The world economic has been changed along the time which affect the financial system. The corporate and wholesale banking also have an affect from the changing in the world economic. Since 1990, the world faced the economic crisis which brought some change to the structure of the corporate and whole banking. In this paper will examine the trend of the industry since 1990.
Corporate and wholesale banking are the banking service which provide to merchant banks, financial institutions or various corporations. It is different from retail banking by focus on more corporate style and higher value of transactions. Also, wholesale banking is an option for investors to buying or selling properties because they are easy to access the financial portfolio which makes the transfer simpler.(Wisegeek, 2010)
According to Matthews (2005), there are three trends that affect the activity and structure of banking which are deregulation, financial innovation and globalization.
The deregulation of financial markets and banks has effected their competitive actions. There are three phase of the process of deregulation in economic.
The first phase of deregulation is about lifting of quantitative controls on bank asset and the interest rate ceiling (Matthews, 2005). In the USA, after the great depression occurred in 1929, banks were limited the interest rate in order to prevent the interest rate wars at excessive levels by the Regulation Q. However, just before 1980, inflation forced the interest rate to exceed the limitation. The money market mutual fund was created by brokerage firm and other financial institutions. It operated without the limitation of the rates of return. The Depository Institutions Deregulation and Monetary Control Act 1980 was established to ease off the interest rate ceiling on deposit in six years which help bank to compete with money market mutual funds. In 1982, the Garn-St. Germain Depository Institution Act was established. It deregulates the savings and loan industry to give advantage to the thrift industry by attracts 10 percent of commercial loans in order to compete with the money market mutual funds. However, this Act led to the savings and loan crisis in the late of 1980s. In 1989, the Financial Institutions Recovery and Enforcement Act was written to recover the savings and loan crisis (Sherman, 2009). In the UK, Competition and Credit Control in 1971 was the beginning of relaxing the credit restriction and in 1981, the credit control in the UK had been canceled completely by the UK hire purchase control Act (Matthews, 2005).
The second phase of deregulation is about relaxation of the specialisation of business between banks and financial intermediaries. They will have opportunity to compete each other. In the USA, the deregulation on Glass-Steagall Act in 1932, according to Sherman (2009), the legislation separated commercial banking from investment banking and insurance services. There were many complains of Glass-Steagall Act during the mid of 20th century. The Garn-St Germain Act 1982 gave opportunity for banks to compete thrift agencies. In 1999, Glass-Steagall Act was completely deregulated by Gramm-Leach-Bliley Act. It canceled all restrictions of merging of banking, securities and insurance operations for financial institutions. From this deregulation, the bank will be able to operate both in commerce and banking. In the UK, after the mortgage market was opened in 1980s, the Building Societies Act in 1986 and the new Banking Act 1987 allowing Building Societies and Bank to widen their financial services. So, both of them can compete each other in the market. (Kasi V., 1990)
The third phase is about the competition from non-financial institutions. The new entrants of the financial market in the UK are major retail stores in the UK, for example; Tesco Finance, Marks & Spencer, Virgin, which provide banking service. In the USA, retail companies and automobile companies, for example; Sears, Roebuck, General Motors, have entered financing, leasing, consumer credit, investment and insurance market. (Matthews, 2005)
The second trend is financial innovation which can be viewed as satisfying a gap in the supply and demand disequilibrium in the financial market. This gap may also refer to ‘financial preference gap' (Gardener E.,1988). As refer to Bank For Internation Settlement (1986), the innovation of bank is motivated by financial instability, regulation and technology. For the financial instability, the instable of market will influence the financial institution to create the new instrument for the market; the example to these is the debt crisis in 1980s. OPEC enables to do a short term deposit with a roll-over credit while oil importing developing countries need to finance their long term requirements. So, the later need to borrow money from the bank which cause the bad debt to bank (Llewellyn, 1988). Also, the inflation, interest rates and exchange rates are easily to change and unpredictable. The new instrument was influenced to hedge against those risks for example floating rate note (FRN) (Matthews, 2005).
The regulation is another factor that influences the financial innovation by bringing new financial instruments and markets have their origin in an attempt to avoid regulation (Llewellyn, 1988), for example; the regulation of domestic banks in the USA which motivated to development of Eurodollar market offshore (Matthews, 2005).
As the same time, technology creates wide rank of bank products (Matthews, 2005). According to Llewellyn (1988), technology brings in the design and pricing of new instruments, and simplify the identification, measurement and monitoring of risks in portfolios using complex instruments, reducing the trading costs in international markets, and affect of widening the market for new instruments to an international dimension.
Financial innovation has changed two of the structures of wholesale banking which are changing from asset management to liability management and the development of variable rate lending (Matthews, 2005). Buckle and Thompson (2000) supported the idea of changing the management structure of bank. The wholesale banks do not match their assets with its liabilities which mean their liquidity is low. Its structure need to be switched from asset management to liabilities management. The general trends of corporate and wholesale banking in term of financial innovation are securitization and off-balance sheet activities (Llewellyn, 1988). There are two distinct definitions of securitization. The first type involves the unbundling and repackaging of the existing loans or financial asset into securities which are sold to market investors. The second type involves the raising of debt through the issue of securities in the capital market (Kasi V.,1990). For example, in the USA, banks borrowing from the Eurodollar market by using their overseas branches in order to avoid the restriction of regulation Q (Matthews, 2005). From volatile inflation and interest rates during the 1970s, the variable rate lending was developed. So, many companies switched to variable rate loans which linked to the London Inter Bank Offer Rate (LIBOR) in order to avoid the fluctuated of the interest rates (Matthews, 2005).
The globalisation refers to a circumstances where each country's financial market and economy becomes integrated resulting in development towards a single world market (Kahveci E., 2006). It has been influenced by ‘push' and ‘pull' factors. The ‘push' factors of regulation in the base country to drive banks aboard. For example, The Bank holding Act 1956, the restriction on funding capacities influenced US bank abroad. On the other hand, the ‘pull' factors of following their customer which go aboard. For example, banks tend widen their service to the country which their customer going to expand (Matthews, 2005). The growth of international business added to the value of overseas branches and representative networks. The main objective of international bank is to provide the customer with the service that customer expect in a global integrated market. Also, the globalisation helps to widen the range in terms of sources of finance because the capital market has widened the market for borrower and investor, at the same time encouraging the growth of securitization (O'Brien R., 1992).
In conclusion, due to current situation, the bank centred financial crisis occurs in 2007-2009. Turner (2009) summarised the cause, which led to the crisis, includes huge growth in securitised credit, securities trading, leverage and too much dependence on short-term capital market funding.
Handout tiger gave me
David T Llewellyn Financial Innovation: A Basic Analysis Research paper no 56 November 1988
Turner A, Chairman, FSA, speech for, The Economist's Inaugural City Lecture, LSE, 21st January 2009
Valliappan Kasi The Impact of Securitisation on UK Bank Corporate lending 1990 print by photo-litho at the university college of North Wales, Bangor, Gwynedd
Richard O'Brien 1992 Global Financial Integration: The End of Geography Printer Publishers Limited London
Edward P.M. Gardener and Jack Revell Securitisation: History, Forms and Risks 1988 Institute of European finance
BANK FOR INTERNATIONAL SETTLEMENTS RECENT INNOVATIONS IN INTERNATIONAL BANKING
Globalization of Financial Markets and its Effects on Central Banks and Monetary Policy Strategies: Canada, New Zealand and UK Case with Inflation Targeting