Threats to global banking: Ways to bail out

B K Mukhopadhyay concluding his two-part article The banking world in 2050 will look radically different from the one we see today, with the E7 (Emerging 7- China, India, Brazil, Russia, Indonesia, Mexico and Turkey) economies becoming at least as important our estimates suggest that total profits from domestic banking in the E7 will be around half those in the G7 (Group of 7 industrialised nations- France, Germany, Italy, Japan, United kingdom, USA, and Canada) by 2025 and larger than in the G7 before 2050. This forecast has been made by global accounting agency Price Waterhouse Coopers (PwC) signs of which are already visible, with Russian banks hiring investment bankers from London, Chinese banks importing the US or European executives, and Indian banks attracting staff with experience of working for major G7 institutions. What is more important finding to note from this assessment is the forecast - "As the E7 banks internalise the knowledge of these staff, so their competitiveness in both domestic and global markets will increase". In the next few decades E7 banks will also become major competitors in the global "war for talent". Accordingly, India is likely to be the fastest growing of the E7 economies and could grow faster than China in the long run. The banking sector in the seven emerging markets are not going to "rival" those in India and China in terms of size, but by the year 2050, they could be of the same order of magnitude as the banking sectors in countries like France and Italy. According to a (PwC) report, total domestic credit in the E7 economies is likely to overtake total domestic credit in the G7 economies within the next 40 years. PwC'S forecast is that: retail banking sectors in emerging market economies are likely to see particularly rapid growth, since mortgage and consumer credit lending is generally not well developed yet in these markets compared with corporate and government lending. The role of the central bank thus becomes very crucial as the global situation continues to be very dismal, which, in turn, could severely affect the financial sector in a number of ways - directly and indirectly. Euro zone's problems were threatening the global economy. For example: any sort of prolonged economic crisis in the rest of Europe, the UK's main export market, would hurt Britain when the government is trying to rebalance a struggling economy and increase the sale of British goods and services overseas. British Prime Minister David Cameron very correctly said that there was little Britain could do to "insure" itself against what was happening on the continent - the euro zone is a threat not just to itself but also to the British economy, and a threat to the worldwide economy. Action needs to be taken to strengthen Europe's banks, to build the defences that the euro zone has, to deal with the problems of debt. They have got to do that now. They have got to get ahead of the markets now." With no spare cash to spend on stimulus, the government has looked to the Bank of England to keep monetary policy loose to support growth. The bank may have to start printing money again, despite inflation running at more than twice the 2.0 per cent target! Whatever is: in this fast changing world of 'innovention' (innovation + invention) the entire banking world has been witnessing such things which were hitherto not much in existence. The modern banking industry has brought greater business diversification. Banks in the developing world also like the industrialised counterpart have been entering into investments, underwriting of securities, portfolio management and the insurance businesses, among others. In fact since the beginning of the 21st century, the biggest banks in the industrial world have become complex financial organisations that offer a wide variety of services to international markets and control billions of dollars in cash and assets. Supported by the latest technology, banks are working to identify new business niches, develop customised services, implement innovative strategies and capture new market opportunities. With further globalisation, consolidation, deregulation and diversification of the financial industry, the banking sector will become even more complex. While over the past decade there has been an increasing convergence between the activities of investment and commercial banks, because of the deregulation of the financial sector, today, some investment banking (that covers an array of services from asset securitisation, coverage of mergers, acquisitions and corporate restructuring to securities underwriting, equity private placements and placements of debt securities with institutional investors) and commercial banking institutions [banking that covers services such as cash management (money transfers, payroll services, bank reconcilement), credit services (asset-based financing, lines of credits, commercial loans or commercial real estate loans), deposit services (checking or savings account services) and foreign exchange] compete directly in money market operations, private placements, project finance, bonds underwriting and financial advisory work. Taken together, these changes have made banks an even more important entity in the global business community on the one hand, while on the other the risks dimensions have leapfrogged. The stern reality - given the critical role of banks in the intermediation of capital flows - through their underwriting, leasing and long-term lending activities - the very lack of follow-through just is not good enough yet, clearly speaking. Risk management rules the game ultimately and it is protection and betterment of assets' health that occupies the central position indeed. So, ultimately the challenge before all is managing the change. No doubt, this arena has been fast gaining ground. There is the beginning of change - the Co-operative Bank in the UK and Triodos in the Netherlands have 100 per cent ethical lending policies. But many more banks should be developing ethical screens for their financing activities for their moral and financial profit. International Institute of Sustainable Development has rightly located that commercial and investment banks need to broaden the range of risks they consider when assessing asset finance deals. The 1992 Rio Resolution (on social investment) sought to encourage financial institutions to integrate ethical considerations into their investment analysis, and echoed in the July 2000 amendments of the UK's Pensions Act which required pension funds to disclose the extent to which they take environmental, ethical and social issues into account in their investment decisions. This theme has been picked up recently by the think-tank the London Principles on Sustainable Finance, backed by the Department for Environment, Food and Rural Affairs, which is trying to get broad agreement among financial institutions as part of the UK's submission for the 2002 World Summit on Sustainable Development. Undeniably - where asset managers are engaging themselves with companies for change, banks are engaging more for maximisation of profit. We need to try to look beyond the apple pie statements in corporate reports to the assets financed by banks. As such banks which engage in unethical lending not only risk collateral damage to their reputations, but also their stakeholders'shareholders' capital, if environmental or other liabilities impact the cash flows and residual value calculations on long-term asset finance. That is why questions have been raised - while among financial institutions, asset managers have led the way with clear investment policies and increasing shareholder activism, what about the commercial and investment banks? Accordingly, "..Sure, they have wonderful statements of their own principles and direct investment policies - enough to earn them 'ethical' status in most portfolios. However, there is scant evidence that they have carried this higher purpose through into their business practices". The upshot: like businesses everywhere, global banks are adjusting to the new normal following the global financial crisis. Key areas of interest would continue to include: greater consumer skepticism; shifting credit and investments needs, and new customer-service opportunities through evolving technologies. To be specific: though, since the economic crisis, banks have experienced huge challenges with their customer relationships, yet the big question loom large as to how can banks create higher customer satisfaction and loyalty. The fact is that customer confidence in the banking industry continues to be impacted by the credit crisis as their confidence level has gone down during last couple of years. Naturally, the task before is how can customer confidence be rebuilt. It has several crucial areas, which, if followed systematically - by big or small - could lead to enhance health of the financial system: (a) brand enhancement programs where all elements of the customer experience - at both the national and local level - need to be reassessed with continued investments made in customer charters and innovative approaches to marketing the bank's ethos and service offerings ; (b) personalising banking: being a vital element of a successful customer relationship and a cohesive approach to the development of tailored products and services which will help to better brand perception ; (c) creating brand ambassadors so as to ensure that the sales force represents the bank's brand needs to be a continued focus on transparent and sustainable incentive and an adequate customer relationship and (d) embracing 'innovention' - adopting a coherent social media approach will help improve brand perceptions and leverage the benefits of online advocacy. At the top it is the group of effective risk managers who can see the future. After all this is the new era of customers' expectations and simultaneously how the entire banking sector is able to adapt to the fats changing business environment. (Dr B K Mukhopadhyay, a noted management economist, is attached to the Department of Business Administration, Gauhati University, India. He can be reached at email: m.bibhas@gmail.com)