Impact of the Financial Crisis on Finance Sector Workers - Essay Example

Topic: Impact of the Financial Crisis on Finance Sector Workers Name of student: Name of instructor: Course: Semester: Table of Content Sr. No. Topic Page 1 Introduction 2 2 Globalization and the financial crisis 3 3 The impact of the crisis on financial services employment 4 4 Comprehensive strategy to respond to the crisis 6 5 Conclusion 7 6 References 8 1. Introduction The current devastating financial crisis has its genesis in the precipitous contraction in credit, the wider consequence of which surface somewhere around mid of 2007. Since then, it has spread throughout into what is now perhaps the most overwhelming financial crisis, the world has experienced since the great depression of 1930s. As a matter of fact, the origin of this financial crisis can be traced further back, to the bursting of the high-tech bubble in the early 2000. When the equity markets across the globe began to decline steeply and the world economy started taking a downturn, the Federal Reserve of USA and various other central banks stridently brought down the interest rates to contain the economic devastation. This prolonged phase of lower interest rates in turn fuelled mortgage-borrowing boom, which encouraged the then homeowners to refinance their running mortgages. This financial novelty divided mortgage origination from lending decisions. As such, because of this financial innovation, there was complete lack of concern about the ability of these customers to repay their mortgage. Over the last twenty years, the financial markets across the globe have witnessed exponential growth. As part of this transformation, various banks and other financial institutions became global in their operations. Broadly, the financial service sector includes following sub-sectors: Banking industry (Comprising of both retail as well as corporate banking with operations spread in national, regional or global markets) Insurance industry (Comprising of both life as well as general insurance and the reinsurers as well) Financial and investment intermediaries (Like those involved in hedge funds, mutual funds, wealth management, insurance and financial advisory, etc.) The said financial service sector employs millions of skilled and semi-skilled professional as well as technical workforce. These people have proficiency in business, finance, technology etc. Further, with the requirement of higher levels of skill sets, the knowledge base of the entire financial services sector has enhanced over a period of time. As a matter of fact, many new roles also require higher level of formal education and superior customer-orientation. However, opposing to prevalent notion, most of the jobs in this sector are not appropriately paid. Further, most of the support roles have witnessed widespread reductions and cutbacks in response to this financial crisis. 2. Globalization and the financial crisis The financial sector had inherently been highly regulated. Further, to great extent it had been highly compartmentalized also. However, on account of the advances made in the field of information technology and on account of the expansion of global trade resulting from treaties like that of GATS (General Agreement on Trade in Services), a huge and exponentially growing sector of financial services now operates globally. Even those firms which are confined to national level operations are subjected to competition from multinational institutions operating in their country of operations. As such, financial markets can now be considered as a closed network of interlinked sub-systems wherein array of assets having underlying loans, inter-bank credit, real estate, exchange rates, equities and commodities are created at one place and are traded globally. Due to their popularity, such asset trading has witnessed exponential growth over a period of time. Global financial centers like London and New York has benefitted by such trades a lot. The globalization has critical impact on the financial services sector. Because of globalization, the decisions taken at the global headquarters of multinational financial institutions have significant and long lasting employment repercussions on their national or regional subsidiaries. For an instance, Job downsizing decision by Nomura (Japan), Deutsche Bank (Germany) and Credit Suisse (Switzerland) have impacted the employees involved in Asian and African operations. Similarly, decisions by American Express, Citigroup, Bank of America, and Morgan Stanley etc. have their affect on the financial services sector jobs not only in those countries but also in Europe, Asia, Africa, Latin America, Eastern Europe, etc. Thus, it can be inferred that it is not possible now to contain the impact on the employment in this sector only to the home country level. 3. The impact of the crisis on financial services employment Given the fact that the financial services sector has been at the epicenter of the said financial crisis, the employment in this sector, around the globe has been severely affected. For an instance, in UK, the banks’ decision not to all brokers to deal at the best available interest rates, has dealt a severe blow to the mortgage broking industry. As such, the mortgage broking industry has lost around 20% of its members since the start of the credit crunch in mid 2007. Similarly in the USA, mortgage brokers are affected by the decision of the banks to marginalize them. Some of the largest lending Banks in USA have already barred the brokers from offering loans to the customers. Brokers have for long served as a critical source of loan business to banks. They have been in this business of offering variety of loan products from a range of financial institution, thus providing the best available choice to the end customer. The given table lists some of the planned employment downsizing by banks, asset managers and insurers around the globe during the period of 2007 to 2009. Table 1: Number of job cuts from banks, insurers and funds (Source:http://www.iii.co.uk/investment/detail/?display=news&code=cotn:BARC.L&action=article&articleid=7149688; sourced from company announcements and releases, Reuters reports) 7 Estimate based on earnings reports and management statements, but excluding headcount of firms acquired subsequently. 8 Headcount effective on the date provided between Aug. 2008 and Feb. 2009. 9 Estimates. With the ongoing financial crisis, employment losses are expected to become further critical. Moreover, as the downsizing by big players in the sector is only highlighted, the various reports published substantially under-represent and actual job losses. Redundancies in front, as well as in back-office jobs across the profiles like management, sales, HR, office and administrative support, clerks etc have already incurred extensive job cuts. Even IT specialists, who initially were safe from the wave of job cuts, have now been affected badly. Further, the investment banking firms are expected to witness extensive job cuts as mergers are concluded and the acquiring firms are now preparing for a slowdown in business. Information Technology support roles are likely to be affected severely as the financial institutions plan to scale down for lower business volumes and merging firms cut out overlapping roles. While the whole world is feeling the heat from the employment cut down in the sector of financial services, the employment scenario in world’s leading financial centers like New York and London are far more critical. Further, the bankruptcies, mergers and consolidation which are resulting out of the ongoing financial crisis are expected to lead to significant job losses in this sector. 4. Comprehensive strategy to respond to the crisis With this ongoing financial crisis, the outlook of this sector is dependent on the overall approach adopted to deal with the situation. Moreover, the said approach should be global in nature as the crisis itself has its global impacts. Various bailout plan rolled out by central banks across the world seems important but have been insufficient so far. The global economy has gone into a vicious circle wherein the confidence level of people in general has gone down and has lead to decline in demand, output and employment. This in turn further depresses confidence. It is critically needed that a globally coordinated incentive package be provided to break this vicious circle. Any such policy should be based on following broad principles: These measures are critical in order to bring stability in the global economy and brighten the outlook of the financial services sector. Further, specific approach should be adopted for bring in the stability in the employment generation and maintenance prospects which would have economic and social consequences for the financial sector. 5. Conclusion The financial services sector is presently passing through a severe crisis and is undergoing thorough restructuring. The said crisis has hit the sector unevenly and has resulted into employment consequences. The sector is already experiencing a permanent decline in demand after years of expansion, which in turn is triggering significant job losses. Moreover, evidence shows stagnation and even deceleration in income growth. Further, the restructuring taking place will substantiate the effect on the employment and income of the existing employees in this sector. Policies with social and economic focus are needed to help the people working in this sector to cope up with the crisis. These include well designed and sustainable unemployment benefits, social protection and effective public employment services. Such measures will not protect the income of the affected workforce but will also help them switch to new jobs and mitigate the risk of long term unemployment and prolonged inactivity. There is also a requirement of effective re-training program designed especially for finance sector workers. Further, the most crucial approach needed is that of starting a social dialogue among employers and trade unions so that it should be ensured that the policy approach being designed to deal with employment situation are well designed. 6. References This issues paper is based on information from a variety of sources. ILO publications, various studies, national statistical databases and press and other publications available on the Internet were extensively consulted during its preparation. 1. Steve Lohr, http://www.nytimes.com/2009/02/13/business/economy/13insolvent.html?_r=1&hp: Ailing Banks May Require More Aid to Keep Solvent. 2. http://www.timesonline.co.uk/tol/money/property_and_mortgages/article4004332.ece. 3. http://www.nytimes.com/2009/02/01/realestate/01mort.html?ref=todayspaper. 4. http://www.computerweekly.com/Articles/2008/12/05/233751/50000-it-jobs-could-go-in-global-bankingsector.htm 5. http://www.cepr.net/index.php/data-bytes/jobs-bytes/employment-free-fall-continues,-unemployment-ratejumps-to-7.6-percent/. 6. http://www.iii.co.uk/investment/detail/?display=news&code=cotn:BARC.L&action=article&articleid=7149688 Read More