Can We Avoid Another Financial Crisis?

Whither Global Banking

Dr. BK Mukhopadhyay

(The writer, a noted management economist and international commentator on ongoing business and economic affairs, can be reached at m.bibhas@gmail.com)

In this age of globalization actually nothing can be analyzed keeping away the global operations/ trends. In fact, the global banking system is a network of interconnected nodes each depicting a specific location. International banking is the process in which financial institutions render their services to foreign clients. International banking thus involves the transactions relating to the acceptance of deposits and loans anywhere in a currency other than that of the country in which the bank is located.

According to Danièle Nouy, the then Chairperson of the Supervisory Board of the European Central Bank - Global financial institutions facilitate trade and investment, create new sources of funding for the economy and improve capital allocation across nations.

Obvious enough global banking makes it possible for the world economy to function, by being the instrument for transferring money across national borders. So, as of now the challenge that hovers: can we avoid another financial crisis?

Though the most talked-about international banks are located in Switzerland, yet a number of economies, including that of India, have overtime developed international banking infrastructures. It has also been a fact that many individuals and companies participate in international banking to minimize (or evade) their tax liability. This strategy has certain disadvantages. Side by side, international organizations have also made recent efforts to curb the use of international banks as tax havens.

Not only the biggies, but for others that are trying to create a brand image has to prove the mettle – better customer services utilizing customer feedback, mainly through ‘voice of the client’ survey, plus high-speed digital infrastructure was grievances from clients are sought and acted on at every stage of digital development.

The latest trend is that of open banking. It is an emerging service model that allows customers to share access to their financial data with non-bank third parties, which can then use that data to provide them with better banking. Some large banks plan to make major investments in open banking initiatives by 2020.

It Is the Performance in the Global Arena That Counts

Financial intermediation at the international level involves intermediation similar to the home country’s range of bank and non-bank financial intermediaries. The international financial intermediation process is essentially a recycling process and on a global basis, one country’s surplus is equal to another country’s deficit. International banking intermediates world financial imbalances and maturity preferences.

However, the global banking sector poses global risks. Banks can operate internationally and set up their operations in different countries for various reasons. But risks remain where the banking business is.

Naturally, effective measures have to accompany the trend of global expansion. As in the case of other forms of financial intermediation, international banking is also involved in maturity transformation - this process has been eased with roll-over credits where the syndicated loan may be financed by banks borrowing money with a six-month maturity. The interest rate risk here in such a maturity mismatch is transferred from the bank to the borrower. This is based on the practice whereby the interest rate is reset every six months on the basis of the interest rate paid by the bank (LIBOR) on six-month money.

Still, specific attention is to be continued to ensure that the risks like sovereign risk, risk arising out of a diversified portfolio held by an intermediary, among others, are managed.

International banks are capable of tackling the risks, of course in a better manner, especially after the shock received via sub-prime crisis. For example, the Euro-dollar market also lets banks adjust their overall liquidity position in both domestic and foreign currencies. Bank’s constituents are offered forward exchange positions without the banks themselves incurring an undesired open forward position. Basel III journey- a good going!

Nature of the Problems Change But Potentialities Remain High

Deteriorating bank profitability is a common phenomenon in most advanced economies, as the prolonged ultra-loose monetary policy has squeezed net interest margins.

The BoJ observes rightly that the low profitability of Japanese banks is “striking from an international perspective”.

Declining trends in long-term interest rates have been a global phenomenon that has been observed in many advanced economies, including Japan, the US, and Europe, since the 1990s. Major central banks increasingly have been paying attention to these movements, especially after the global financial crisis, which, in turn, reflects their concerns about declining potential economic growth – long-run growth prospects – and weaker-than-expected inflation performance.

Obvious enough: The financial system in Europe is bigger now, relative to its GDP than before the crisis. It is also more concentrated plus non-banks play a bigger role in it. According to the European Central Bank, while capital ratios have increased, non-performing loans remain high in key member states - hampering recovery in the region’s periphery, limiting credit growth and putting financial stability in jeopardy. Not to lose sight of - even in developed economies, the question of overbaking is coming up. The Bank of Japan has warned the excessive number of bank employees and branches has led to intensified competition among banks and resulted in a decline in profitability. The question remains – will Metro Regions Remain overbanked?

So far the developing block is concerned the going can be located as moderate.

Indian Banking sector, thanks to the continuous attention being received from learned RBI backed by slow but steady reform measures, has been able to keep the head above water. The still-growing size of NPA has been causing deep concerns.

Whatever is: The big question is already before us – are we at risk of a financial crisis? The Bank for International Settlements warned that one of its indicators of banking risk, the credit-GDP gap must not rise beyond the level it considers a danger signal.

Hopefully Rosy

But competition is bound to go north – more intense. There is nothing wrong in it. Economists from Adam Smith to Kenneth Arrow are in favor of competition. A competitive market allocates resources as well as is possible, also foster innovation and thus economic growth. That, it can reasonably be said, is the basic and standard position. So, it can reasonably be concluded that the challenge is how to keep the head above water. It is the positive result-based risk management backed by speed and stability, which help to stay alive on the wicket.

The world is not stopping – time stays we go out!!

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