Question

Describe three ways in which international banks can improve their financial position when debtor nations cannot meet their debt obligations.

Answer 1

Like we know, International Banks are large fund houses availing credit to those who are in need of money. But it is important to understand that banks require reasonable profits to grow and expand in this competitive world. Even if the debtor nations cannot meet their debt obligations, it is important to take measures in order to maintain steady profits to grow in the market. In 2014, we saw the banking and financial services industry in the midst of a compliance crisis. Therefore, Most banking institutions pursued a shift in focus from defensive compliance remediation to revenue growth and cost reduction. Some banks had to settle some of their mortgage-related cases, the fines for which were quite huge.

Following are the three ways in which international banks can improve their financial position when debtor nations cannot meet their debt obligations.

1. Reducing Process costs

The opportunity to improve process costs often is underappreciated in banks, in part because it involves taking a more manufacturing view of business processes. It is also important to reduce the cost of operation of such banks to reduce huge financial losses. The goal is to improve the bank’s efficiency ratio by reducing the unit cost-to-value ratio of each activity or transaction. Process improvement in this area involves continual performance monitoring and often comes about as a result of analysing, mapping, benchmarking, and ultimately rethinking back-office processes. Important trends include greater reliance on electronic documents, automated routing and processing, and process automation driven by machine learning models.

2. Mergers and Acquisitions

This method can solve the problem for the time being. When two banks merge, they will be pooled up with the capital and resources of both the banks. Bank mergers and acquisitions empower its business to fill product or technology gaps. Acquiring a smaller bank that offers a unique revenue model or financial product is sometimes easier than building that business unit from scratch. And, from a technology perspective, being acquired by a larger bank might allow your institution to upgrade its technology platform significantly. Bank mergers and acquisitions empower its business to fill product, technology and financial gaps.

3. Managing data and analytics

It is easier to analyse the potential risk of financial losses by properly managing and analysing data so that these banks can find alternatives to move forward. Banks now need to move toward a central Regulatory Management Office (RMO) in order to monitor the data management processes. To be successful, they need to start now with a portfolio of initiatives that balance a strong short-term business case with enabling the long-term achievement of the target vision. Such initiatives could include digitizing the underwriting processes, use of machine-learning techniques, and interactive risk reporting.