The potential ramifications of FMA have been, and surely will be, continuously analyzed as the details of the enabling regulation emerge and the industry responds to its new perspective on firm structure and allowable activity (ABA,1999, Stein and Perrino, 2000). Yet, the proponents of the FMA have already heralded its passage and argued that the legislation will result in more competitive, stable, and efficient financial firms, and a better overall capital market (Greenspan, 1997). Detractors, and there have been some, claim the new law will result in unfair business practices and less stable capital markets (Berger and Udell, 1996). In this contribution to the debate we attempt to consolidate many of the arguments for and against the financial conglomeration that will inevitably follow the passage of the new law. We offer our view of the effects of this new competitive landscape on affected financial firms, as well as the behavior of the capital market itself. Our focus is on the impact of the changing nature of both the market infrastructure and the regulatory regime on the behavior and likely span of activity conducted by large financial firms. In the words of our title: now that firms can do everything, what should they do, and why should regulators care?

The determinants of success in the new financial services environment: now that firms can do everything, what should they do and why should regulators care?

Financial services industry ; Financial services industry - Europe ; Bank supervision ; Business forecasting

Punitive Damage Effects on Post-Loss Bargaining and Settlement

We examine the theoretical effects of punitive damages and how they affect pretrial bargaining of insurers and insureds. We also seek to determine how the introduction of symmetric punitive damage awards could affect the bargaining, and by extension, the entire litigation process. We find that asymmetric punitive damage awards do tend to increase the bargaining power of insureds and by allowing for a symmetric system the bargaining power of insureds and insurers are more balanced. We also find that altering the mechanisms for court cost payments also can alter the probability of out of court settlements.Nous examinons dans cet article les effets théoriques des dommages exemplaires et comment ils affectent les négociations préparatoires au procès entre les assureurs et les assurés. Nous cherchons également à déterminer comment l’introduction des dommages exemplaires symétriques peut influer sur les positions des parties et sur l’ensemble du procès. Nous avons découvert que l’octroi de dommages exemplaires asymétriques a tendance à augmenter le pouvoir de négociation des assurés et que le pouvoir de négociation entre assureurs et assurés est plus équilibré en tenant compte d’un système symétrique. Nous avons également trouvé que toute altération des mécanismes reliés aux frais des litiges peut aussi modifier la probabilité des règlements hors cours

Asymmetry in Earnings Management Surrounding Targeted Ratings

This study investigates asymmetric incentives in firms managing earnings in an attempt to achieve a target financial strength rating. We find empirical evidence that firms with an actual rating below their target rating use income-increasing earnings management. However, we find no evidence that firms above their target rating manage earnings. Our findings are robust to a variety of alternative definitions of target rating. Notably, we examine a subset of firms with an exogenously determined target rating and find consistent results. These findings indicate that firms have incentives to reach a target rating if they are rated below their target, but not above their target. Highlight: https://www.ln.edu.hk/sgs/chair-professor-research-sharing-webinar-02-highlight

Loss Aversion and the Framing of the Health Care Reform Debate

The high-stakes debate over health care reform captured the public\u27s attention for nearly a year. Options ranging from fully nationalized insurance to maintaining the status quo were considered, though little consensus as to the appropriate solution emerged. Most surveys indicated an agreement that a problem existed with the current health care system and a clear and consistent majority favored taking some action on health care reform. However, clear public support for any specific reform proposal was difficult to muster since most individuals also indicated satisfaction with their own health care. This paper explores this disconnect in public opinion within the context of loss aversion. We note that even as elites actively attempted to frame the issue to counteract the public\u27s loss averse tendencies, these strategies met with little success in generating support for Obama\u27s reform plan. However, we also argue that these loss averse tendencies will now work against any Republican efforts to repeal the health reform legislation

Punitive Damages and the Demand for Insurance

This study examines the theoretical effects of punitive damage awards on the demand for insurance. The demand for insurance is shown to be decreasing in the amount of possible punitive damage awards. The decrease in demand occurs as a result of these awards being priced into the insurance premium. This model shows yet another reason for the existence of partial insurance even with fairly priced insurance premiums.Le but de cet article théorique est d’examiner les effets de l’attribution des dommages exemplaires (dits punitifs) sur la demande en assurance. Nous montrons que cette demande est décroissante en fonction du montant des dommages exemplaires puisque ces-derniers sont inclus, en espérance, dans la prime d’assurance qui est payée. Notre modèle présente ainsi une autre raison qui sous-tend l’optimalité de l’assurance partielle même si les primes reflètent uniquement les pertes actuarielles