Are Banks Losing Their Traditional Role - Essay Example

? Bank’s role Traditionally banks have played a crucial role in financial systems through playing an intermediary role in financial markets. Banks are considered to be asset transformers. They have created assets with one set of characteristics and accepted deposits with the other. The central payment mechanism is known to be driven by banks, besides engaging in maturity transformation in the case of debt contracts. Banks have traditionally been referred to as a special part of the financial systems. This has been inspired by systemic consequences and potential dangers that can result in bank insolvency. However, over the last few years, banking has changed radically and is expected to continue changing in a foreseeable future. The purpose of this essay is to discuss the principal functions of banks, the emerging challenges and the impact of market and global dynamism on the future of banks and banking institutions. The types of institutions performing banking business have been changing. Banks seem to be foregoing their traditional role. In many countries, the income coming off-balance sheet exceeds the income coming from the traditional intermediary roles in finances. Banks have become financial services organizations. The actual role of banks is increasingly becoming ambiguous since it is no longer clear what banks are or the details of the businesses they conduct. The actual definition of a bank seems to be missing. This has caused banks to be under intensive regulations compared to many financial institutions. Banks the world over are experiencing formidable challenges. Banking institutions have been losing their past monopolies and perceived comparative advantages. These attributes have underpinned the dominant positions taken by the banks in the financial systems. Banks are increasingly facing stiff competition from potential or actual suppliers of banking services (Fredrick 2005). Some of these include non-financial institutions of banking, capital markets, non-banking institutions of finances and money markets. The entry of electronic banking has caused the retail banking markets to become relatively closed (Skinner 2007). This has made it difficult for the foreign banks to enter into such markets. In other cases, the corporate clients are considering having in-house banks. Under this initiative, the banking operations are conducted through internalized banking operations. This is forcing banks to shed staff and closed down branches. The entry of new technologies and alternative means of banking services delivery is pushing banks to the reconsider restructuring to meet the demands of the dynamic nature of the market (Skinner 2007). Banks have been squeezed by inroads affecting their conventional businesses and ever growing competition, banks are swiftly expanding to unit trusts, insurance and life insurance sectors (King 2010). As these trends emerge, banking institutions have been coerced to conduct major structural changes in their mode of operations. Major structural changes have been emerging in the financial systems. There has been a push to increase the strength of institutions that deal with saving and investment businesses (Gap 2003). These institutions have a growing role in the modern financial systems. At the same time, the financial markets have been experiencing extreme dynamism. The world is having complex financial instruments and globalised financial markets. The role of the managers of institutional funds has been on the rise in the financial markets (Skinner 2007). The traditional distinctions between financial institutions have been gradually eroded. New financial suppliers have been entering the markets at an increasing rate. There seems to be a declining share of bank loans in the corporate sector borrowing (Skinner 2007). The money markets mutual funds have experienced tremendous growth. The business of the corporate lending has been steadily declining which the financial markets have been on the rise (Schmid 2011). Non-bank financial institutions have infiltrated into the traditional banking markets. At the same time, non-banks companies are offering payment facilities. This has caused the role of banks in the financial system to decline. The erosion of banking franchise value has been on the rise (King 2010). The power of technology has been decisive in the financial systems. Technology offers both opportunities and threats to banks. Technology has increased availability and reduced the cost of information. The entry barriers in some areas have been reduced. Technology offers increased efficiency in the existing markets (Schmid 2011). Information has led to extensive disclosure laws in the face of increasing power of rating agencies. This has significantly eroded the traditional information advantages of the bank. In the emerging economies, banking has been an overly protected industry. This had caused the banks to benefit from regulated deposits and lending rates. The restrictions on the domestic and foreign markets have been pervasive (Schmid 2011). Technology, macroeconomic pressures and global market have caused the banking sector to consider new ways of doing business. Financial markets have been opened up to foreign competition through deregulation of banking industry (Skinner 2007). The technological and economic pressures have caused banks t o undergo structural changes (Gap 2003). Banks have become vulnerable to competitive pressures in the emerging economies. This has attracted deep changes in the banking industry. Some of the changes include privatization of state-owned banks, an increased presence of foreign banks, mergers and consolidation. Increased competition had been occasioned by the lifting of prohibitions on the payment of interests. At the same time, ceilings on deposit rates have been removed (King 2010). Deregulation measures have put pressure on banks’ profits and reduced the cheap funding sources. Banks have had to review the public relations as the engage in realistic price risks and harder cross-subsidies on different activities. Banks own cost structures are also assumed to have decreased their comparative advantages. Increased competition has caused banks to have a lesser ability to cross-subsidize the business of corporate lending (Schmid 2011). The development of financial markets has caused significant improvement in the risk management and process formation (King 2010). Rating agencies have been growing. This development has resulted in banks having to compete for traditional roles like monitoring of firms and screening. It is clear; banks are losing some of the traditional advantages compared to capital markets. Studies show that banks have been losing significant share when it comes to financing the corporate sector (Gap 2003). Capital markets are said to offer cheaper loans to corporate businesses than banks. In the emerging economies, banking systems seem to be fragmented in terms of size and number. Ownership and competitiveness of banking institutions have been affected the restructuring (Skinner 2007). Modern technology and ownership patterns have introduced new significant impacts in the present banking sector. Some commercial banks have heavily invested in cutting edge technology and innovation. However, the struggles in the credit risk management have not been exhaustively addressed in the modern banking strategies. Liquidity management is still a point of struggle yet it is considered to be a basic operation. Are banks necessary for banking? There is little that banks do that other non-financial banking institutions or markets cannot do. Banks are not necessary for banking (Schmid 2011). The erosion of the entry barriers has resulted to emergence of a wide range of competitors in the sectors. In the modern globalised market, alternative firms can effectively offer traditional banking services. Increasingly, life assurance companies have obtained banking licenses (King 2010). This means they offer a wide range of banking services. This has caused banks to appear to be unnecessary for banking in the new era. A telling example is the Scottish windows Life assurance. The company has been offering an instant access account besides four savings deposit accounts. Standard Life offers mortgage lending services. Marks & Spencer has obtained a banking license and offers many financial services. The company also offers retail customers with general loans (Gap 2003). Some supermarkets like Sainsbury have limited banking services and can charge interest rates which are higher than traditional banks. Many companies offer banking services like mortgages deposits and loans (Skinner 2007). These were a preserve of traditional banks in the recent past. It is not clear who the future competitor of banks will be. This has made is extremely difficult for banks to device viable competitive strategies. Is banking necessary for banks? The traditional distinctions between multiple financial institutions have been eroding increasingly and substantially. Whether distinguishable institutions called banks or insurance companies shall exist in future remains a debatable matter (Schmid 2011). Banking is not necessary for banks. However, the ambiguity surrounding the role of banks might cause banking to appear to be anything done by the banks (Skinner 2007). It is evident that banks have diversified to a wide range of services. However, the diversification has been confined within offering the financial services (Gap 2003). It is increasingly becoming necessary to define the extent of limits in both economy and regulation that banks cannot exceed in the process of diversification from the traditional financial roles. It is not clear whether banks shall diversify into non-financial business ventures (King 2010). The core banking business can be protected through regulation. However, the relationship between core banking and financial or non-financial services need to be defined. A casing point is the National Westminster Bank. The bank has some intentions of selling stationary to other companies but the initiative was never successful. The banks have not given up of the desire to explore for opportunities outside the traditional banking roles. Survival for banks The traditional roles of the banks have been to offer intermediary services by accepting deposits and holding assets. Over time, banks seem to have diversified in to a wide range of financial services. Banking has been on the decline because of development of cutting edge technology outside traditional banking, external competition, switches in consumer demands and decreasing entry barriers (Schmid 2011). At the same time, there has been an influx of alternatives that satisfy the consumer demands are removal of subsidies. Secondary securitization is replacing standard retail loans which most of corporate are turning to capital markets. Traditional banking is vertically integrated. This means that the sector undertakes all the processes that develop the products and services it offers. Contract banking poses a major threat traditional banking. Banks might be forced to act as brokers between clients and contractors who deliver the actual baking services and products. In future, the banking industry will have to conduct substantial structural changes. The banking business is expected to change radically as the banking operations change (Skinner 2007). The technological pressure seems to have affected the core financial business of the banks. Information processing has redefined offering of the banking services in the global market (King 2010). The decline of the entry barriers is likely to force banks to redefine their traditional roles through comprehensive restructuring. The fundamental economics of banking are changing (Schmid 2011). These changes are expected to continue at technology and innovation expands. Competition has been occasioned by an increasing number of competitors. There is an expectation that technology shall transform banking and the mode of delivery of financial services. This might completely the fundamentals of banking and its economics (Gap 2003). National banking systems are evolving. The timing and extent of banking pressures vary from one country to another. In the coming years, banking competition is expected to take a global nature any various national banking systems and structures interact and compete for clients on the digital space. At the same time, this may call of a review of the international law. The technological developments in the banks and banking sector must take into consideration the changing consumer trends. In conclusion, the traditional integrated structure of banks has to revamp and align with the consumer and technological requirements in order to survive. The banking sectors are expected to experience overwhelming competition. The entry and exit barriers are expected to lower even further. This shall demand the traditional and conventional banking ethics to be altered. In the United Kingdom, there has been a reduction in the number of people working in the banks. This might increasingly become common in other markets as banks develop stronger banking systems. Technology appears to have increased the supply and lowered the cost. Contract banking is expected to grow further as banks embark on out-sourcing services and products. The banking sector is facing intense pressure and must restructure in order to survive. References Fredrick, A. 2005. Banking Finance & Accounting.1st ed. Lotus Press. Gup, B. E.2003. The Future of Banking.1st ed. Greenwood Publishing Group. King, B. 2010. Bank 2.0: How Customer Behavior and Technology Will Change the Future of Financial Services.1st ed. Brett King. Schmid, V.2011. Financial Innovation - with a Particular View on the Role of Banks.1st ed. GRIN Verlag. Skinner, C. 2007. The Future of Banking In a Globalised World.1st ed. John Wiley & Son. Read More