The financial industry, or financial services industry, includes a wide range of companies and institutions involved with money, including businesses providing money management, lending, investing, insuring and securities issuance and trading services. The following institutions are a part of the financial industry:
Financial Industry: History
The major events that have shaped the modern finance industry are:
- The Great Depression (1929): The Great Depression originated in the US with the Wall Street crash in October 1929. The effects of the depression spread across the world, especially in the heavy industries. Capital requirements regulation, financial industry oversights and the insurance of deposit accounts sprang out of this tumultuous period.
- Black Monday (1987): On October 19, the stock markets across the world witnessed a huge crash. This was the largest one day decline in the stock market history. The crash started in Hong Kong, spreading to Europe and the US. Analysts blamed computer trading systems for magnifying the losses.
- Asian Financial Crisis (1990s): The Asian Financial Crisis was triggered by the collapse of Thai baht as the government of Thailand decided to float the national currency. The nation had a huge foreign debt at that point, driving it to the verge of bankruptcy. The crisis rippled across the whole of Southeast Asia and has led to many emerging market countries to reduce debts and build up foreign currency reserves.
- Stock Market Downturn (2002): Stock exchanges around the world witnessed a significant decline in March 2002. It was attributed to the bursting of the ‘Dot-com Bubble’, which saw major Internet companies going bankrupt.
- Sub-prime Crisis (2007): Credit markets faced major crunch due to large scale default on loans. It led to the Financial Crisis of 2008 – 2009 and resulted in the bankruptcy, fire-sale acquisition and government bailouts of finance industry giants such as Lehman Brothers, Bear Stearns, AIG, Fannie Mae, Freddie Mac, Merrill Lynch, Wachovia, Northern Rock, Lloyds TSB, HBOS, RBS and the entire banking system of Iceland. The world economy can expect reduced growth rates and tighter regulations as a result of this crisis.
Financial Industry: Demand and Supply Drivers
Demand for financial products are driven by risk-reward assessments, which consider:
- Potential Yield
- Risk rating
- Availability of information
- Access to alternatives
The major supply drivers are:
- Money supply
- Interest rates
- Economic conditions
- Government regulations
Financial Industry: Major Players
According to the Global 2000 (annual report by Forbes), seven of the world’s top 10 companies belonged to the financial industry. These included Citigroup, Bank of America, HSBC Holdings and JPMorgan Chase. Their combined revenues in 2007 were worth $645 billion, down from the 2006 high of $785 billion.
According to the Fortune 500 rankings, in 2006 financial services generated $257 billion in profits, a third of total Fortune 500 profits. In 2008, however, they lost a staggering $213 billion, a total swing of $470 billion. Big players on the list, such as Citigroup and Bank of America, may only be alive today thanks to government money.
The finance industry is an industry in itself as well as an ancillary that supports other industries. Trade and commerce across the world would come to a standstill if there was no means to fund, pay and protect the transactions, hence the need for governments to support the financial services industry when companies that are ‘too big to fail’ are close to collapse.