Question

b) Discuss the view that the globalization of financial services is likely to increase the complexity of banking regulation.

Answer 1

Globalisation refers to intensification of economic, political, social, and cultural relations across boundaries, and it is principally aimed at homogenization of political and socio-economy boundaries. A sound banking system depends partially on the control exercised by central bank and the trust that customers have that their money will be safe, and that one wants to withdraw money their funds will be available. Global banks operate in developed and emerging markets, carrying out retail, corporate and investment banking operations and using legal structures combining branches and subsidiaries depending on their business model (centralised or decentralised).

It has been seen that presence of foreign banks in a country leads to a fall in the costs of financial intermediation for the banking system as a whole, increasing competition in the sector. There will also be an increase in the quality of intermediation, and the authorities may have an incentive to make regulation and supervision more detailed and transparent. Also there are gains in human capital with greater international experience and advances in technology, marketing and business organisation.

However with this the globalization of financial services are also likely to increase the complexity of banking regulation, as it reveals the challenges of financial and banking global networks which are difficult to manage, and often have complex structure. The prime causes of the complexities could be difficulty in managing global networks, fierce competition in the banking and financial sectors, new barriers in form of national and regional regulations created by countries and international organisations and need for more compliance measures as well as higher capital standards.

At the time of global melt-down which started in the US in 2008, it severely affected the world economy for over two years. The crisis has shown the limits of the current regulatory and supervisory frameworks at both the domestic and international levels. The crisis was precipitated by monetary excesses in the form of very low interest rates for a long period in line with the policy pursued by the Federal Reserve and some other Central banks. The low interest rates led to a housing boom which eventually ended in a bust and was a significant factor in the crisis. And the effect of this was faced by the entire world due to globalisation.

Overall, globalization of financial services have brought many challenges that would include enhancing corporate governance alignment of regulatory and accounting requirements outsourcing risks and application of advanced technology.

Although Globalisation of domestic banks has been facilitated by tremendous advancement in information and communications technology and has thrown up lot of opportunities but at the same time it is also accompanied by concomitant risks.