Financial Service: Banking - Coursework Example

Financial service--Banking Inserts His/her Inserts Grade Inserts (28, May, How might you distinguish between a better performing and worse performing bank or financial services firm? In your answer indicate the assessment of banking performance can differ from other firms? It is very important to analyze a bank’s financial status before getting associated with it. As a matter of fact it is quite true that a bank cannot only be judged by its lending decisions. For example a bank can be outstanding as far as its credit quality control is concerned but at the same time it can experience difficulties due to poor customer services or competition that give out cheaper loans. In order to distinguish between a better performing and worse performing bank following factors should be strictly kept under consideration: Mobilization of deposits Lending Quality Equity analysis Liquidity Earnings Mobilization of deposits A bank mobilizes deposits to attract customers towards it. This is actually a process in which a campaign is set up to do various activities in order to invite people to deposit in the bank. This reduces the political pressures as the bank would not be dependent upon government funding. Apart from political pressures, these deposits provide security to the depositors if by any means any mishap takes place in the future. This ensures the customers that the money they have deposited is secured and could not be lost no matter what. Therefore mobilization of deposits is an essential factor on which a bank’s performance could be judged. The better the mobilization, the more reliable a bank would be (Banerjee, Abhijit & Esther Duflo, 2000). Quality of Customer Service As mentioned before it is not at all necessary that a bank is up to the mark in all of its departments. Even if a bank is offering remarkable interest rates, free online banking, and a detailed brochure of banking, it is all useless if the bank is unable to provide quality customer service. The customers do not select the bank based solely on money. Therefore it is quite essential that the customers are provided with quality service and are not given a chance to complain. The banks which are able to provide excellent service are benefitted and the banks which are not are likely to face huge losses. Capital Adequacy Capital adequacy refers to the percentage ratio of a bank’s primary capital to its assets. By calculating the capital adequacy we are able to predict the room for protection if by any means the bank faces any kind of losses in the future. It ensures that both the depositors and creditors need not to worry no matter what. Liquidity Liquidity is actually the degree to which a bank can buy or sell its liquid assets in order to return all of its dues. It is quite obvious that the bank which is having high liquid assets are likely to repay all their dues in a short span of time. This makes the bank more reliable and surely attracts customers to a greater extent. Earnings analysis This determines that whether a bank’s operation is able to generate reasonable returns on their assets and equity. Since many banks are noticed that no proper attention is given to returns on equity, it is therefore one of the most essential quality of a good performing bank that appropriate attention is given to this department. It is not necessary that all the firms are judged on the same aforementioned aspects. The assessment of banking performance may differ from other firms, as the objective of any firm is to serve their clients which may include some aspects that has got nothing to do with finance whereas a bank is solely a financial institution and only deals in finance and is therefore analyzed respectively. 2a: What are the principal components of modern financial regulation? In your answer critically discuss why these forms of financial regulation are important. The financial regulation refers to the restrictions, laws and precautionary measures in order to maintain financial discipline in an organization. The principal components of modern financial regulation are as follows: Minimum requirements Supervision Maintain Market Discipline Minimum Requirements The reason for implementing minimum requirements is to stimulate the objectives that are set up by the regulators. These requirements are tied closely to the level of risk in the certain departments of an organization. For example if we talk about the regulation in bank the minimum requirement is to maintain minimum capital ratios. Supervision It is very important for an organization to get a license by a regulator in order to run the business legally. The regulator makes sure and supervises that each and every organization is licensed and is fulfilling all the requirements as per set up by the regulator. If by any means any firm is found disobeying the regulation, huge penalties would be imposed. Therefore it is very essential as it ensures that every firm is running their business within a proper channel. Maintain Market Discipline In this section, the regulator makes sure that all the firms disclose their financial information publicly, so that the expected customer could use this information, check the financial status of the firm and would be able to take the decision appropriately. This procedure enables to maintain a market discipline throughout and no one would be cheated whatsoever. As it is solely the customer’s decision whether to get associated with a firm or not, as each and every bit of information is disclosed in front of him/her. 2b: What regulatory requirements need to be considered when providing retail financial services? While providing the retail financial services 3 key areas of identification are set as regulatory requirements: Information and transparency It is vital to provide the consumer with detailed information about the service provider. It is quite obvious that the consumer will also need to assess the features of the contract and the proposed investment. This transparent information would also be beneficial for the firm as it would discard if any sort of mishap occurs in future. Reimbursement Amongst the most significant blocks to a financial market is the consumers uncertainty about the possibilities of reimbursement in the cross-border prescribed dispute. We need to find an efficient and effective judicial and extra-judicial settlement of disputes to provide the necessary confidence in cross-border activity (Jorion, 2000). Online Retail Finance Services As we know that E-commerce has already created a revolution in all financial sectors therefore it is very fruitful to impose online retail financial services. This would benefit the customer as he will be able to deal from anywhere in the world with minimum communication cost. The service provider will also be benefitted as it would enable him to contact the users easily and market its goods throughout the world with minimal distribution cost. As far as security of online services as concerned, there are many organizations that provide security to the sites for example VeriSign, which is one of the best organizations as far as online security, is concerned. What actions might a lender undertake when assessing loan applications to increase the probability a loan is repaid? Critically discuss at least two methods which are used to assess lending applications. It has been observed by various studies that while providing a loan to the borrowers the lender may assess the following points in order to increase the probability of the loan to be repaid: Less number of dependents Dependents refer to the members that are depending on a single source of income. It is quite essential that the lender consider the number of dependents borrower have before approving him/her a loan. It is very obvious that if there is less number of dependents, there would be a smaller claim on their business income which would definitely increase the probability of the repayment of the loan. Moreover, the marital status of the borrower also comes in to act. If the working spouses are able to generate an income every month it is likely that there are fair amount of financial resources which will help in repaying the loan in contrast with the borrowers who are single or divorced, then the probability of repaying the loan would certainly be decreased. Savings criteria It has been observed that the borrowers who have got a habit of saving a definite amount from their salary every month are good loan payers. As a matter of fact the borrower who reserves a certain amount every month is very much in a position to pay back the loan even if he is facing and sort of financial difficulties in the business. Therefore while assessing the financial background of the borrower; it is very important that the lender somehow find such borrowers who save an amount from their income regularly. Business status If a borrower is a business man then the lender must consider the business status of the borrower. This means that if the borrower is running the same kind of business for at least three years then it is quite obvious that he is associated with a well running business. It is not possible for anyone to run a business in loss even for six months. Understandably, a business that is being run for at least three years would be generating fair amount of profit. Lending loan to such borrowers would certainly increase the probability to repay the loan. Conversely, if the borrower is not indulged with the same kind of business for at least three years then it would be a risk to lend him the loan. There has been numerous studies that are done to analyze the status of the borrowers before lending him or her a loan. Similarly, same analysis were even made to judge the odd ratios that were classified by borrower characteristics in Ghana. It was clearly observed that the borrowers who had more than three dependents and the borrowers who did not have a habbit of saving a certain amount of money from their monthly income significantly factored in the decrease of the probability for the repayment of the loan (Jha, Negi & Warriar, 2004). Conversely, it clearly showed that the borrower who is running a same kind of business for the past five years has been able to repay the loan fastest. Alongside it was also studied that the person who does not save a certain amount from the income is unlikely to pay the loan quickly. Whereas it would be very foolish if the lender lends a loan to the borrower who has no other Non-Business income. Therefore it is very vital for the borrowers to gather each and every bit of financial information of the person to whom he is lending a loan. Otherwise the lender would face serious losses which in some dreadful cases could not even be recovered. What were the causes of the recent financial and banking crisis? With reference to prior academic work on the common causes of past financial crises critically discuss the various explanations that have been put forward to explain why the ‘credit crunch’ of 2007/2008 happened The 2007/2008 is marked as the dark time as far as finance was concerned. It was the time when Global Financial Crisis occurred and transpired. It is considered to be the worst financial crisis since 1930s that resulted in the demise of many financial institutions throughout the world. After reviewing the comments of different economists, the main reasons for the financial crisis were immense risk, complex financial products; undisclosed conflicts of interest; the failure of the regulators. This financial crisis eventually resulted in a Credit Crunch (Steinbock, 2005). Credit Crunch is the term referred to the unavailability of loans. It can also be said that credit crunch is a period where the banks are not in a position to offer loans to people which results the rationing of credit. The reasons behind this can be highlighted as follows: Inadequate Information about the borrowers There are certain reasons which bring a bank in a position to stop lending loans to borrowers. Inadequate information about the borrowers is one of them. It leads to a boom for financial institutions when a sudden regulation is imposed by the government which states that the borrowers are or will not be worthy of lending a loan which leads to the contraction of credit. Under such circumstances, the financial institutions almost become helpless and could do nothing more than stop offering further loans to the borrowers. Careless Lending One of the main causes of the Credit Crunch was the careless lending of the investors which results in heavy losses to the financial institutions. This mostly happens when the investors compete with each other to grab the market share and revenue and to do this; they lower their market rates and end up taking a careless decision due to which they suffer heavy losses and are not able to invest further. To compensate their loss the investors increase their accessing rates which are not reasonable for the borrowers and hence results in the unavailability of credit. Exponential fall in liquid assets The crunch takes place when there is an exponential reduction in the over-inflated assets. Due to this, many investors have to face bankruptcy and find themselves in a problem that has no solution. To overcome their low capital, one thing that immediately comes to an entrepreneurs mind is to sell the liquid assets, and when price of these assets collapses, there is almost no way out. One thing that the business man would then do is to approach towards accessing additional credit lines and allow the business to continue which would give some hope to overcome. A Credit Crunch is something that an investor should be well aware of even in good times. Usually the investors in the upward phase of the credit cycle are only concentrating in the increase in demands of their assets and forget that there could be a point of collapse also. However when the prices collapse they are eventually left with almost nothing. Critically discuss the success or otherwise of the universal banking movement. Universal Banking movement holds an essential position as far as financial institutions of a country is concerned. Universal Banking is mainly done by huge banks. As they provide huge sum of finance to various companies, it becomes more likely that they become part of a company’s Corporate Governance. They have got several numbers of branches throughout the world with a motive of providing financial services to their clients. The concept of Universal Banking is actually to summon the banking industry together via mergers and integration of financial services. This means that Universal Banking is actually the combination of different banking and financial services. It has been noticed that Universal Banking has been beneficial for many financial institutions but at the same time it has certain weaknesses also which cannot be neglected. Let’s now discuss both the advantages and disadvantages of Universal banking (Kregel, 1992). Advantages Trust of the Investor: since universal banks hold major equity share in different companies. This allows the companies to easily attract the investors to invest in their respective companies. The investors have firm faith in universal banks that each and every financial activity is being closely watched and that no harm would be done to their money as far as the company is associated with the Universal banks. Appropriate Utilization of Resources Universal Banks smartly utilize their client’s investments. They keep all the financial information of their clients. The clients that have high capacity of taking risks are asked to do risky investments. It makes sure that the company which is advised to do unsafe investments has the ability to recover if by any means, a mishap occurs. At the same time it avoids advising the companies which have less risk taking capacities. To date, universal banks invest their client’s money in different funds and also in market share. They keep all the appropriate information about the equity due to which they are able to manage their client’s portfolios in a profitable manner. Less Marketing efforts Since universal banks have got handsome reputation throughout because of its brand-name, it is very easy for them to market their other products and services also. Existing clients will easily get attracted to their other products and services as well. This results in less marketing efforts and the universal banks need not to pay huge amounts on their Marketing techniques. Disadvantages Single platform, different rules As Universal banking merges into a single platform, they provide their services and products under the same platform. It is also very certain that under the same platform these products and services have to undergo different rules and regulations. This eventually creates many problems. For example, Home Loans, Car loans and insurance policies have their respective rules and regulations but at the same time they are offered by the same bank which creates a complex situation. Failure of the Banking system Since the universal banking is the combination of huge banks that holds equity share of many companies, if by any means a failure occurs, it would almost destroy the banking system and alongside the trust of the people on them. This is highlighted as one of the main problems of Universal Banking. Bibliography Banerjee, A. & Duflo, E. 2000. Efficiency of Lending Operations and the Impact of Priority Sector Regulations, MIMEO, MIT Kregel, J. 1992. Universal Banking, U.S. Banking Reform and Financial Competition in the EEC. BNL Quarterly Review, 45 (182): 231-53 Jha, Negi & Warriar. 2004. Ghana: Microfinance Investment Environment Profile. Princeton University. Retrieved from http://wws.princeton.edu/research/final_reports/wws591g_104.pdf Jorion, P. 2000. Risk Management Lessons from Long-Term Capital Management. European Financial Management, 6: 277-300 Steinbock, D. 2005. U.S. Business Schools. Origins, Rankings, Prospects. Helsinki: Academy of Finland . 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