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Business of banking in fast changing environment

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As per latest assessment, Citi Private Bank (CPB) has been named 'Best Private Bank for Customer Services and Best Global Brand in Private Banking.' It has been one of the leading banks in utilising customer feedback mainly through its 'voice of the client' survey. In its high-speed digitisation project, complaints from clients are sought and acted on at every stage of digital development. The Global Private Banking Awards is firmly established as the world's most prestigious private banking event with over 125 banks entering the race from countries around the world.

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 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.

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

Clearly, 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 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.

Though the most-talked-about international banks are located in Switzerland, yet a number of countries have fully developed international banking infrastructures. Many individuals and companies participate in international banking to minimise (or evade) their tax liability. This strategy has certain disadvantages. In addition, several international organisations have made recent efforts to curb the use of international banks as tax havens.

However, a 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 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 interest rate is reset every six months on the basis of interest rate paid by the bank (LIBOR) on six-month basis. 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 is a good going!

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 gross domestic product (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. Silver lining - economic growth is picking up in these economies. Portugal has been growing above the euro zone average, thanks to stronger exports. The central bank expects GDP to expand by 2.5 per cent in 2017, up from 1.5 per cent in 2016. This rate is expected to be 0.3 per cent higher than the eurozone average. Exports are predicted to outperform consumption and investment in boosting the economy. They should expand by 7.1 per cent in 2017, the central bank says, up from 4.1 per cent in 2016.

Not to lose sight of - even in developed economies the question of over-banking is coming up. The Bank of Japan (BOJ) 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 over-banked?

So far as the developing bloc is concerned, the going can be described as moderate. The Indian banking sector, thanks to the continuous attention being received from the Reserve Bank of India (RBI), has been able to keep the head above water.

But is China at risk of a financial crisis? Many influential voices believe so, including the Bank for International Settlements, which recently warned that one of its indicators of banking risk, the credit-to-GDP gap, had now risen to over three times the level it considers a danger signal. 

However, global banking makes it possible for the world economy to function, by being the instrument for transferring money across national borders.

Dr B K Mukhopadhyay, a management economist, is Professor, ICFAI University, Tripura, India.

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