The competitive structure of markets and institutions

Deregulation, globalization and advances in information technology are having a dramatic impact on the structure of domestic and international financial markets and the nature of financial service firms. Currently, governments and regulators around the world are evaluating their rapidly changing financial systems and the ways those systems influence national economies.

The Financial Institutions Center is deeply involved in studying changing market structures. A significant share of its research agenda is focused on global markets and the forces fueling their transformation.

Key studies, forums and programs

For example, FIC Co-Director Richard Herring has been a member of the Group of Thirty Study Group on Supervision and Regulation. Herring helped draft "Global Institutions, National Supervision and Systemic Risk," a report that led to the establishment of the Institute for Foreign Stability, an affiliate of the Bank for International Settlements. In addition, Herring has served as advisor to the World Bank on an initiative to restructure Asian financial systems in the wake of the Asian financial crisis of the late 1990s.

In other international activities of the Center, FIC Co-Director Franklin Allen and former director Anthony Santomero assessed Latin American and Caribbean financial structures and their trend toward deregulation in a study for the InterAmerican Development Bank. In addition, the Center participated in a review of Japanese government policy options and, at the request of the Swedish Productivity Commission, the FIC analyzed the impact of the financial sector on Sweden's national economic performance.

Changing domestic markets have also been a target of Center research. In a research study of consolidation within the U.S. banking industry, for example, Wharton's Harbir Singh found that of the three stages in the acquisition process—screening, negotiation/valuation and post-acquisitions management—the least understood was post-acquisition management. This finding has inspired further research to study the factors that differentiate post-acquisition strategies from desired outcomes.

Similarly, the phenomenal growth of mutual funds is radically altering the financial services marketplace and introducing new service providers. To address these market trends, the Center is analyzing the effects of changing structural issues and developing business practices on fund suppliers. As part of this broad focus on mutual funds, Wharton's Richard Herring took part in a Securities and Exchange Commission initiative to strengthen the role of outside directors in the mutual fund industry.

In other activities, Wharton's Olivia Mitchell is working closely with industry partners to assess the management of retirement assets in U.S. markets. In one series of studies, sponsored by KPMG Peat Marwick, researchers analyzed consumer retirement savings choices and the changes associated with a more competitive marketplace.

In a related action, the FIC developed a research program and forum geared specifically to the life insurance industry. The FIC Life Insurance Forum charted the long-term course of the life insurance industry as it relates to changes in the broader financial services marketplace. Members of the industry-sponsored forum met twice a year with Wharton faculty to review research results and provide input to the evolving agenda. Tillinghast Financial Services served as a research partner in the program, adding an applied dimension to complement Wharton's academic perspective.

A summary of the Center's insurance-related work appears in a book entitled Changes in the Life Insurance Industry: Efficiency, Technology & Risk Management (Kluwer Academic Publishers, Norwell, Mass.). This work is co-edited by Anthony Santomero, former FIC director, and David Cummins, Wharton Professor of Insurance and Risk Management.

The impact of globalization on financial markets is another sub-theme attracting the attention of Wharton researchers. Funded by Deloitte & Touche, one research team is examining the forces of consolidation and product convergence and their effect on the structure of multinational financial service providers. The globalization of financial markets was also the featured theme of the third Brookings-Wharton Papers on Financial Services, examining issues of cross-border consolidations, international regulatory standards, and global security markets.