Introduction

A dominant feature of the international financial services industry today is the changing intensity of competition. Among the important environmental forces driving this change are continued exchange rate and interest rate volatility, persistent financial disintermediation and securitization, progressive financial deregulation and market interpenetration, and rapid technological evolution in financial processes and products.

It is an environment that is increasingly forcing a radical reassessment of strategic positioning on the part of firms in the industry. In addition, structural change in the industry has encouraged regulators to rethink the trade-offs between financial efficiency and creativity on the one hand, and safety and stability of the financial system on the other. Theirs is an effort to strike an optimum balance for regulatory treatment of the financial sector in its central role as an agent for national economic growth and development.

The purpose of this chapter is to develop, in a coherent analytical framework, the principal variables that appear to explain differential competitive performance among players in the international financial services industry. This framework is then used to evaluate the sources of market power and the strategic behavior of individual institutions. For example, the acquisitions in 1986 and 1987 of significant shares in Goldman Sachs and Shearson Lehman Brothers by Sumitomo Bank and Nippon Life, respectively, can be interpreted in a coherent manner. Similarly, penetration of the U.S. and European securities markets by Nomura, Daiwa, Nikko, and Yamaichi – as well as penetration of Japanese securities markets by U.S. and European firms – can be assessed.