"The modern bank is a multifaceted financial institution, staffed by multi-tasked personnel, conduct multitask operations."(Matthews and Thmpon, 2005) Developments in corporate wholesale banking over the past twenty years or so have seen great changes in both structure and nature.
The starting point was the 70's, since the computer technological progress led to the rapid diffusion in the financial sector, the financial authorities have begun to deregulate.
At the same time, the "oil crisis" in 1974 caused by rising global energy prices to form a financial "disintermediation" phenomenon, result in intensified risks by banks. In the 80's deregulation throughout banking sector: relaxation of interest rate, financial institutes, financial markets and the money market led to the increase of financial competition.
Into the 90's, the world economic development, increase in globalization and securitization, the international bond market and derivatives market is developing rapidly, the widespread use of new technologies have all contributed to the change of the world financial structure.
This assignment is aiming to identify and examine the main trends in corporate and wholesale banking. And furthermore, the effect of these trends have had on the industry will also be discussed. The main trends of the banking have faced during the past twenty years are (1) deregulation, (2) financial innovation, (3) globalization. We will analyze each of the trends below.
"The financial deregulation had removal or simplification of the government rules and regulations that constrain the operation of financial market and banks that has consistent force the development sector of advanced economies and has been directed towards their competitive actions". (Matthews and Thmpon, 2005)
"The process of deregulation had seen the removal of imposition of government controls across western countries during the last quarter of the 20th century". Matthews has divided the phenomenon into three phases: "the first phase of deregulation began with the lifting of quantitative controls on bank assets and the ceilings on interest rates on deposits." Regulation Q in the US and Competition and Credit Control in the UK are the best known example. This deregulation is concerned with monetary policy which saw the abandonment and modification of direct controls on bank interest rates, credit ceilings and consumer credit controls etc. by the governments. As a result, the banking system is now more competitive and more consolidated.
"The second phase of deregulation is the relaxation of the specialization of business between banks and other financial intermediaries."((Matthews and Thmpon, 2005) For UK the Building Societies Act in the 80's it allows banks and building societies to compete by opening up the mortgage market. This result in greater competition as more specialists and intermediaries entered the banking sector which also allow banks to create large comprehensive banking services that functional in all areas.
"The third phase concerned competition from new entrants as well as increasing competition from incumbents and other financial intermediaries." (Matthews and Thmpon, 2005) this enhanced competition is consist conglomerates by joining together various types' organizations in order to form one organization of financial institution. Some of them may even be non-financial companies such as: Tesco Finance, Virgin. The phenomenon of this phase is to create large banks covering the whole sector providing all kinds of banking services rather than small specialized provider.
Financial innovation refers to make changes to the existing financial institutions and creating and marketing of new types of securities in order to obtain more potential profit. (Matthews and Thmpon, 2005) has identified three common but not mutually exclusive forces that drive financial innovation they are: "instability of the financial environment, regulation and the development of technology in the financial sector"
Financial innovation has important association for the management of conquering the risk caused by the financial instability, such as: the unpredictable and volatile of interest rate, exchange rates and inflation. For example the 3 month U.S. dollar treasury bills rate fluctuated between 4% and 11.5% in the 70's; by the 80's the volatility of the interest rate extended to 5% and 15%. This kind of volatility in interest rates caused a huge amount of capital gains or losses and resulted in the return on investment with greater uncertainty. The changes in the financial environment have stimulated the right to meet the needs of innovation which can hedge these kinds of the risk. (Wikipedia,2009) During the 70's Competition and Credit control Act 1971, banks switched to variable rate loans which enable banks to lend to customers subject to risk.
As the banking industry is stringent by the government, regulations in this industry have become an important driving force of innovation. When regulatory constrains, regulation arbitrage occurs in order to generate revenue. For example, during the late 60's the U.S. banking industry was restricted by Regulation Q, and due to inflation caused by higher interest rates which reduced banks' profits. Under these circumstances the U.S. domestic banks develop the Eurodollar market offshore
This phenomenon also led to the change from asset management to liability management. Before banks only focusing on their holding of reserve assets, however in order to circumvent the restrictions of regulation Q, U.S. banks starting to borrowing from the offshore Eurodollar market (inter-bank market). Thus the ability to create liabilities rose as liability management.
Developments in technology are changing dramatically, the websites and Internet technologies become more established and dependable. (Sayar and Wolfe, 2007) And with the phenomenal growth of B2B (Business-to-Business) e-commerce, most industries including banking and financial services sector have been influenced. Moreover, deregulation has brought down the boundaries of the banking industry, allowing new entrants and enabling a greater degree of competition. Into this scenario arrived the Internet - another radical technological innovation with potential to change the structure and nature of banking. According to (Wang et al. ,2003) the explosion of Internet usage and the huge funding initiatives in electronic banking can be seen as another cash management technology which has the effect on reducing costs of delivery and may lead to downsizing of banks. Many banks have adopted the Internet as a delivery channel (some banks have set up as Internet-only delivery). It is considered that Internet banking is a very important issue in corporate banking.
"The globalization of banking in particular has paralleled the globalization of the financial system and the growth in multinational corporations in general." (Matthews and Thmpon, 2005)
Financial globalization is an inherent requirement of economic globalization, at the same time it become an important driving force of economic globalization. The internationalization of banking pushed U.S. banks to seek developments abroad to avoid regulation Q which restriction implied on the growth of domestic banks. Multinational companies around the world have to turn to the Eurodollar markets to meet its financial intermediation needs. These factors have greatly contributed to the development of the Eurodollar market.
On the other hand, the expansion of large corporate banking sector pulled the banks attention back to their host countries. It was caused by the high level of economic activities by those large commercial and industrial companies willing to expend, thus created to mass market for financial services.
"The pace of globalization in banking was furthered by the increasing trend to securitization" ((Matthews and Thmpon, 2005) The development of securities market is seen as a financial innovation to make the market more efficient or to complete the gaps in the market, either demand driven or supply driven. Banks have a significant role in providing main incentive to the growth of securitization. Banks act as investors and agents in the securities markets to help to provide liquidity to the securities markets. Banks were also acting as borrowers in the securities markets through issuing long term certificates of deposit and bonds.
Through securitization, corporate markets may raise finance when other forms of finance are not available. However, the risk inherent in lending to such sectors can be vulnerable to the decline in market and economic conditions. At the starting point of the recent global financial crisis, the case in the UK, Northern Rock who depended on money markets for it's funding, when there is shortage of funds because of problems of non-payment of sub-prime lending, Northern Rock being not insuring itself against the risk of liquidity disruption, was experiencing a bankrupt. Consequently, the authority stepped in and guaranteed Northern Rock's liability for at least £20 billion.
Securitization facilitates efficient funding, whereby the originators would be able to access the capital market directly, with securities which are liquid and tradable, and whose pricing is determined by market forces, while reducing the intermediary costs for consumers and companies imposed by banks lending (Norton, 1995, p4). Primary Securitization allows corporate to raise finance through the issuance of securities in the money and capital markets directly from market investors in form of bonds and commercial papers. This disintermediation process, reduce the role of banks as the financial intermediation.
This assignment has simple reviewed the major trends in corporate wholesale banking in the past twenty years. They are deregulation, financial innovation and globalization. These trends were very effective push the banking development and also have created some new regulation and some new financial products to this industry.
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- Wang, Y.S., Wang Y.M., Lin, H.H. and Tang, T.I. (2003), "Determinants of user acceptance of Internet banking: an empirical study", International Journal of Service Industry Management, Vol.14 No.5, pp.501-519.
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- Bank for International Settlements, 79th Annual Report, 1 April 2008 - 31st March 2009, Basel, June 2009.
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