Financial Liberalisation, Alliance Capitalism and the Changing Structure of Financial Markets

For much of the post-war period financial institutions operated in highly regulated markets, with controls that affected both the scope and the location of their activities. However the last two decades have seen rapid growth in international capital markets, with deregulation stimulating consolidation within national markets as well as the rapid expansion of cross-border linkages between firms. This paper surveys some of the forces causing financial institutions to change their corporate strategies and discusses the wider impact of deeper financial market integration on the major industrialised economies. We consider recent developments in the foreign exchange market, the rapid rise in the number and value of mergers, acquisitions and joint ventures in financial markets, the growth of cross-border bank lending and the factors driving cross-border location in the banking sector. Looking at the experience of the 1990s, we also find evidence that differences in the level of cross-border transactions, as measured by national foreign direct investment stocks, are more closely correlated with the cross-country variation of growth rates in the OECD economies than stock market capitalisation, bond market capitalisation or bank lending to the private sector.