Management of Financial Institutions - Case Study Example

Logo Management of Financial s ID Semester IntroductionBanking can be said to have had an undeniably rich history. Several functions of banks can be attributed to the development achieved in this sector. Provision of trade financing, foreign exchange services and investment transactions are some of these functions. Greatest advancements in banking have been achieved with appearance of true international merchant banking. This paper gives an exploration of international banking while at the same time delves into issues that institutions engaged in the business have to contend with. It covers liquidity allocation and an assessment of the involvement in community social responsibility by international banking institutions. Also, large community banks are studied to explore the trends in international involvement before exploring foreign banks in the U.S. Finally, the paper looks into the management function in international banking. Importance of the study This study in international banking is important in several ways. 1. Determining chances of liquidity for institutions in international banking. This determines whether an institution can possibly engage in international operation. 2. Secondly, it is shown how international banking institutions are important in the development of communities in which they operate. Depth and tendency of involvement in community social responsibility is well looked into in this paper. 3. Trends in involvement in international transactions relative to institutions’ size are captured. Impediments to such engagement are looked into. 4. An account of foreign banking institutions in the U.S and a major drive for them to establish camp in a foreign country is delved into. It is noteworthy to say that profit maximization inspires every business. It is shown herein that international banks are no exception. 5. The fifth paper in this discussion brings out the various management functions involved in international banking. It reveals that international lenders have taken measures that ensure minimal loan loss among other advantages. Literature Review Paper 1: International Banking and Liquidity Allocation. Dietrich; Vollmer (October 2009) Aim: This paper examines the relative advantage of multinational banking against cross-border financial services basing on capitalization on a worldwide access to finance sources. The advantage is dependent on both cost and benefit resulting from the deep relation between these multinational banks and local markets. It analyses the conditions that may allow for multinational banking to occur and also shows capital requirements are consequential since they influence differently the internal capital markets inefficiencies for various organizational structures. Methodology: The paper analyses the role played by liquidity for organizational structures of active international banks. The conditions that pay for a bank to establish foreign subsidiaries over delivering cross-border financial services are derived. Through establishment of subsidiary structures, more liquidity is created by a bank. However, in allocation of liquidity in situations pertaining to country-specific liquidity shocks, the bank has to put up with a bank-internal mechanism that is inefficient. This imperfection compels a subsidiary suffering from liquidity shortage to call in all or some of its loans prematurely and in extreme cases it could even close down. A trade-off exists between creation and allocation of liquidity. Multinational banking only comes about when a bank’s ability of creating more liquidity is bigger than the extra cost due to inefficient allocation. Results: The trade-off is affected by capital regulation. A stronger capital requirement lowers a bank’s ability to create liquidity notwithstanding the internationalization strategy of choice. However, they mitigate multinational banks’ internal capital markets inefficiencies. As such, even a uniform bank capital regulation is discriminant of banks offering cross-border services thus affecting their foreign market entry mode decisions. Not much liquidity can be created by banks operating cross-border. This does not, however, put to risk the banking sector as the banks are able to efficiently allocate liquidity across regions. As for multinational banks, though they are able to create more liquidity, it can’t always be passed on to investors. This makes their stability risky as they can’t properly handle liquidity shocks that are region specific. Conclusion: The paper suggests further research toward assessment on internationally active banks’ role regarding the global financial system’s stability. Several important issues have to be studied in order to obtain a complete picture of the current integrated world economy Paper 2: Corporate Social Responsibility in the International Banking Industry. Scholtens (2008) Aim: The paper aims to provide a framework for assessing international banks’ corporate social responsibility (CSR). It applies the framework to over 30 institutions and finds big differences among individual institutions, countries and regions. Methodology: A concise framework developed was used to assess 32 large banks in the Pacific, North America and Europe between the years 2000 and 2005. Main focus was on performance with regard to international codes adoption, reporting, having certified management systems, community external relations, whether the institutions provide financial products to the community that aim to facilitate sustainable development among others. All in all 29 indicators were used to check whether an institution undertook a certain CSR activity. Banks’ performance was assessed based on information available publicly. Result: A comparison of scores obtained from banks in all the three regions studied revealed no significant differences. There were however some differences when countries and individual banks performance were considered. Higher scores on CSR were registered by banks from the UK, Netherlands, France and Germany. Banks from Japan Sweden and Italy scored lowest. Individually, some banks scored way much higher than others. Generally a positive significant association exists between a bank’s financial wellness and wellness and its SCR score. There was also a considerable improvement on CSR over the period of study for all banks. Conclusion: Generally, CSR is seen as increasingly important in international banking as an industry as it is deeply embedded in the banks’ business. Paper 3: International Banking and Large Community Banks: A Preliminary Look. Jesswein (March 2014) Aim: This research work seeks to explore the trends and present state of the banking industry in the U.S. More specifically, it dwells on large community banks and considers provision of international services. Main focus is on determination of specific characteristics in operation and finance which are associated with banks providing international services. Methodology: In the study, the specific bank samples are large community banks. These are institutions with total assets ranging from $ 100 million to $ 1 billion. About fifty per cent of all banks were found to exist in this range. Statistical adjustments were then made in order to eliminate problems arising from the steady growth in size of banks that affects the large community bank definition and hence the sample size. The analysis focused on foreign exchange, letters of credit and direct foreign lending. To determine whether a bank provided any international service or not, creation of a dummy variable had to be done to denote specific services. Result: Examination of the data showed that the banking community in the U.S has steadily been getting less involved over time in banking services of international scale. It was established that fewer banks were providing international services. The depth of involvement was also dropping over the study period. Another thing that stood out was that bigger institutions had a bigger tendency to engage in international banking service provision. Interest bearing deposits when used as a funds source significantly impeded engagement in international banking. As such, large community banks can be seen to be shying away from international business for various reasons. Understanding issues faced by commercial banks has far reaching implications as they are crucial in economic development, and more so of the U.S. Paper 4: International Banking: A Special Look at Foreign Banks in the U.S. Khouri (1979) Aim: This paper seeks to explain, using profit maximization hypothesis as a model, multi-nationalization of the banking industry. It gives a testable equation and also conducts tests on the same. Finally it presents empirical results supporting the hypothesis. Methodology: The extent to which a bank is committed overseas is measured using variation of total loan assets as booked by the bank’s overseas branch. This is to enable development of a supply model to yield testable equations explaining a banking firm’s multinational character. The bank is assumed to be a multiproduct firm with a balance sheet comprising five types of substitutable loans on its assets side and a group of deposits together with a capital account making up its liabilities side. For deposits, a homogeneity assumption is used to allow for concentration on the balance sheet’s assets side. Several assumptions and adjustments are then taken to arrive at the final equation. Findings: The study’s major contribution is from the model, basing on profit maximization that explains motives for a multi-nationalized commercial banking industry. The models validity is confirmed by empirical tests that explain various loan bookings made by Japanese banks resident in the U.S. The tests also establish the hypothesis of profit maximization’s applicability to the banking industry, albeit with minor modifications. The study established that banks tend to follow their customers to wherever they move to. Customers on the other hand want to; when they move to foreign lands, stick with their home country banks that have branches there. This is attributed to a desire to avert risks and also to establish relations that are long term and stable. Paper 5: The Management Function in International Banking. Davis (1979) Aim: Herein a discussion of the various management activities involved in delivering international bank services is handled. These include the objectives and strategy, performance measurement, profit management, asset management, business development and marketing. Results: It is observed that performance measurement remains primarily statistical as factors beyond control of bankers are in play here. One such factor is loan demand absence. Decisions like closure of low performing units is another factor A statistical analysis on international banking is given that gives useful information. A comparison of loan loss experience between international and domestic lending reveals the international side as more secure. This is attributed to greater selectivity in foreign lending and a tendency of loan portfolios being weighted toward bank guaranteed loans. Summary Several things can be learnt from the above studies. 6. Inability to adequately create liquidity by cross-border operators does not harbour much risk to the banking industry. Banks are able to efficiently allocate liquidity across regions hence fending off any risks that may arise. 7. International banking institutions are greatly concerned about the plight of communities within which they operate. Many take seriously the issue of community social responsibility. 8. An institution’s size greatly determines whether it engages in international service provision or not. 9. Businesses and their customers tend to stick together even when far away from their home countries. This is for them to further exploit the loyalty and existing long term relations to avert risks. 10. Greater caution in international lending greatly minimizes loan loss and hence leads to more profits. Conclusion The findings in this paper reveal a wealth of information regarding international banking institutions and their practices. The various aspects covered show that international operation by banks is vital and follows patterns that are crafted to ensure they greatly profit by avoiding any risks that may hamper achievement of great profits like loan loss. This has had an effect of reducing involvement in international practice by some banks. Importance of international banks to communities they operate in can not be overlooked. Such communities greatly benefit from the institutions’ community social responsibility programs. Finally, the fact that cross-border operations do not pose great risks to the banking sector is an evident pointer to a balanced industry. References Davis Stephen I. (1979). The Management Function in International Banking. New York, N.Y.: John Wiley and Sons. Dietrich D. & Vollmer U. (2009). International Banking and Liquidity Allocation: Cross-border Financial Services versus Multinational Banking. Springer Science + Business Media, LLC 2009. Jesswein & Kurt R. (2014). International Banking and Large Community Banks: A Preliminary Look. Retrieved from http://search.proquest.com/docview/215105958?accountid=145382 Khoury, Sarkis J. (1979). International banking: A special look at foreign banks in the U.S. Journal of International Business Studies (pre-1986); Winter 1979; 10, 000003; ProQuest Central pg. 36. Scholtens B. (2008).Corporate Social Responsibility in the International Banking Industry. Springer Science + Business Media, LLC 2008. Read More