Raising the standard of our banks to international level

Increasing core capital ratio, enactment of Dodd Frank Act and strengthening many other regulatory requirements have left big banks in the USA in a very difficult situation to maintain the status of big banks. Even they lost their advantageous edge over small banks in a competitive environment. At the same time, some oversight problems of big banks surfaced exposing many compliance failures which invited very costly punitive measures from the regulators. In spite of making huge investment in technology and human resources, these banks could not prevent the compliance failures. Although talented professionals were hired with very lucrative remunerations, the compliance was not foolproof.
The organisation of a big bank is very big with its worldwide presence through multi-phased operation. The structure of the organisation is very complex and reporting line very complicated and cumbersome through introduction of both direct as well as dotted line of reporting system. Because of such organisational complexity, it was very difficult for all big banks to determine the responsibility of concerned persons and even their accountability could not be established in real sense. As a result, many compliance failures and manipulation, including sanction violation and Libor Rate manipulation, had taken place for which a huge amount of financial penalty was imposed by the regulators as well as by the government through court judgment and out-of-court settlement.
It has been reported that so far US$ 260 billion US dollar has been paid as penalty by big US and European banks. Because of these various action plans, big banks' profitability has started declining considerably and some banks have even started incurring losses. Very recently, Deutsche Bank reported a loss of EUR 6.80 billion (US$ 7.40 billion). Average ROE (Return on Equity) of all big banks has come down to 7.90 per cent from its pre-recession 15.20 per cent.
As a consequence of the changing scenario and all negative implications of strict compliance, regulatory stringency, increasing capital requirement ratio and legal impact, the managements and stakeholders of big banks are actively contemplating to reverse the course; they have also  taken some measures with a view to downsizing their operation.
Deutsche Bank has either closed or reduced some of its business for which many job cuts have been reported. This big bank is going to sell its wholly-owned unit 'Postbank' which is a big retail banking unit in Germany. Barclay's Bank is going to close some businesses in Asia and even this bank is under active consideration of breaking up into some small entities with an objective of being more focused and less regulated. HSBC Group and Citi Group have already undertaken some measures to downsize their operations and various business lines. As a part of downsizing measures, UBS has closed its operation of trading bonds, currencies and commodities. This organisation is even trying to change  from risky and capital-intensive operation to conventional banking which includes managing clients' wealth, helping companies or business units to raise capital, etc.  Royal Bank of Scotland, which has new majority shareholders of the British government, has substantially reduced its business operation and its shrinking is reportedly almost half of its pre-recession volume. Credit Suisse is also actively thinking of cutting its domestic retail operation. It is not known yet whether the biggest US bank, JPMorgan Chase has taken any measures of either splitting or downsizing its mammoth operation. However, analysts and experts always suggest and strongly opine that JPMorgan Chase should be split into four units.
OPPORTUNITY FOR SMALL BANKS WIDENING: The way big banks are being downsized, time is not far away when the concept of big banks will disappear and fair competition among the banks will be restored ensuring congenial atmosphere in the world financial industry. Small banks, which had been confronting undue competition in the market, will now have more opportunity to grow. Because of big bank concept, they were enjoying exclusive advantage in mobilising and deployment of funds. These banks could easily borrow funds at a very cheaper rate than small banks which were always in paucity of funds. This imbalance always leaves small banks to depend on big banks for funding and this opportunity was efficiently capitalised by big ones as they used to borrow cheap funds and lend those to small ones at higher rate and thereby made a big margin. Now small banks will not have to depend on a few big banks for providing services to their customers related to international trade, money transfer, cross-border transactions, and settlement accounts. Many medium and small banks of the developed world will expand their business scope of cross-border transaction which will create new avenues of international trade for banks of emerging market and the developing countries as well. Establishing correspondent relationship and maintaining counterparty limit with more banks in the developed economies will be much easier and convenient for the banks in the emerging market. However, in order to capture this opportunity, banks in the developing world as well as emerging market will have to improve their standing for which extensive preparations are required.
SCOPE OF BANGLADESH BANKS: Although the banking industry of Bangladesh has gone through tremendous development during the last 25 years, our banks do not seem to be equipped enough to take the opportunity created by the shrinking of big banks in the world financial industry. The standard of our banks in general has not yet reached the international level. However, a few banks in our country have appreciable strength and their standards are also close to the international level. These banks can easily take some streamlining measures so that they can join small bank groups at the international level and can thereby share the benefits. For this they are required to address some crucial issues like deposit-loan ratio, non-performing loan, compliance and corporate governance. While evaluating the performance of counterparty bank, deposit loan ratio is viewed with serious attention and higher the ratio, better is the rating. To the best of our knowledge, most of the banks in our country maintain good deposit-loan ratio and the Bangladesh Bank's policy and stringent enforcement thereof compel the banks to maintain the threshold of deposit-loan ratio.
Non-performing loan (NPL) is the main impediment in projecting our banks' performance to the international banking community. In our country, the percentage of non-performing loans is historically high; the high rate of non-performing loans is an acute problem. Now time has come to take drastic measures for streamlining the non-performing loan. With the support and cooperation from the central bank and the government as well, a comprehensive long-term plan should be undertaken with a view to getting rid of bad loan. Although this is a very complicated area, yet it can be addressed if appropriate measures are undertaken.
In the global financial industry, there is precedence of resolving worst NPL situations which worse than that of our country through appropriate measures. The NPL problem and sub-prime mortgage crisis in Ireland have been resolved through an extensive financial action plan with collaboration of the country's regulator and the government as well. Even Italy is now facing acute problem of NPL and a very drastic action programme is going to be undertaken with the help of the government in an attempt to rescue commercial banks from NPL crisis. Therefore, the problem can be resolved if strong commitment and clear action programme are designed with the help of the Bangladesh Bank and, above all, the government.    
Compliance has now-a-days become a very crucial issue in maintaining correspondent relationship with counterparty banks. In the present-day changing geopolitical situation, all banks, irrespective of their status and location, emphasise on compliance. Commercial banks in our country should view this issue with serious attention. Technically, compliance refers to the submission and fulfilment of paper obligation and this will not, of course, be a problem of our country. Directors and major shareholders of our banks are not involved in any unlawful financial activity. So, timely submission of necessary papers and documents will ensure compliance. However, providing information and documents and communicating thereafter should be done in a very professional manner which our banking sector miserably lacks. The onus of maintaining correspondent relationship lies with the international division where there is a scarcity of competent personnel and as a result, banks remain in adverse situation while maintaining correspondent relationship.  
If these challenges of our banks are addressed properly, some banks will be able to significantly improve their standard which will enable them to derive benefits from the opportunity being created by the downsizing measures of big banks. Moreover, international finance market and banks in the developed world are now focusing on the emerging market and since we belong to this category, opportunity of deriving some benefits will always remain there. In addition, small and medium banks of the developed world will also look for reciprocal services from banks of the emerging market because counterparty help is inevitable for providing cross-border services to their respective clientele group. Shrinking of big banks has ushered in an opportunity for small banks. Now, when the opportunity knocks the door, it is the turn of our banks to prepare themselves and reap the benefit from this change in world banking.
The writer is a banker based in Toronto, Canada.
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