Download - Banking - Opportunities & Threats
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Banking: Opportunities anThreats
Strategic Perspectives in Banking
21 July 2014
Aravindan | Gokul | Praneesh | Rajesh | Vinayak
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Agenda
Why Financial intermediaries?
Why Banks?
What has changed?
What else will banks do?
Banks vs Finance Companies
Competition & Limits to growth
Trending opportunities
Nature of banking business
Relationship vs. transaction oribanking
Threats to the traditional relatioriented banking
Advent of securitization & its e
bank loans
Problems innate to the bankin
Transparency issues & free-ridi
Remarks
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Why FIs offer demand deposits andloans
FIs have greatermarket power
than individuals
FIs reduceuncertainty by
pooling
FIs bring econom
Reduce a firmsfunding costs
Enhancecontractualpossibilities
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Why Banks?
Both sides of Balance sheet Governments favor them as creators
Optimal institutional arrangement for private contracting
Liquidityeasy flow of credit
Re-distribution of wealth in impoverished economy
Create wealth opportunities
Govt. does NOT act as the bankitself a major borrower
Rents in deposit business: political advantage of taking a little from
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Synergies in Banking
Liquidity insurance
Avg. maturity of finance company loan50% higher than that of banks
Liquidity on demandScale
economies
FIs usually go for longer term loans
Meets unexpecrted liquidity demands
Offers liquidity on both sides of balancesheet
Co-insuran
Opaque opertaionsHigh borrowing
Building reputation will ta
considerable time
Other possibility is to invest inassets
Acts as con-insurance for liqui
LiquidIlliquid asse
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Deregulation & Technological Chan
ATM, Credit & Debit cards
Credit rating/history of a client/consumer
Reduced Transaction costs,
Provide funding on demand, not per se
Unlike Finance companies, banks lend outside their area of focu
Loan sales is a repeat sales market. -> incentive for borrowers tohonest
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Finance Companies vs Banks
Misconceptionregarding fall in the
growth of banks due tofinance companies
Short notice finance stillprovided by banks
Finance comhave much match between
income they and cost of fu
Banks offer services forcertain class of
borrowers that cannotbe obtained via capital
markets
Secondary loan salesmarket provides a
cushion effect
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Competition
Increase dueto
deregulation &
technologicalinnovations
OpportunityBanks most
valuable Asset
- CaptiveCustomer
One approachincreaseswitiching
costs
Innovation-means at
differentiation
Idetr
Re
Egcrotra
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Automation - reduces costs but high investments required
Hence done by large banks leading to consolidation
New productsModern version of traditional ones
Fingerprint replacing money, plastic card, checks
Non traditional businessunderwriting a corporate security
CapabilitiesProviding liquidity, information gathering & transactioprocessing
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Limits to growth
Personnelchahging roles,
perceived conflict
of pay equity
Perception ofLemon Problem
Effect of nbusinessebanks ave
cost of borro
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Trending Opportunities
Financialinclusion
Technologydriven
products
ImprovingCapital andBusinessefficiency
Climate RiskManagement
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Functions of a bank
Non-marketableassets(lend) funded
with liquiddeposits(borrow)
Difference in liquidityreflected in ratescharged by banks
Informasensitivity o
asse
Ability of banks toeconomize on
search/matchingcosts
Blurring boundariesbetween modern &traditional banking
Absocredit/placeQualitativ
transform
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Nature of bank loans
Capital market financing vs. Bank lending
Mitigation of information asymmetriesoptimal informat
Value of information & incentives for information acquisit
Enduring close relationships between bank & client
Nature of lending contractsflexibility & bargaining pow
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Advent of securitization: A threat totraditional lending? Primal activities of a banks lending function
OriginationScreening prospective clients & pricing contracts FundingProviding resources for the contract ServicingCollection & client monitoring Risk processingHedging, diversification, & absorption of risks
SecuritizationUnbundling of financial services
Asset-backed securities & not deposits fund bank-originated assets
Securitization removes the funding activity
Securitization quality enhanced by issuing bank through risk absorpt
Pooling benefits of securitizationextendable to commercial loans?
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Way forward for relationship bankin
Shorter nature of relationships diminishes the value of informat Weak relationships disincentivise information acquisition
Relationship puzzleborrowers also need to invest in relationsh
Relationship banking works even in cases of asymmetric informa
Relationship paradoxCompetition threatens relationships butincentivizes the need for relationships as differentiation factor
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Transparency in banking
Opaqueness due to the nature of loans and not bank policies Banks diversify into a wide range of activities
Evaluation of a banks performance becomes harder
Elevated cost of funds, thus ceding advantage to financial marke
Opaqueness leading to poor cost accounting & cross-subsidizati
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Proprietary trading & free-riding
Prop tradingBank trades with own money rather than deposito Prop trading leads to a problem of free riding
Prop trading appears more profitable than it is
Prop trading unit does not internalize risks
Relationship-oriented activities face a high cost
Internal capital allocation becomes arbitrary and flawed
Cost of capital is risk dependent & hence not same for all units
Putting idle capital to use further elevates the cost of capital
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Remarks
Relationship banking is characteristic of value-enhancing interm Relationship banking has suffered from advent of transaction ba
Financial markets have gained market share & increased competi
Diversification of bank activities & increased importance given t
Banks may mistakenly conclude relationship banking is not profi