FINANCIAL INTEGRATION AND SCOPE EFFICIENCY POST GRAMM-LEACH-BLILEY

The Gramm-Leach-Bliley Act of 1999 removed barriers that forced separation between commercial banks, investment banks, and insurance companies in the U.S., and promised the most fundamental reform in U.S. financial services regulation in more than half a century. By constructing a unique dataset that links the U.S. banking and insurance regulatory datasets, we firstly identify domestic “assurbanks” (insurers owning banks), “bancassurers” (banks owning insurers), and the unique subsidiaries licensed as commercial banks, thrifts, or insurance companies. We then estimate efficiency effects from the economies of scope across the two formally separate sectors by estimating multi-product costs, revenue, and profit functions. The empirical evidence suggests that a significant number of cost scope diseconomies, revenue scope economies, and weak profit scope economies exist in the post-GLB U.S. integrated banking and insurance sectors. The scope economies are variant among firms, and certain firm characteristics (size, business portfolio, geographic diversification, product mix and diversification, insurance distribution system, and X-efficiency) are the determinants of scope economies.