The In The Corporate And Wholesale Essay Example

is a need for re-regulating the international banking sector, particularly regarding mergers and acquisitions, as concerns arise about excessive size and potential anticompetitive behavior. Additionally, the rapid growth of the securities market also calls for re-regulation.

Securities, being contingent liabilities, are regarded as off-balance sheet activities. Since the securities market was rapidly expanding, regulations were necessary. However, banks, which are monitored based on balance sheet ratios, were not subject to regulation for their involvement in securities because these activities were not reflected on their balance sheets. Modifications were made to the calculation of the risk asset ratio to incorporate these activities within the balance sheet. Further discussion on securitisation will be provided later. The advent of new technology has lowered barriers to entry.

Originally, the banking sector heavily relied on branch networks to conduct operations in foreign countries. However, advancements in technology, particularly the internet, have reduced the need for physical bank presence. Thus, branches are no longer essential for operating overseas since proximity is no longer a determining factor for raising funds. Notably, electronic trading technology has led to the emergence of companies like E*Trade and introduced new distribution channels. This shift in power towards consumers has compelled banks to innovate and adapt their delivery of financial services and range of offerings. As a result, direct banking methods such as telephone and internet banking have become increasingly important. Conversely, the branch network was once a significant competitive advantage by creating barriers to entry but has now become one of the most expensive challenges for banks (Llewellyn 2 Clare F Thomas Corporate and Wholesale Banking B 1994).

The Prudential has launched its new banking service Egg in the

UK and is rapidly expanding through the use of the internet. This expansion is mainly due to advancements in technology, which have reduced information asymmetry. In the past, banks had privileged information that was not accessible to the public. However, with improvements in technology, information has become more accessible and less expensive. International rating agencies such as Standard and Poor now offer ratings and information on companies' credibility that are available to anyone interested in investing.

Easy access to global financial markets and stocks has diminished banks' exclusivity and comparative advantage. Consequently, the market is moving towards a more perfect situation where banks primarily provide advice to their clients.

Disintermediation in the banking industry has occurred due to the process of companies raising money directly on financial markets and bypassing banks. According to Bisignano (1998), this shift is driven by asymmetric information. With the increased availability and reduced cost of information, it raises the question of whether banks could be completely sidelined in the future. Howcroft (1997) highlights the significant disintermediation of commercial banks by large companies over the past two decades, which has led to unprecedented change in corporate and wholesale financial markets. To remain competitive, banks have had to diversify their activities and offer innovative services. Additionally, as companies globalize, their funding operations must adopt a global perspective.

The rise of large national and international companies raising funds on global capital markets will result in a decrease in bank borrowing. This has significant implications for banks as disintermediation may lower profits and increase loan portfolio risk. Disintermediation can also lead to more small businesses.

Technological innovation, like electronic cash (E-cash), has the potential to reshape intermediation by

replacing debit, credit, and smart card transactions with instant online account crediting or debiting. However, despite its capabilities, e-cash only serves an exchange function, allowing banks to still have a role.

Customers often take time to adopt new money transmission services. Technological advancements and relaxed entry and regulatory barriers in banking make it easier for non-bank financial and non-financial institutions to enter the banking sector. As a result, banks will face competition from a wider range of potential competitors.

Companies like GE Capital and Tesco have broadened their product range to include financial services, including credit cards, loans, and insurance. This has led to intensified competition and surplus capacity within the banking industry worldwide. As a result, business operations have been significantly affected. To tackle this issue of excess capacity, banks are implementing strategic measures. One noteworthy approach is the surge in mergers and acquisitions among international and wholesale banks as they seek to address this challenge. Llewellyn (1994) predicted that there would be fewer but bigger banks due to consolidation.

According to Frazer (1991), there has been a significant increase in mergers and acquisitions within the US banking industry. The reason behind this growth is the belief that mergers can address issues such as excess capacity, lack of capital, and poor profitability. Similarly, European Union countries have also seen an increase in banking mergers and acquisitions. Valdez (2000) predicts that this trend will continue. However, it is important to note that while banks may benefit from economies of scale through these transactions, there comes a point where diseconomies of scale become evident. Consequently, banks may grow in size without necessarily improving their profitability.

Consolidation in the banking industry

can occur through mergers between banks and non-financial companies. Historically, banks have focused on increasing their volume and assets. However, there has been a shift towards prioritizing the quality of assets. This shift involves transitioning from transaction-oriented activities with high volume to market-oriented activities that prioritize building relationships and practicing sustainable methods for the long term. As a result, new strategies have emerged regarding customer awareness, relationship management, customer profitability, and retention.

To address competition from non-traditional sources and the expansion of domestic and international capital markets, banks are diversifying their businesses. The traditional role of banks as financial intermediaries – providing loans and accepting deposits – is expected to become a relatively smaller part of their overall operations. Instead, banks are expanding their offerings by including a wider range of services such as unit trusts, stockbroking facilities, insurance policies, pension funds, asset management, and real estate.

Rabczynski (1996) states that commercial banks have adapted to these changes by shifting towards an investment bank-oriented approach.

The conventional services provided by large companies on their balance sheets have largely been replaced by off-balance sheet activities, such as investment advice, placements, and standby facilities. Howcroft (1997) states that commercial banks have recognized the need to expand beyond traditional "ancillary business." This shift has resulted in a significant change in income structure, with more focus on fee income rather than interest income. Modern banks now specialize in either a narrow range of activities or offer a wide array of financial services. The line between international and domestic markets has become less distinct as investment banks are connected to domestic banks. 4 Clare F Thomas Corporate and Wholesale Banking B Securitisation Some

argue that banks exist due to imperfect and incomplete markets.

The process of financial innovation and the creation of a wider range of financial instruments, as described in Llewellyn (1985) as spectrum filling, have resulted in a decrease in market imperfections and incompleteness. The remarkable growth in Euronote facilities is proof of innovation and rapid expansion. Van Horne (1985) also contends that securitisation and financial innovation have contributed to more comprehensive markets. The increasing significance of the securities market is a result of a significant shift in investor demand preferences.

The preference of contemporary investors has shifted from bank deposits to securities, especially bonds, as they prioritize capital growth over liquidity. As a result, banks are securitizing a substantial portion of their assets and issuing subordinated loan stock to generate funds. This has several significant consequences: (1) Fee income will constitute a greater proportion of banks' total income compared to margin income. (2) The financing for the corporate sector in the capital markets will undergo a change in magnitude relative to banks. (3) The liquidity of banks' balance sheets will rise.

The banking industry is expected to experience a major transformation in its operations as it starts dealing with securitized assets, according to The Economist (1992). This shift towards securitization is anticipated to result in slower growth of banks' balance sheets in the future, compared to previous years. Additionally, the securities market's expansion has increased the responsibilities of banks, requiring them to serve as intermediaries for risk management and providers of underwriting services.

CONCLUSION

The corporate and wholesale financial markets globally are currently undergoing significant changes. These changes include disintermediation, diversification, increased competition from non-financial institutions, and shifts in banks'

revenue. The catalysts for these changes are the deregulation of entry barriers and advancements in technology. In response to these transformations, banks have had to improve their innovation capabilities and expand their range of services. Their main objective now is to provide high-quality services while prioritizing long-term sustainability and customer retention. To remain competitive in the financial market, banks must continuously adapt to evolving intermediation practices, emerging technologies, and changing customer preferences. Although the structure of financial firms may change, banking will persistently evolve rather than disappear.