Question

In: Accounting

(a) Discuss any four trends in the banking industry which analysts have dubbed “banking revolution”.​​​​ ​​​...

(a) Discuss any four trends in the banking industry which analysts have dubbed “banking revolution”.​​​​ ​​​

(b) Explain three main reasons why in evaluating bank’s performance Operational profit is usually not considered.​​​ ​

(c) In preparing the statement of financial position of a commercial bank, the bank is expected to show three main components of the financial statement.
(i) List two items that will reflect under each of the components
​​


(d) Outline four basic methods of asset management​ ​

(e) Enumerate four limitations of Bank Regulations​ ​

Solutions

Expert Solution

a) Four trends in the banking industry

Digital

The first trend is digital transformation. The move towards digital platforms continues to dominate the agenda across the banking industry. The need to compete with competitors, while decreasing costs and meeting the changing demands of customers means that there is no slowing down ongoing drive towards digital platforms and technology in banking.

Regulation

Regulation remains an important issue for the banking industry. Firms could well be caught off-guard, due to the fact that no new regulatory initiative is being introduced. This is unlike the last few years, where the introduction of MiFID and GDPR, among others, were launched to keep the sector on its toes. Without a new, headline-grabbing regulation, firms must be wary of becoming complacent on the matter.

Brexit

In the short-term, despite technology’s importance, Brexit is the most significant area of focus for the UK banking industry. Mike Hampson, CEO of Bishopsgate Financial explained that the overwhelming area of change planned for the year was Brexit. At 87% of respondents, the issue is clearly worrying the sector, with change managers still seeking clarity from politicians the best part of three years since the process began.

Growth over restructuring

Finally, the banking industry will continue to refine its client focus and revenue growth. Focusing on revenue growth means that cost reduction is no longer the overwhelming focus for change leaders. This represents a major shift from the initial post-crash era, which since the 2008 financial crisis has seen banks focus on restructuring, cost reduction, and rebuilding balance sheets. This year, banks have finally opted to make use of the economic stability that has continued through several years of geopolitical chaos. As a result, they have focused more heavily on revenue generation, product development, and entering new markets.

b) reasons why in evaluating bank’s performance Operational profit is usually not considered.

1. Does not necessarily equate to the cash flows generated by a business since the accounting entries made under the accrual basis of accounting can result in operating profits being reported that are substantially different from cash flows.

2. A primary drawback of operating profit as a metric for assessing a company is it reveals a company’s profits and not its profitability.

3. investors cannot rely on operating profit as a sole metric for comparison between companies from different industries.

c)

Assets

· Property

· Trading assets

Liabilities

· Loans from the central bank

· Deposits from customers

Equity

· Common and preferred shares

· Retained Earnings

d) methods of asset management​ ​

· Financial asset management

· Physical and Infrastructure asset management

· Enterprise asset management

· Public asset management

e) limitations of Bank Regulations​ ​

1. Less Profit

Unnecessary control and heavy regulation may restrict banks to perform their tasks freely. So, banks cannot earn adequate profit.

2. Failure

Banking regulation may control unnecessary banking activities but it cannot prevent bank failure.

3. Costly And Time Consuming

Bank regulation is very costly and time consuming process.

4. Competition

Barriers to entry means reduced competition

a) Four trends in the banking industry

Digital

The first trend is digital transformation. The move towards digital platforms continues to dominate the agenda across the banking industry. The need to compete with competitors, while decreasing costs and meeting the changing demands of customers means that there is no slowing down ongoing drive towards digital platforms and technology in banking.

Regulation

Regulation remains an important issue for the banking industry. Firms could well be caught off-guard, due to the fact that no new regulatory initiative is being introduced. This is unlike the last few years, where the introduction of MiFID and GDPR, among others, were launched to keep the sector on its toes. Without a new, headline-grabbing regulation, firms must be wary of becoming complacent on the matter.

Brexit

In the short-term, despite technology’s importance, Brexit is the most significant area of focus for the UK banking industry. Mike Hampson, CEO of Bishopsgate Financial explained that the overwhelming area of change planned for the year was Brexit. At 87% of respondents, the issue is clearly worrying the sector, with change managers still seeking clarity from politicians the best part of three years since the process began.

Growth over restructuring

Finally, the banking industry will continue to refine its client focus and revenue growth. Focusing on revenue growth means that cost reduction is no longer the overwhelming focus for change leaders. This represents a major shift from the initial post-crash era, which since the 2008 financial crisis has seen banks focus on restructuring, cost reduction, and rebuilding balance sheets. This year, banks have finally opted to make use of the economic stability that has continued through several years of geopolitical chaos. As a result, they have focused more heavily on revenue generation, product development, and entering new markets.

b) reasons why in evaluating bank’s performance Operational profit is usually not considered.

1. Does not necessarily equate to the cash flows generated by a business since the accounting entries made under the accrual basis of accounting can result in operating profits being reported that are substantially different from cash flows.

2. A primary drawback of operating profit as a metric for assessing a company is it reveals a company’s profits and not its profitability.

3. investors cannot rely on operating profit as a sole metric for comparison between companies from different industries.

c)

Assets

· Property

· Trading assets

Liabilities

· Loans from the central bank

· Deposits from customers

Equity

· Common and preferred shares

· Retained Earnings

d) methods of asset management​ ​

· Financial asset management

· Physical and Infrastructure asset management

· Enterprise asset management

· Public asset management

e) limitations of Bank Regulations​ ​

1. Less Profit

Unnecessary control and heavy regulation may restrict banks to perform their tasks freely. So, banks cannot earn adequate profit.

2. Failure

Banking regulation may control unnecessary banking activities but it cannot prevent bank failure.

3. Costly And Time Consuming

Bank regulation is very costly and time consuming process.

4. Competition

Barriers to entry means reduced competition


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