New Trend in International Banking

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New Trend in International Banking
Presented by Dr. Peter Larose
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Focus of the Presentation

• Role of Financial Intermediation in Different
  Phases of the Business Cycles
• New Internal Rules on Corporate Governance
• Front-Office Commercial Strategies
• Information Technology Revolution
• Tightening of New Prudential Norms
• Strengthening Skills and Intellectual Capital
• Dealing with Greater Uncertainty in the Credit
  Market
• More Emphasis on Risk Management
• Strategies Needed in the New Banking Environment
• Prevention of Banking Crisis

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Changing Landscape In Banking The face of
financial services sector, as we are all aware is
changing very rapidly. Many industrial nations
including the emerging markets in South East Asia
are focusing on the 21st Century banking in terms
of financial conglomerates, whereby one-stop
financial services boutique is becoming the
norm. Pressure to compete within the banks
incorporated jurisdiction is also increasing
rapidly by the days. Cross-border transactions
are also being increased with new products on
offer in relation to the multitude of business
risks. As a results banks and other provider of
financial services are having to prepare for
changes in the international regulatory
framework.
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Role of Financial Intermediation in Different
Phases o the Business Cycles It is understood by
most players in the financial services sector
perceived that banks no longer operate as the
principal mobilizer of funds for organic
growth. The new paradigm shift is about
efficiency in the financial intermediation
activities . The business cycles are now
considered a very important factor in the banks
forward planning process. With these economic
development and strategies being considered Many
well established banks are now having to consider
administrative reforms in order to accommodate
the changes.
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New Internal Rules on Corporate Governance
The Enron, Worldcom and Tyco type of corporate
collapses has created a condition, whereby the
Board of Directors responsibilities are now more
pronounced that previously in place. The new
rules states that there should be a separation of
power between the Chairman of the Board of
Directors and the Chief Executive Officer
(CEO). The need for independent directors has
arisen because of the potential divergence of
interests between the providers of capital, i.e.
shareholders, and management. The directors of a
Board must be qualified in their respective
field of specialization so that they can bring a
blend of collective knowledge to run the business
with prudence.
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Front-Office Commercial Strategies
There is no longer the job for life for banks
employees. Most banks require that their
employees can create a good image vis-à-vis the
customers in a cordial and customer-relationship
management. Front-Office employees are trained
to create the first-hand impression for
the customers to use the banks services more
frequently and economically. Many improvement
are being made in the manner that the banks
recruit their employees to have a long-lasting
impression on the customers minds. Customer-rela
tionship is now the motto of all banks to achieve
without having to sacrifice the standard of
services and its prices. The new work culture is
to deal with employees as groups or teams of
people, who can use their targets as benchmarks
in evaluating their performance.
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Modern Labour Force The need for productivity
and efficiency will create new sources labor and
work practices. The new labour force will have
to follow the modern setting of a customer-demand
environment that they are the boss. It is
expected that there will also be intense
competition to attract and retain professional in
all fields so as to satisfy the clienteles
profile. Training costs are expected to increase
progressive with the level of revenue that the
banks generate. The cost of gathering marketing
intelligence will also increase correspondingly
with the level business activities. More
emphasis will be placed on marketing selling
skills.
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Information Technology Revolution
Since the 1990s, the banking systems worldwide
has witnessed a rapid transformation. Information
Technology is considered as one of the key
drivers in a banks operations. There has been
a spate of merger, and acquisition transactions
due mainly to the link of information
technology. A new style of management also
emerged as a result of the advancement in
new technology manage by wire. This
development has caused the individual management
to channel their resources on the universal
banking concept. While the consolidation
process has brought about new opportunities,
there has also been some identifiable risks with
the rapid development in I.T (e.g. concentration
risk and security aspects). The general trend
that emerged from the I.T. revolution is the
combination of non- banking activities (e.g.
insurance, pension, investment banking, mortgage
finance, and financial securitization) with the
hope that there will be internal synergies
and economies of scale. There is also the global
consideration, where non-banking activities can
be conducted at the subsidiaries level.
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Technology Issue The key driver of all this
change will be technology that supports
efficient, accurate decision making and greater
operational flexibility and efficiency. The
speed in the performance of transactions will be
the main issue between success or
failure. Customers are now more educated and
sophisticated in their demands for services. The
successful banks will be those who can track and
analyze specific customer needs at all level. As
more sophisticated information technology is
required, banks will have ton consider their
investment well in advance in their financial
planning.
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Tightening of New Prudential Norms

• Banks are having to prepare for the new Basel
  Accord II, which accentuates on the
• following considerations
• Minimum Capital Requirement
• Supervisory Review, and
• Market Discipline.
• The primary focus of the new Capital Adequacy
  Accord is based on improving the
• measurement of risk in all its dimension.
• The process of measurement of market risk is to
  be maintained.
• There will be 3 alternatives for a start on how
  to calculate Credit Risk
• Standardized Approach (SA) this approach
  employs by less complex banks
• (as 1988 Accord) it expands the scale of
  the risk weights and also uses external
• rating agencies (e.g. SP, Moodys, Fitch,
  Capital Intelligence etc).
• (ii) Banks with more advanced risk management
  structure can also employ an

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• Strengthening Skills and Intellectual Capital

The new banking era in the 21st Century place a
heavy demand on how the banks management utilize
its human resources skills for greater
efficiency. Factors such as knowledge of the
products/laws/customers/economic
environment, general service attitudes to
identify the customers needs, and the selling
skills to deal with existing and potential
customers are all important factors in the
survival in a dynamic market. Banks no longer
rely on the quantity of its labour force to show
the sign of being powerful institutions, but on
the quality of its employees to convince the
customers. Managements focus in the integration
of its skillful human capital in a
holistic manner with other departments in a
professional way. Most of the qualities demanded
in the banking sector are added value,
creativity, manage changes, flexibility and team
work. Management are now emphasizing on
performance management, competencies, and a
forward-looking approach by all employees in the
banks hierarchy.
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• Dealing with Greater Uncertainty in the Credit
  Market

• The credit market can be subject to a multitude
  of factors that may create
• uncertainty for the banks
• Inflation,
• Adverse Movement in Interest rates
• Adverse Movement in Exchange rate
• Change in the Gross Domestic Products (GDP)
• New Investments
• Change in Customers Attitudes Expectations
• Intensity of Competition
• Change in Government Policy

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• More Emphasis on Risk Management

Risk management is an important aspect of all our
daily lives. We are all exposed to risk daily,
as soon as we open our eyes in the morning and
sometimes even in our deep sleep. It is our
utmost duty as an individual that we make
provision in our lives to identify the risks,
make an evaluation, quantify them, insure or
shift the risks unto another party, if we cannot
deal with them. More emphasis is placed on banks
to manage their risks more prudently so that the
banking system is not place at risk. Any
regulatory agency in the world would ensure that
there is always a safe and sound banking system
at all times. Otherwise, the public money may be
used to bail out distressed banks and there
will be a lost of confidence in the banking
system. No jurisdiction can afford to deal with
a banking crisis.
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More Emphasis on Risk Management
continues
What is the relationship between effective
enterprise risk management and improved financial
reporting and transparency?
There are natural linkages between enterprise
risk management, improved financial reporting and
transparency. The new Framework requires that
organizations establish a risk appetite, measure
actions and decisions against that risk appetite
and communicate results. Communication of
enterprise risk management to users of financial
information clearly enhances transparency.
Sarbanes-Oxley Act 2002 is quite specific on this
issue
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Commercial Banking
Investment Banking
Conglomerate Style
Other Commercial Activities in Subsidiaries
Professional Services
Travel Agency Insurance Company Retail/Supermarket
I.T. Companies Others
Taxation Planning Accounting Pension Fund
Management Investment Management Advice Financial
Planning Real Estate Management Advice
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Conglomerate Approach
Banks are no longer content to remain with its
core business, they are more eager to develop a
conglomerate business style that is, a
one-stop financial services boutique. It
means that the customers profile are used more
productively to cross-sell other subsidiary
services, such as insurance, pension fund,
financial planning, taxation advice, corporate
restructuring, investment banking faculties,
invoice discounting, travel facilities, and a
host of other services to meet the customers
needs. While there are business opportunities to
deal in such a corporate manner, there
are equally a certain degree of risks as well. In
the event that one of the subsidiaries failed
then how is the regulatory going to deal with the
parent company. This issue has been the concerns
of most regulatory authorities that is, which
part of business that should be closed in the
event of a financial problem, and then,
should the shareholders of the parent company
absorb the loss of the subsidiaries and to what
extent? This issue also involved cross-border
operations, where a bank has foreign subsidiaries
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Transparent Regulations Banks will be required
to comply with more stringent and transparent
regulations that must be enforced
internationally. The key to such a development
(e.g. Basel II) will force the banks to be more
accountable in the adoption of an integrated risk
management infrastructure. Business continuity
planning is a tool that cannot be shelved as an
administrative document only.
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• New Corporate Strategies Needed
• New target market
• Employment options (if needed)
• Improve Infrastructure
• New Approach to Business Style
• Pro-active Management

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New Target Market Banks must be able to identify
business areas and mount Strategies to win the
new market. Banks must also do their best to
maximize operational efficiency. Where possible
they should endeavour to enter into
strategic Alliances with the identifiable
partners that will provide a win-win
result. The economic cost of this strategy must
be adequately studied with a lot of prudence,
bearing in mind, the risk factors.
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Employment Options Financial services players
will need to integrate into their operational
structures low-cost, highly flexible employment
options. For example, some jobs may be more
cost-effective if they are processed outside the
main corporate offices. Management must
integrate the workforce in a holistic manner with
all the rest of the operating system so that
economies of scale and greater profitability is
achieved. Employees should feel that they are
placed at the centre of development rather than
considered as one of the resources. Performance-r
elated pay will be the mode of the employment
contract, whereby the employees are expected to
deliver on all the set targets.
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• Improvement in Infrastructure
• NO bank can be complacent when it comes to
  investment in new or
• improved infrastructure.
• The infrastructure can be considered in the light
  of
• New office space,
• technology,
• communication system, and
• employees.
• There will be more demands on the Board of
  Directors in terms of
• collective responsibility to ensure that they
  follow evolving development
• in all areas of the banks business.
• A Board of Directors that failed to act
  responsibly will not survive the
• intense competition.

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New Approach to Business Style Since customers
want more out of their banks, the management
must pay greater attention to the customers
needs in a cost-effective manner. More
information should be made available whereby the
customers can get easy access in order to
increase the level of their transactions. The
new business paradigm is for the management to
visit the customers regularly with the view to
strengthen the banker-customer relationship.
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Pro-active Management Customers expect the banks
to involve them in their forward planning
process so that they can make their
contribution. Bank Managers must be ready to
keep in touch with the customers at all times so
as to identify their needs under one roof that
is, one-stop financial services boutique. The
role of advocacy must be more pronounced with the
evolving complexity of the financial market and
the business cycles. New products/services must
be timely released on the market. It will be a
matter of becoming more innovative with changes
in the market.
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• Main Causes of A Banking Crisis
• Non-Performing Loans Bad Loans
• Inadequate Market Discipline (captured by Basel
  II)
• Unsustainable Macro-economic Policies
• Poor Regulatory Supervisory Framework
• Poor or Reckless Management

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Prevention of Banking Crisis As competition
intensify for banks to maximize the returns on
their investments there will be opportunities for
banks to take on new businesses without
paying much attention to the risk aspects. As
the risk level increase, the chance of a banking
crisis emerging can also be apparent, if the
Regulatory Agency does not spot the danger in
good time. Even with Basel II, a less prudent
management can conceal the risks by
using different accounting methods to suit the
bank. The past banking crises must be used as
lessons to be learnt. Will the regulators have
learnt enough experience from such crises? (See
Next Slide for more information).
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A Research Analysis on Banking Crisis Prof.
George G. Kaufman made the following statement as
part of his Concluding remark in a paper entitled
Preventing Banking Crises in the Future
Lessons from Past Mistakes. Page 55 -77 This
article was originally prepared for presentation
at the annual meeting of the Japanese Society of
Monetary Economics in Tokyo on 25 May
1996. Volume II, No.1, 1997. Developed countries
generally have better capitalized banking systems
and the financial resources, although not always
the political will, to recapitalize individual
insolvent banks, which are too often state-owned
institutions. They also have a highly educated
and sophisticated labor force from which to
attract bank regulators and supervisors. Thus,
they possess the most important prerequisites
for the successful implementation of this
reform. Less-developed countries are likely to
have more poorly capitalized, often insolvent,
banking systems to encounter more serious
constraints in recapitalizing them and to have
fewer educated and trained bankers and
examiners. These conditions make these reforms
more difficult, but not impractical nor
unimportant, to implement in these countries.
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Non-Performing Bad Loans One of the dangers
that a number of banks face is the amount
of non-performing or bad loans in their portfolio
of assets. Normally, bad loans arises from poor
lending practices, excessive risk taking, poor
governance, weak risk management, lack of
internal controls, focus on market share rather
than profitability, and asset liability
mis-match. In fact, under the Basel II Accord,
there will be more capital that must be provided
by banks to cover their credit risk from various
asset exposures. Management will be more
restricted from taking excessive risk, unless
at a huge cost to the shareholders.
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Inadequate Market Discipline Stefan Ingves of
the IMF Monetary and Exchange Affairs Department
quoted If bank creditors have limited
information on a bank's financial condition,
they cannot exert discipline on the shareholders,
due to opaque system. This is typically the
result of poor transparency and disclosure, poor
accounting and auditing practices, especially
due to the lack of proper loan and collateral
valuation methods and consolidation, which allow
overstatement of capital adequacy. Market
forces are further impeded by weak frameworks for
dealing with problem banks, including weak
legal, judicial and institutional frameworks for
dealing with failing banks and companies. Expecta
tions of depositor and creditor bailouts may
overpower any policy to the contrary.
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Unsustainable Macro-economic Policies Unreliable
macro-economic policies made by a Government can
have a devastating effect on the banking system
especially for the credit market. With changes
in the business cycles, the lending booms can
easily puncture the loan portfolio. Changes in
the interest rates can also affect the banks
operations if they are highly exposed without a
hedging strategy.
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• Poor Regulatory Supervisory System
• Failure of the regulatory agency supervising the
  banks not to follow
• concentration risk,
• weak loan valuation,
• capital charge against the loan portfolio,
• asset-liability mis-match, and
• reckless management
• Supervision may also lack authority, and have an
  insufficient number
• or professional employees that may be poorly
  motivated and
• compensated.

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• Poor or Reckless Management
• Shareholders cannot afford to employ reckless
  management for the sake of
• concentrating mainly on profits as the principal
  business motive.
• reckless management are most likely to cost
• shareholders investment,
• the banking reputation,
• the taxpayers money (if there is a rescue), and
• perhaps, the entire banking sector (e.g. systemic
  risk).
• It is absolutely crucial that the Board of
  Directors together with the assistance
• of the Regulatory Agency to hire a management
  team with the highest
• integrity.
• This issue is a being addressed under the
  operational risk aspect under
• Basel II.

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Post-Enron Episode Around the World In USA, the
New York Stock Exchange (NYSE) Corporate
Accountability Listing Standards Committee
submitted a report to the NYSEs Board of
Directors on 6 June 2002. The report makes
recommendations to amend the NYSEs listing
standards withthe goal of enhancing the
accountability, integrity and transparency of
the NYSEs listed companies and was accepted by
NYSE Board of Directors on 1 August 2002. In
UK, Mr Derek Higgs has been asked to lead an
independent review of the role and effectiveness
of non-executive directors. In Mr Higgs
consultation paper dated 7 June 2002. Singapore
has amended its Companies Act to establish a
Council on Disclosure and Corporate Governance
that will be an independent body overseeing
corporate governance rules and accounting
standards.
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I Wish You All Good Luck In Your Studies
In life you can never stop learning.
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Thank You All for Your Attendance Participation
Please feel free to contact me any time Email
larose_at_seychelles.net
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The End