The Banking Crises in the UK - Essay Example

Introduction The financial sector worldwide has witnessed a dramatic increase in its volatility forcing to make many important strategic changes required to withstand the different challenges. One of the most important elements in the whole paradigm shift has largely come out due to the regulatory changes in the environment within which Banks function. The emergence of new regulatory requirements such as BASEL II, anti-money laundering rules and implementation of other strict rules and regulations have reduced the competitiveness of the banks because significant resources seems to have been diverted towards the implementation of these regulations into the organizations. By doing so, banks are actually diverting their resources to potentially unproductive activities as the regulatory compliance may not directly provide the desired benefits in terms of monetary return. The emerging trends in the regulations in the financial as well as corporate markets are increasing in numbers and intensity as the increasing mismanagement and corporate scandals have forced regulatory authorities to look for the legal frameworks which help achieve the organizations more transparency as well as flexibility in their approach and responsibilities towards all the stakeholders in the firms. Some of the external events like the 9/11 incidents also played a major role in bringing in the new regulations into place so that traditional business channels specially the financial institutions are not being used for potentially harmful activities including terrorism. It was because of these reasons that regulations like BASEL II, Sarbanes Oxley, and The European Commissions Financial Services Action Plan were enforced to rationalize and revamp the existing regulatory framework. Thus the challenges are various to the banking sector as a whole and to the UK financial sector especially as London is now largely being considered as the international hub of the financial activities all over the world. The essay will look into the present crisis banking sector is facing currently all over the world and UK especially. External environment for the UK Banking and Finance Companies In order to analyze the external environment for the UK Banking and finance companies, it is very important that we need to take a very comprehensive view of the factors involved into the overall banking scenario in the world. The globalization is taking its roots on more firm basis and it is because of this reason that the economic resources are being shifting from the more developed countries to the emerging economies such as China, Brazil, India and Russia. The emergence of the BRIC has therefore effectively shifted the economic resources and with it the economic activities therefore now since most of the activities are being performed in those geographical locations therefore like all other businesses, the banks are also shifting themselves to these locations to concentrate on the market development and penetration into these countries. (Hale, 2004). Thus the trends in globalization are forcing banks and other financial institutions in UK to face challenges from the banks working in those areas as most of the international syndications are being done by the regional banks in those regions and the overall market share of the UK Banks is shrinking. Further to this, banking sector over the period of time has seen a period of consolidation allowing a wave of mergers and acquisitions. Banks, over the period of time has improved their competencies by acquiring and merging with more efficient banks in order to gain more and more market space. Further Information technology is a new and emerging trend in the market which suggests that the banks are increasingly becoming more competitive in this area.(Grealish,2004) One of the most important challenges that are being faced by the UK Banks is the fact that the impact of US subprime mortgages is going to hit or have already hit the UK banks. The subprime mortgage crisis which has started into US is slowly being engulfing other countries also. This is because of the fact that in international trade, countries use to trade with each other and with the decreasing trends in trade with the US due to the fact that US is facing recession would definitely culminate into the adverse impacts on the UK banking industry. In order to correctly assess the political issues which are of strategic nature for UK banking industries, we need to divide this external challenge into two different geographical areas. In developed world including UK, banking sector is mostly de-regulated and enjoy a great deal of freedom and autonomy and the political influences on these institutions are lesser however in developing countries, the sector is still heavily regulated with lot of political influence over the sector. Since most of the banks in developing countries are government owned therefore there is a lot of political influence over the banking sector. The point here is the fact that increasing role of regulators into the banking sector may force the regulators in UK to exert greater influence over the banking sector thus resultantly increasing the political influence in those institutions. The period after 9/11 have witnessed a new shift into the industry trends in terms of the political influence over the institutions. The anti-money laundering rules, terrorist funding etc are some of the key external influences which are greatly impacting the world banking sector as a whole and UK's banking sector is no exception to it. Banks are explicitly being forced to adopt methods to block the channeling of illegal funds through banks and UK banking sector is feeling the same heat too as EU has increased its regulatory role in the region. The current economics trends, most importantly the crisis emerging out of the subprime mortgages is being now considered as one of the strongest external influences over the banking sector all over the world. Subprime mortgages are considered as the threat because of the fact that international banks have violated their own policies and prudent lending practices to lend to those who borrowers who were traditionally not being served through conventional banking practices. However lending to such borrowers provided banks an opportunity to earn high at the high risk. "Sub-Prime lending typically has been characterized as lending at relatively costly interest rates and fees to credit impaired or otherwise high risk borrowers." (Lax, Manti and Raca,2004). Subprime loans are among some of the products which are being used by the banks to serve the worst customers however as they grew in numbers subprime mortgages are now sprouted themselves into one of the worst strategic issues being faced by the banks all over the world.(Blanton,2005) It has also been argued that banks, through their wizardry and innovative products have put the people into a vicious cycle of never ending debts. The never ending debt mounting on the consumers have created a growing social unrest into various countries especially those who are new to the experiment of consumer credit. Many people feel being trapped by the banks and a strong post purchase dissonance is being created within the customers too. The pricing methods adapted by the banks are somewhat complex for most of the consumers. Subprime mortgage crisis can also be considered as the results of such innovative pricing methods being adopted by the banks which virtually force consumers to default because ever increasing debt was out of the reach of the consumers. Such factors have resulted into the use of more unconventional means of banking. Since UK has one of the largest Diaspora in the world therefore many of them prefer to choose more non-conventional means of remitting money to their parents and families outside UK. This influence, though may be somewhat internal in nature suggest a growing dissent into the customer base of the UK Banks. (www.metro.co.uk) In most of the Muslim societies, the banking business is not considered as religious. Considering the strong influence of religion over the lives of the people, banking is fast becoming something an unacceptable form of business which has many social as well as religious evils in it. For banks like HSBC which claim to be the world's local bank, this is probably one of the strongest challenges to face. If succeeded, Islamic banking can overtake the more conventional forms of banking and if banks in UK do not take into account this factor the same can provide one of the decisive factors to determine the future of banking in the world and UK also. SWOT Analysis of HSBC HSBC claims to be the world's only local bank with presence in most of the countries of the world. Due to its presence across the globe, HSBC enjoys great reputation as a bank which has evolved over the period of time into something which has re-defined the banking standards in the world besides offering a new and unique experience to customers. It is because of this reason that it proudly claims to be the world's local bank. A SWOT analysis of the bank is given below: Strengths: Over the period of time, HSBC has developed its expertise in different areas of the banking. It has very specialized expertise in mergers and acquisitions thus effectively, HSBC has one of the highly qualified and trained staff which has developed its niche into particular sectors of the banking thus allowing it the necessary flexibility and dominance into the international market. HSBC has one of the largest networks of branches spread all over the world. This fact alone provides it a very important competitive advantage as it has the required presence into various markets of the world allowing it to develop various customized banking solutions for each region within which they work. HSBC is the oldest Bank in China and having developed its base already in the market; HSBC has the required presence in the market which is fast developing to be the leading economy of the world. In an environment where most of the companies struggle to find the new market space, HSBC has a ready market to which it can tap more vigorously than others. HSBC is the world's first Carbon neutral bank of the world suggesting the bank's strong orientation towards the environment and the concerns being shown by the group. Weakness HSBC despite its presence in various countries of the world has failed to create an integrated marketing strategy and have not evolved as a brand. Due to its extensive acquisitions in the past, bank has failed to recognize the power of its brand until late 1990s. HSBC has a presence in many countries however what is important to note here is the fact that it is not as aggressive in all the countries as it is in some of its leading markets. It is therefore just considered as the fact that HSBC is maintaining just its presence in the market without actually exploring the market. Such actions may suggest that HSBC may divest from the countries where it has just nominal presence. Opportunities There is an increasing demand from emerging markets as due to lack of sophisticated information technology tools in those markets, the local banks fail to cater to the needs of the increasing demand from newly emerging companies therefore HSBC has one of the most important and growing area to tap for. Further Middle East is one area of operation where the strength of HSBC is not so much therefore this part of the world also providing a good market to tap. Further, microfinance is one such area where HSBC has not yet engaged itself. Experience suggests that an organized effort on the microfinance can provide banks a largely untapped market potential. If banks can lend to subprime borrowers than lending to more unconventional areas like microfinance can be an acceptable risk also and can provide a significant opportunities for HSBC to tap a new market. Threats Subprime mortgages are being considered as one of the biggest threats to the banks generally. The slow down into the US economy is catching up with the banks in other parts of the world also. Further, the increasing role of regulators into the banking sector may hurt the independence of the institutions working in the banking sector.( http://findarticles.com). Further, HSBC is heavily relying on information technology to gain competitive advantage therefore being more IT reliant also put it at the threat of various important issues such as identity thefts, system slowdowns, email viruses etc.( http://news.zdnet.co.uk) Consumer attitudes The current trends in the market are that most of the consumers view online or internet banking with much favoritism as many surveys have suggested that the banks are going to implement hybrid marketing concepts in order to lure customers to them.(Kayanak& Harcar,2005) thus it is now extensively being believed that the future attitudes of the consumers in this regard are going to shift towards technologically driven banking rather than traditional banking. However one also needs to understand the fact that online banking may serve just one segment of the market i.e. consumer finance whereas the wholesale banking may still face the traditional way of doing the business. Further to this, there is an increasing trends in credit card debit delinquencies in major banks of the world also suggesting that the consumers especially those who enjoy debt from the banks are changing their attitude towards banks even at the cost of their credit histories. Further, it is also being anticipated that the consumers of the banks like HSBC may tighten their belt and reduce their spending due to the fears that banks, in order to provide for the losses incurred in subprime crisis may significantly raise their prices or include hidden charges which could overall increase the burden on the consumers. (Said, 2007). Further to that as the subprime crisis worsen; the potential foreclosures of mortgages may see a radically different shift into the perception of the consumers as many of them may view banks and financial institutions with more skepticism than the present level of discomfort. What to Do In order to alter the changing preferences of the consumers, it is very important that the banks and financial institutions must view their marketing mix and revise them. First of all banks needs to correct their pricing mechanism as there is a growing concern over the pricing techniques used by the banks. Many consumers believe that banks cheat them through innovative pricing methods which banks initially fail to inform the customers. The so called innovative pricing methods allow banks to enjoy certain extra benefits in terms of the overall billing made to the customers. It is because of this reason that consumer's feel that they never get out of the debt. Banks in order to help themselves revive this position, need to work more and extensively onto the price setting of their consumer products. Further, international banks which work in such geographical areas where saving trends are higher than the spending trends offer very minimal interest rates on the saving accounts and charge heavy on the consumer products offered thus many consumers in such areas tend to place their savings into mutual funds and other secured financing which provide relatively higher rate of returns as compared to banks. Further, as the consolidation within the industry is emerging therefore banks are now offering more comprehensive products such as insurance, consumer credit etc thus banks need to improve their promotional activities to project themselves as responsible citizens of the society. "Revenue growth will require greater emphasis on the underserved customer segments, tools for more effective cross-selling, and new technology deployments that will enable differentiation and new product offerings. Consumer protection issues will also remain a challenge throughout 2007, but new tactics for compliance will mean easier access to bank products and greater customer satisfaction"(www.paymentnews.com) References 1. HSBC. (2008). HSBC Commit to change. Available: http://www.hsbccommittochange.com/environment/hsbc-case-studies/index.aspx. Last accessed 26 July 2008. 2. Kaynak, Erdener, Harcar. Talha D. (2005). Consumer attitudes towards online banking: a new strategic marketing medium for commercial banks. International Journal of Technology Marketing. 1 (1), 62-78. 3. Said Carolyn,. (2007). Why subprime mortgage crisis may have impact on stocks, lending and spending. Available: http://www.sfgate.com/cgi-bin/article.cgif=/c/a/2007/03/18/BUG9AOMAJH66.DTL&ref=patrick.net. Last accessed 25 July 2008. 4. Blanton, B. K. (2005). Dark side of subprime loans Mortgages for those with bad credit leap in popularity despite high foreclosure rate. Available: http://boston.com/business/personalfinance/articles/2005/08/03/dark_side_of_subprime_loans/. Last accessed 26 July 2008. 5. Lax, H., Manti, M., Raca, P., & Zorn, P. . (2004). Subprime Lending: An investigation of Economic Efficiency.. Housing Policy Debates. 15 (3), 533-571. 6. Grealish, Alenka. (2004). Banking Trends in 2005 That Will Make a Difference. Available: http://www.banktech.com/story/news/showArticle.jhtmlarticleID=55301770. Last accessed 25 July 2008. 7. www.paymensnews.com. (2007). Top Ten Banking Trends for 2007: The Focus on Revenue. Available: http://www.paymentsnews.com/2007/01/top_ten_banking.html. Last accessed 25 July 2008. 8. http://www.metro.co.uk. (2007). Banks 'unfair' overdraft charges court challenge. Available: http://www.metro.co.uk/money/article.htmlin_article_id=58977&in_page_id=36. Last accessed 26 July 2008. 9. http://findarticles.com. (2005). UK Banks Face the Challenge of Adapting to Meet the Changing Market Conditions. Available: http://findarticles.com/p/articles/mi_m0EIN/is_2005_Dec_1/ai_n15889739. Last accessed 25 July 2008. 10. http://news.zdnet.co.uk. (2005). UK banks failing the security challenge. Available: http://news.zdnet.co.uk/security/0,1000000189,39195199,00.htm. Last accessed 26 July 2008. Read More