The structure of the U.S. financial services industry has changed dramatically during the past quarter century. Large banks, securities firms, and life insurers have pursued aggressive expansion strategies by merging with direct competitors as well as firms in other financial sectors. The Gramm-Leach-Bliley Act of 1999 has encouraged this consolidation trend by authorizing the creation of financial holding companies that engage in a full range of banking securities, and insurance activities. The Act’s proponents have claimed that these new “financial supermarkets” will produce favorable economies of scale and scope, offer convenient “one-stop shopping” to customers, and achieve a safer diversification of risks.In contrast, Professor Wilmarth contends that the motivations for a probable outcome of financial conglomeration are very different. In his view, managers of large, diversified financial firms have sought growth to build personal empires, to increase market power, and to secure membership in the exclusive club of “too big to fail” institutions. By virtue of their too big to fail status, major financial conglomerates are largely insulated from market discipline and regulatory oversight, and they have perverse incentives to take excessive risks at the expense of the federal “safety net.” Based on past experience, the new financial megafirms are likely to encounter diseconomies of scale and scope, shrinking profit margins, increased customer dissatisfaction, and greater vulnerability to sudden disruptions in the financial markets. In addition, the federal government will feel compelled to support these risky behemoths during economic crises. Professor Wilmarth calls for fundamental reforms to our system of financial regulation because current regulatory approaches cannot control the potential risks associated with financial conglomeration.*Professor of Law at George Washington University Law School. B.A. Yale University; J.D. Harvard University.
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