Identify and critically appraise the main trends that have taken place in corporate and wholesale banking over the past twenty years or so. In your answer make a critical appraisal of the effect these trends have had on the nature and structure of the industry The recent two decades witnessed the great change in the financial world. In the past, the banks might are limited with the ability of exchange foreign currency, but nowadays, it is available to exchange foreign currency at any time in most of the banks. In the past, a majority of Chinese might have no idea about HSBS, however, there are 108 branches of HSBS in China now.
In the past, the banks did not sell stocks in the market, to the contrary, nowadays many commercial banks had began this practice following the J. P. Morgan. It can be seen that the banking system has altered greatly. In accordance with Kent Matthews and John Thompson’s view, three trends have the dominant influence on the alternation of the corporate and wholesale banks, and they are deregulation, financial innovation and globalization, respectively. At the end of last century, the deregulation of financial markets and banks had been a main force to push forward the development of corporate and wholesale banking.
Kent Matthews and John Thompson, the authors of The Economics of Banking, have pointed out that the deregulation happens in two aspects: “one is the removal of impositions of government bodies and another one is the removal of self-imposed restrictions. ” In terms of the first one, for instance, United States approved Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to empower the state banks to break the state barriers and to conduct cross-state cooperation and alliances.
Meanwhile, the banks removed the self-imposed restrictions, for example, by setting the same rates for a particular project. After a series of research, Matthews and Thompson also recommended that the process of deregulation was carried out in three phases. Firstly, both the quantitative controls on bank assets and the restrictions of interest rates were removed, which can be proved by the application of Exchange Control Act, Hire Purchase Control Act and so on. For the second phase, the difference between banks and other financial intermediaries got vaguer during the recent decades, for instance,
The Gramm-Leach-Bliley Act (GBLA), which is also known as the Financial Services Modernization Act of 1999, broke up the separation between bank insurance and bank investment. Banks got more freedom in their financial business through this Act. When it comes to the third phase, it can be seen that the financial markets faces a more demanding environment, in the other words, an increasing number of new entrants, ranging from the retail stores to the automobile companies, set foot in the financial market and began to provide financial services, for example, Tesco Finance.
The information technology had a great influence on the development of the world during the recent twenty years, and the financial market was not an exception. Financial innovation is the second trend, and Christian Noyer defined it as “an emergence of new financial instruments and services, and of new forms of organization in more sophisticated and complete financial markets”. Besides, it can also be considered as a result of the combined influence of the revolution of information technology, financial instability and regulation (Matthews and Thompson).
In detail, the effects of technology mainly are reflected in the diversification of bank products, the reduction of cost, and the decrease of time consumed. For instance, the wide application of internet has forced the spread of information, and the relevant people who have access to the internet can be informed the latest financial information almost at the same time. Meanwhile, the establishment of new branches seems to get less important since the money transactions can be conducted through the high-tech financial instruments. What’s more, the financial innovation can be caused by the financial instability as well.
New financial instruments are in need because of the unpredictability of a great number of factors, ranging from oil price, interest rates to inflation. With the application of high-tech financial instruments, the bankers are able to predict the future market and make proper decisions. Last but not least, in accordance with the Financial Services Authority (FSA) annual reports, “regulation will act as a catalyst for improving significantly the operational infrastructure of the market and modernizing the business models of many firms”.
In the other words, the function of regulation is avoiding the banks to pursuit profits by taking advantage of some deficiently regulated markets. Therefore, it can be concluded that the factors, which are the rise of information technology, the instability of financial environment and the demand of regulation, determine the trend of financial innovation which can offer convenience and protection to both the banks and the customers. International banking has expended during the recent decades, and the following graph illustrates the increasing importance of the international financial activities.
It can be seen that both the foreign claims and international claims take more and more percentage of the GDP. What can be account for this trend? As what mentioned by Matthews and Thompson, this phenomenon was caused by both “push factors” and “pull factors”. More specifically, they believed that the “push factors” are regulations of the home country, while the “pull factors” are carried out by the customers. Since the end of last century, the barriers between the various financial markets faded step by step, and the wholesale banks get much easier to enter into foreign financial markets.
According to Andrew Crockett’s report, the development of banks’ globalization is, to some extent, resulted from the deregulation of financial system and the innovation of financial instruments. As explained by Canals, the globalization experienced three strands. In his opinion, these strands, which are the relaxation of capital controls, popularity of securitization and harmonization in regulation respectively, contribute to the trend of globalization.
As the prevalence of the globalization, the global financial crisis shows more influences on the financial banking system, for example, the Global Financial Crisis is an important cause of the bankruptcy of the Lehman Brothers, and it accelerated the relationship between the banks and government. In addition, as what Ian Morison pointed out, the cross-border strategic alliances and cross border banking acquisitions begin to play a significant role in the current financial market.
Furthermore, the globalization pushed the mergers within national markets, such as bank of Tokyo and Mitsubishi because the bankers hold the idea that the merger can bring them larger size and scope which enables them to be more competitive. Deregulation, financial innovation and globalization intensify the competition of financial market. The change on the bank profitability can be seen from both sides of the balance sheet of the banks. Matthews and Thompson agreed with this point and conducted a research about this effect.
According to the statistics, they found out that the large commercial banks in some countries, such as France, experienced an increase trend of return on assets, while the others, such as banks in Japan, had a declined return on assets. Even though the statistics changes, the overall figures are small, which are below 2%. What’s more, the wholesale banks begin to restructure the banking system, which aims to reduce the operational costs. Normally, the banks take the measures such as merger, branch closure and staff reduction.
These actions can result in the reduction on both the scale of the bank and the operational costs. Due to the financial recession, the wholesale banks lay off the staff during previous years to survive. Meanwhile, the application of the high technology can help the banks to decrease the costs as well. For example, the use of internet can assist the wholesale banks to do business through some special designed financial instruments, and this practice can reduce the costs of office supplies, moreover, it may help the bank save money by avoiding building too much branches.
Apart from the effects mentioned above, the three main trends also pushed the bank business to be diversified and to start some non-intermediary financial services, for example, insurance. In the other words, the banks have the tendency of disintermediation. According to the analysis above, it can be concluded that the corporate and wholesale bank mainly experienced three trends during last twenty years, and they are deregulation, financial innovation and globalization, respectively. During this period, the wholesale banks removed some restrictions to increase the freedom and the fairness of market competitions.
Meanwhile, the financial innovation enhanced the efficiency of the banking system by reducing the operational expenses and the number of unnecessary branches. Besides, globalization of the wholesale banks makes these banks more competitive in many ways, such as merger, alliance and so on. As these trends dominate the development of wholesale banks, it can be found that the profitability of the wholesale banks maintain at a level which the ROA is under 2% averagely. What’s more, the banks begin to conduct the disintermediation to keep them to be competitive. (1457)