The Main Forces that are Causing Unprecedented Change in the Corporate and Wholesale Financial Markets

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Identify and discuss the main forces which are causing unprecedented change in the corporate and wholesale financial markets. Explain why these forces have had such an impact on these markets.

Clare F Thomas 9934287 May 2003

Clare F Thomas

Corporate and Wholesale Banking B

INTRODUCTION The traditional function of commercial banks has been to act as financial intermediaries between deficit and surplus sectors. This assumes that banks can intermediate at lower costs than those prevailing with direct financing. However developments in corporate and wholesale financing have significantly undermined this cost imperative. This essay aims to identify and discuss the main forces behind these developments and explain why they have had such an impact on the corporate and wholesale financial markets. Llewellyn (1994) highlighted some key forces and resultant developments when he stated that two major determinants of structural change in the banking industry were likely to emerge: 1. A further reduction of barriers to entry through deregulation would allow more institutions other than banks to provide traditional financial services. 2. Banks would continue to diversify into a wider range of non-traditional banking services, in particular, more of banks’ business will be conducted off-balance sheet. Both of these determinants have been and still are features of the corporate and wholesale financial markets. However other factors have also played a crucial role in shaping the industry, in particular, new technological developments have broken down barriers to entry and led to increased disintermediation of banks. These forces and their impacts on the corporate and wholesale financial markets will now be discussed in greater detail.

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Clare F Thomas

Corporate and Wholesale Banking B

WHAT ARE THE MAIN FORCES CAUSING CHANGE; HOW AND WHY HAVE THEY HAD SUCH AN IMPACT? Changes in Regulation Domestic banking has been somewhat protected from the full effects of supply and demand as it has been tightly controlled by high regulation and cartels. Through operating in a generally weak competitive environment, banks have been induced to develop cost structures that are unsustainable in more competitive and unregulated environments such as the international financial markets. Domestic banks were keen to move into this completely contrasting environment as the deregulation of financial markets allowed freer capital movements, greater competition, fewer restrictions on place and scope of activities and rapid innovation without the need for massive government intervention. However, banks ceased to benefit from what was in practice, protective regulation and Bisignano (1998) discusses the near or actual failure of major financial institutions around the globe following financial deregulation in the mid-1980s. The results of this deregulation are evident; global competitive pressure has increased: not only has competition between banks increased due to the global nature of the competitive arena but also institutions other than banks are able to provide traditional financial services too. One way in which banks have reacted to this change is through mergers and acquisitions of competitors. It is important to note that there is an argument for re-regulation of the international banking environment, particularly where mergers and acquisitions are concerned as banks are becoming so large that they could be deemed anti competitive. Reregulation has also been required after unprecedented growth over a short period of time in the securities market. Securities are contingent liabilities and therefore offbalance sheet activities. Regulation was required due to the fast growing nature of the securities market, but as banks are controlled through balance sheet ratios, there was no way of regulating the banks where securities were concerned as they did not appear on the balance sheet. Changes in the...
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