##findahl - hirschman index ( hhi ) in msas decreased from 1990 to 1949 between 1985 and 1997, while in non - msa counties it decreased from 4357 to 4114 ( thrifts excluded ). the stability of average local market concentration is noteworthy because research suggests that competition for retail customers takes place substantially at the local market level, and concentration is a determinant of competition. based on these trends and the fact that tremendous new opportunities for bank mergers have been created by the removal of restrictions on interstate banking under the riegleneal interstate banking and branching efficiency act of 1994, i would expect more consolidation to occur in banking. based on historical experience, some fed economists have projected that in a decade or so about 3, 000 - to - 4, 000 banking organizations will remain. importantly, most of these firms would be smaller organizations. in addition to commercial banking, other financial service sectors have also experienced movements toward consolidation. insurance companies and securities firms have all experienced merger waves in recent years, though not to the extent of commercial banking. this more moderate pace of consolidation in nonbank financial industries is likely due to the absence of preexisting restrictions on geographic expansion. like banking, insurance underwriting is characterized by a broad size distribution of firms, from several large national insurers to much smaller local or technically specialized firms. investment banking is more heavily concentrated, due to the greater geographic expanse of the markets for their services, and due to the considerable benefits of portfolio diversification. extending current patterns into the future, we can only expect a continuation of the trend towards consolidation. informal projections on conglomeration as i noted earlier, in addition to a continuing consolidation in banking and elsewhere in the financial sector, there is also a tendency toward increased conglomeration. given the prospects for legislation expanding the product lines available to banks, i would not be surprised at a wave of cross - industry mergers within the financial sector, particularly among the largest firms, that results in the formation of financial conglomerates. in order to consider the form of the financial sector in the future, i believe it is very important to distinguish between retail financial services ( i. e., those for households and small businesses ) and wholesale or large - scale corporate financial services. the customer bases of these two sectors differ dramatically, as do many of the products used. despite their differences, both the retail and wholesale sectors have moved to expand their product offerings. in retail financial services, the desire by

mr. ferguson speaks on the future of the financial services sector remarks by mr. roger w. ferguson, jr., a member of the board of governors of the us federal reserve system, at the college of management of the university of massachusetts in boston, massachusetts on 27 / 10 / 98. some observations on the future of the financial services sector and related public policy issues let me first thank you for your invitation to speak today at this very topical conference. the future of the financial services sector holds great interest for industry participants as well as bank regulators, given the remarkable changes affecting the industry. developments in this sector will affect all of us. we are all acutely aware of the trend toward the blurring of lines that have separated the various parts of the financial sector, particularly commercial banking, investment banking, and insurance. most recently, we are faced with the prospect of the formation of huge financial conglomerates, composed of amalgams of firms that have previously operated within the roughly defined boundaries of their respective industries. in addition, we have witnessed a substantial degree of consolidation through mergers in the commercial banking and other industries. i will begin my remarks today by discussing historical experience with conglomeration in the us, and the underlying conditions necessary for conglomeration to be a successful business strategy. i will then offer some thoughts regarding what the financial services sector may look like in the future. finally, i will address some of the issues that the federal reserve as a supervisor and regulator will need to consider. there are several conclusions that i would like to highlight. the first is that the movement to financial conglomerate may prove to be transitory. second, basic financial and risk management skills will likely remain the most important determinant of a company ’ s viability and success. third, even in a world of financial conglomerates there will be room for smaller, and more nimble, participants. finally, the supervisory and regulatory structure will need to evolve to meet these new challenges, but regulatory authorities should remain vigilant to carry out our duties, particularly in enforcing the antitrust laws. ii. will financial service conglomerates be successful? the historical context of conglomeration the concept of the financial conglomerate is receiving a great deal of attention at this time because of the diminishing distinctions across financial industries. however, the success of such conglomerates is certainly not guaranteed, based on historical experience. for an illustration, one need only look back to the conglomerate merger movement in the industrial sector during the 1960s