Global Banking Strategies - Case Study Example

Global Banking Strategy Proposal Student’s Name Institutional Affiliation Global Banking Strategy Proposal Table of Contents Introduction 2 Objectives 3 Analysis of global banking strategies that some banks have used and impacts of culture differences and liquidity regulations 4 Rationale 8 Exploring the topic of banking strategies further 12 References 14 Introduction After the financial crisis, there was a trend that saw many banks use re-localization strategies. Many of the major banks disposed of their international assets with the aim of satisfying higher capital investments, respond to regulatory complexities that were becoming more complex or to offer more of their management attention to restoring their profitability capabilities on their main domestic franchises (Holland & Westwood, 2001). The international strategy is, however, back and most banks, which are strong players in the industry, seek to take advantage of their relative position to have global expansion. Low growth banks, on the other hand, seek to lay the foundation for making future profits (Holland & Westwood, 2001). Compared to the last witnessed international banking expansion a decade ago, there is a changed landscape where the main players in the banking industry have to operate. There exist two macro trends which pull from opposite directions. First, the markets that were thought to be emerging, such as Latin America, Asia and Middle East, have now matured. These markets have become great sources of profits and are experiencing medium term growth rates that seek to surpass those expected in North America and Europe (Wright, A. (2002). On the other hand, the important aspects of marketing are now facing strict regulatory environment that is advocating for higher operating costs, increased localization and barriers that prohibit the entry into some of the most attractive markets (Wright, A. (2002). The special nature of banking services lead to obstacles to international trade in banking services because all nations have regulations of banking operations. Similarly, different nations have different cultures, and lack of local sensitivity to culture leads to failure (Cetorelli & Goldberg, 2012). Objectives The main objectives of the study will be A. To explore the main strategies that some of the international banks such as JP Morgan Chase and HSBC Holdings use to become global. B. To explore the extent to which cultural differences will affect the retail banking by focusing on the Islamic culture. C. To explore the impact liquidity regulations will have on international banking. H1: There exists a linkage between cultural differences and international retailer banking. H 2: There is exists a linkage between regulations on liquidity and international banking. Research questions 1) To what extent will culture differences, including the Islamic culture, affect international retailer banking? 2) To what extent will regulations on liquidity affect the international banking? Analysis of global banking strategies that some banks have used and impacts of culture differences and liquidity regulations According to Kwok and Tadesse (2006), despite the ease in which the banking operations have managed to cross national boundaries in the previous years, there have been obstacles in the efforts the banks have made to serve customers in foreign markets. According to (Laird, 2014), there have been conferences such as the one held by SWIFT every year that focuses on beating the obstacles to serving customers in foreign markets. Laird (2014) adds that the conferences allow tons of presentations and information from various major banks from all over the world, such as JP Morgan Chase and IBM and major technology companies such as Oracles. HSBC Holdings is one of the most successful international banks. According to Lesova, (2012), HSBC is focused on becoming the worlds leading international bank by aligning its internationalization strategy on two long term trends (HSBC, 2014). First, the economy of the world is becoming more connected daily, with increased growth in world trade and the flow of capital from cross border operations (HSBC, 2014). HSBC is, therefore, focusing on the fact that the growth in the world trade is overtaking growth in gross domestic product (HSBC, 2014). The second trend is that HSBC expects Latin America, Asia-pacific, Africa and Middle East economies to increase four times their current sizes by 2050; therefore, it is strategizing on focusing on the growth of such economies (HSBC, 2014). What has made HSBC to be a true international bank is acting on its strategy whereby it has a network that corresponds with the appropriate international financial flows, their access to markets and business of high growth and their strong balance sheet that generates a resilient stream of incomes (Roose, 2012). JP Morgan & Chase is also one of the largest global banking organizations in the world today. JP Morgan specializes in asset management, commercial banking and investment banking. According to JP Morgan (2012), the organization has used various strategies to improve its global presence, including helping its clients and communities navigate their way through a complex global economy. For example, in 2013, JP Morgan donated over $ 210 million to many non profit organizations in different states of America and forty four countries around the world (JP Morgan, 2012). In addition, JP Morgan uses the strategy of providing credit and raising capital to enable economic development (JP Morgan, 2012). Despite being some of the largest banking organizations in the world today, HSBC Holdings and JP Morgan are also facing obstacles of international banking, including differences in culture and liquidity regulations. One of the effects of culture changes includes changes in the consumer behaviour and difficulties in understanding some of the foreign markets. De La Merced (2014), states that effects of cultural differences in the banking sector are determined by the patterns of trust between countries. De La Merced (2014) focuses on four types of international flows: people, products, information and capital and explains how differing cultures would make it hard for banks to operate internationally. Culture is one of the powerful environmental factors that determine the accounting systems of a country (Postrel, 2004). Culture also determines how people receive, analyse, perceive and use information. While banks are very much dependent on the accounting standards of a country, culture plays a very big part in influencing the way accounting standards are formed. Postrel (2004) claims that there are three specific areas that accounting standards are affected by culture: auditor’s perspective, reporting of financial information and system of management control. The accounting standards of a country play a very big role in international investing of banks. The culture of a country and the accounting standards in practice are, therefore, major aspects that need to be considered when laying down a strategy of venturing into foreign markets (Postrel, 2004). People are affected by the roles that their nations uphold. For example, a bank manager in India will be more likely to bend standards for a client, as opposed to one from Australia (Postrel, 2004). A person from India would feel that pleasing a client is the most important thing, while a person from Australia would feel that sticking to the set standards is his ethical duty. Islamic culture is one of the cultures that offer a challenge to international banking due to its strict requirements that people stick to their traditional values (Lackey, 2013). According to Roose (2012), Islamic banking is one of the most dynamic segments in the banking industry. Some of the rules of traditional marketing do not apply in Islamic banking because most of the rules that uphold their religious beliefs are preferred. The Muslim customers are mostly appealed by Islamic banking because it allows them to fulfil their religious obligations. Other banks from other cultures and religions may find it hard to venture into nations that are strictly Muslim (Lackey, 2013). According to Islamic tradition, when people want to venture into businesses, they do so as partners by sharing both profits and risks. Muslims are, therefore, more likely to choose Islamic banks over banks from other religions because they allow them to be partners, invest their income and fulfil their Muslim duties (Lesova, 2012). Islamic banks that stick to the requirements of their religion will mostly appeal to Muslims only, restricting the growth of Islamic banking. However, Islamic banks that want to appeal to non Muslims try to appreciate diversity, which makes their potential for growth higher. This, therefore, leads to successful internationalization (Kwok & Tadesse, 2006). Kwok and Tadesse (2006), gives an example of Malaysia where non Muslims mostly use Islamic banking products. This proves that Malaysian people are more open to diversity, and therefore, banks planning to go global can venture into their market. The non Muslims constitute forty percent of the population, and they represent the major banking segment customers (Lackey, 2013). According to the Islamic culture, trust is the most valuable concept. In the banking context of Islam, trust is a moral obligation of every individual to perform their duties and obligations to the society. When designing a strategy to venture into nations that uphold Islamic culture, banks have to put measures whereby they can prove to the residents that they also value, trust and respect their religious obligations. Banks seeking to venture into Islamic nations need to have an overview of the moral values of the Islamic religion. Islamic culture also values customer loyalty. Banks venturing into Islamic nations need to make sure that they maintain the values of customer loyalty. A slowdown in emerging markets, increased geopolitical risk and regulatory investigations are some of the effects of regulations in liquidity that may affect business models and profitability of banks seeking to go global. Bray, Anderson and Protess (2014) states that following the global financial crisis, there has been a change in the regulatory and legal restrictions placed on global banking. According to Bray, Anderson and Protess (2014), major banks are facing new waves of regulatory amendments. (HSBC, 2014) adds that after the global financial crisis, governments and other regulators from all over the world have been developing measures that will strengthen global banking systems, and make sure that financial institutions have sufficient liquidity and capital to prevent future financial crisis. HSBC, like other international banks, has used the approach of transitioning from a fragmented liquidity management to one that is more centralized and global structure that encourages the use of automated processes, controls and standardization and realization of the full value of liquidity generated from business activities from several geographies (Holland & Westwood, 2001). Wright (2002) claims that dramatic changes in the market value are among the challenges that banks choosing to go global might face as a result of liquidity regulations. All foreign markets, just like any other market, may undergo sudden unexpected changes and investors who time markets are less likely to succeed in foreign markets (JP Morgan, 2012). Banks choosing to go global are, therefore, advised to implement globalization strategies that allow and favour long term investment to avoid the impacts of the sharp up and down swings of the market (Kwok & Tadesse, 2006). Rationale Studying the impacts of culture and government differences on internationalization strategy of banks will be beneficial to the banking industry, as a whole. When banks go global, they will have employees from diverse backgrounds. They will, therefore, be able to base their company values around fairness and inclusion (Cetorelli & Goldberg, 2011). Information from this study will help banks have a greater share of the market. The employers will be able to appeal to wider supplier and customer base, and this will be achieved through recognizing, embracing and utilizing diverse experiences, skills and knowledge that diverse members of staff have (Schnabl, 2012). The banks will, therefore, be well informed and they will come up with an international banking strategy that favours an inclusive workplace. For example, JP Morgan’s banking strategy is based on the value of integrity for all that states that no employee should sacrifice their integrity for the benefit of the bank or personal benefits (JP Morgan, 2012). The question of government differences and how they affect liquidity will help banks to have an effective international banking strategy that favours their lending to domestic and foreign customers. Knowledge gained from the study will be effective in creating an international banking strategy, which will help banks to react to aggregate liquidity by adjusting their cross border lending, domestic lending and interbank loans (Holland & Westwood, 2001). It will also allow them to adjust their internal lending and borrowing, or to make adjustments to their balance sheets. Different international banks use different ways of responding to liquidity risks. When a bank chooses to go global, their business model will be different from the one it had operated on when it was only operating domestically. International banks will encounter some foreign markets that have low trading volumes and few listed companies (Wright, 2002). Banks going global may also find out that the government requirements in some countries are that organizations should be open only a few hours a day. The question of government differences, and their effect on liquidity, will allow banks going global to come up with an international banking strategy that helps them venture into foreign markets, which do not impact on their trading negatively. The questions of how the impacts of culture and government differences affect the internationalization of banks will interest policy makers and bank owners. In the current environment, banks are undergoing a lot of pressure and struggle to restructure themselves and rehabilitate the whole banking industry (Wright, 2002). They, therefore, have to come up with internationalization strategies that do not neglect the changing expectations of shareholders and customers. The questions of study in this paper will be beneficial to the policy makers because they have been working to come up with amended regulations that favour the best implementations that will benefit both small and big banks, clients and shareholders (Laird, 2014). The policy makers are focused on amending regulations in such a way that they offer a balance between factors that are time critical, such as economic growth and banking business. The policy makers aim to provide stability to the financial system (Cetorelli & Goldberg, 2012). Policy makers, therefore, will benefit from the information gathered from the study of the impacts of culture differences and government differences in the banking industry. Major Banks are negotiating with the policy makers to offer them lenient measures that will favour the growth of their banks and rebuilding of their businesses after the damage done by the credit crisis to their balance sheet (Bray, Anderson & Protess, 2014). Policy makers will, therefore, have efficient information on the damages done, and will know the kind of measures to apply to balance all involved parties’ interests. The policy makers and regulators will, therefore, be in a position to increase the strength and stability of the banking systems. The question of the impact of cultural differences on the effectiveness of internationalization of banks is worth exploring further because it will benefit bank owners. It is clear that cultural elements affect people’s views and practices in a workplace. Exploring the question of culture will give employers information about the ways in which they can treat different people from different cultures with respect and dignity. Treating everyone with dignity plays a greater role of enhancing customer service. In addition, it leads to increased productivity in the banks (JP Morgan, 2012). Information from the study will allow banks strategizing to go international, to review their inclusion strategies. They will be in a position to consider whether their formal policies and procedures are in line with their customer base. Banks will also be able to come up with strategies that allow them to have informal or unwritten working practices that do not contradict the values and practices of the communities they are serving. Exploring the question of culture further will be useful to human resource managers, operations directors and other personnel, who are offered the responsibility of managing people in the banks. Following up the ideas that the study will find out will bring several benefits to the banks choosing to operate internationally because the employers will be able to promote equality, human rights and create a workplace that is all inclusive, with the purpose of improving motivation, retention and providing inclusive and adaptable services to clients (Postrel, 2004). The benefits will spread further from the international banks because when the employees have the right relationships at the work place, having been able to interact with people of diverse cultures, they discover ways of getting their relationships in the wider community. Incorporating inclusive working according to the values of different cultures as one of the key values of an organization will be good for the international banks, for the staff and for the community around (Vaara, Sarala, Stahl & Björkman, 2012). Exploring the topic of banking strategies further The topic of the effective global banking strategies that banks use will be explored further, with some emphasis being laid on the strategies that some of the international banks have used to go global. Further exploration will also be done on the role of liquidity regulations on global banking strategies. The impact of differences in culture and how they affect customer base and strategies that banks may use will also be investigated. Some of the literatures that will be reviewed include Vaara, Sarala, Stahl and Björkman (2012), which states that the lack of having local sensitivity when strategizing to go global leads to failure. Vaara, Sarala, Stahl and Björkman (2012) and Schnabl (2012) add that some banks tend to centralize their operations and marketing, which leads to decline in profits rather than an increase, because the banks fail to meet the needs of the local clients. Amin, Isa and Fontaine (2013), which focuses on Islamic culture and how it has affected the customer base of Islamic and non Islamic banks while focusing on Bank Muamalat Malysia Berhad and BIMB, will be reviewed. Amin, Isa and Fontaine (2013), focuses on Islamic banking, particularly in Malaysia, stating that Muslims mostly prefer Islamic banks because they allow them to invest their income, and fulfil their Islamic religion obligations. Doole and Lowe (2012), however, claims that there is a high number of non Muslims using Islamic banking products in Malaysia because Islamic banks have become internationalized, and are having strategies that appeal to non Muslims, leading to an increase in their growth and successful internationalization. Cetorelli and Goldberg (2012) will be one of the literatures focusing on the impact of liquidity regulation and its impact on the global strategies of banks that will be reviewed. Cetorelli and Goldberg (2012) states that during the international financial crisis which started in 2007, there was a dry up of the liquidity in form of short term money markets. This, in turn, led to banks having severe funding challenges. Gambacorta and Van Rixtel (2013) is relevant to this topic because it focuses on how liquidity regulations will reduce the risk of freezing interbank markets, while stating also the negative impacts liquidity regulations might have on bank lending and profitability. Cetorelli and Goldberg (2011) is also relevant to this topic because it offers information on how banks can respond to liquidity regulations by having a global banking strategy that allows them to have multiple dimensions of exploiting implementations of tight liquidity regulations in different countries. References Amin, M., Isa, Z., & Fontaine, R. (2013). 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The New York Times. http://dealbook.nytimes.com/2014/04/07/jpmorgan-to-shift-executives-at-corporate-and-investment-bank/?module=Search&mabReward=relbias%3Aw%2C{%222%22%3A%22RI%3A16%22}&_r=0 Doole, I., & Lowe, R. (2012). International marketing strategy. Cengage Learning. Gambacorta, L., & Van Rixtel, A. A. (2013). Structural bank regulation initiatives: approaches and implications. Holland, C. P., & Westwood, J. B. (2001). Product-market and technology strategies in banking. Communications of the ACM, 44(6), 53-57. HSBC (2014). Internal control. http://www.hsbc.com/investor-relations/governance/internal-control JP Morgan (2012). Code of conduct http://www.jpmorganchase.com/corporate/About-JPMC/document/2012_CodeofConduct.pdf JP Morgan (2012). CORPORATE RESPONSIBILITY REPORT 2012 http://www.jpmorganchase.com/corporate/CorporateResponsibility/document/JPMC_Full__CR_Report_2013.pdf Kwok, C. C., & Tadesse, S. (2006). National culture and financial systems. Journal of International Business Studies, 37(2), 227-247. Lackey, R. (2013). Why Have The Islamic Countries Failed To Develop Even With Resources Like Oil, While Countries With no Resources Like Switzerland Have Flourished? Forbes. http://www.forbes.com/sites/quora/2013/01/08/why-have-the-islamic-countries-failed-to-develop-even-with-resources-like-oil-while-countries-with-no-resources-like-switzerland-have-flourished/ Laird, L. (2014). Global Banks Settle Charges of Foreign Exchange Rigging. Forbes. http://www.forbes.com/companies/ubs/ Lesova, P. (2012). Dimon: London Whale Issues. Tempest in a Teapot,’” Wall Street Journal MarketWatch blog. Postrel, V. (2004). Economics and Islam. Business Day. The New York Times. http://www.nytimes.com/2004/08/12/business/12scene.html Roose, K. (2012). Muslims on the Wall Street, Bridging Two Traditions. New York Times. Schnabl, P. (2012). The international transmission of bank liquidity shocks: Evidence from an emerging market. 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