Impact of Globalization and Technology on Risk Management

The development of globalisation, information technology and increase in competition has mostly impacted the banking industry and the industry’s risk management strategies. Risk management is a vital aspect of the finance industry to ensure that the banking business is profitable and sound. particularly when considering finance dissertation help. Therefore, for a sustainable economy, regulators have to implement some soundness in the financial system. Over time, the finance industry has developed with the introduction of advanced technological and sophisticated financial products. As much as these developments in the banking industry improve the central roles played by banks, their general profitability and diversification of the risks faced by various banking institutions, they also pose vital challenges to risk management in baking institutions (Krainer 2009, p. 23). For a long time, the risk management strategies of banks have been perceived to be weaker as compared to the dynamics in the financial market. In respect to the recent financial crisis, risk management in the banking business has become a substantial concern to the policymakers in this industry. The Basel Committee established in 1974, acts the primary global standard-setter for the recommended banking regulations (Andersen, Johansen, and Kolvig 2012). The committee developed international standards and guidelines for the national authorities to use in supervising the banking system. Its principal publication dubbed “the Basel Accord” hugely impacts on the way banks manage their capital and risks and the right procedures and stipulations to follow when monitoring and supervising banks.

As per the deficiencies that were noticed throughout the previous global economic crisis and the management of counterparty credit risk, various guidelines were introduced by the Basel committee and national regulatory authorities to reinforce the capital necessities for counterparty credit revelations that arose from Over the Counter results and equity funding actions. These restructurings are expected to increase the capital set contrary to such vulnerabilities, decrease the rate of procyclicality and offer supplementary inducements to drift OTC derived bonds to the vital counterparties, therefore assisting in the reduction of systematic risks across the financial system. As from the enactment of the Basel Accord plus many more, banks ought to limit their capital needs meant for counterparty credit risk by use of strained inputs. Such a framework is likely to address several apprehensions on capital custodies becoming too low, especially in times of flattened market instability, and will also discuss the problem of procyclicality. Financial institutions will also be subjected to a Credit Valuation Adjustment (CVA) capital control to safeguard themselves to counter the probable mark to economic fatalities that are linked to deterioration in the affluence of the counterparty (Goodhart, Sunirand, and Tsomocos 2006, p. 21). CVA helps to assess reduction in the fair value of a derived spot because of the decline in the solvency levels of the counterparty (Borio 2006). Therefore, the canons for security management and preliminary margining have been fortified. Banks that have significant and illiquid derived exposure to counterparties have to utilise more extended phases of margining as a reason for defining the regulatory principal needs. Therefore, these regulations enhance risk coverage. Such frameworks are necessary because of the unwarranted revelations of financial institution to derivate products whose risk were not documented expansively.

Before the global financial calamity, the leverage ratio of some of the internationally dynamic banks was as high as 50 time the amount of their capital, although such financial institutions conformed with principal tolerability needs. The risk leverage, particularly when assembled up with short term borrowing and the far-reaching effects of deleveraging over phases of stress by withdrawing to the real sector, heightened the predicament (Ayadi 2008). The international regulators hence introduced a straightforward and non-risk-based leverage proportion as a complementary backstop quantity. The control proportion has both micro and macro-prudential facets. The micro-level aspects serve the drive of comprising unwarranted threats as an addition to the risk-based capital ratio. The risk-based capital proportion, however, does not document the jeopardy of unnecessary leverage on account of having low-risk assets. The leverage proportion as an unassuming accounting extent fills this gap.

The reforms formed after the global regulatory framework helps in consolidating the pliability of banks to adverse shudders by compelling banks to conform to an increased requirement for advanced quality capital and liquidity. These reforms aimed at addressing the risks that were posed by the systems of critical financial organisations and lessen implied public appropriations, and also simplify the appropriate resolution of financial institutions. These frameworks are envisioned to reduce the probability of evasion for banks to a lower level and enhance the system’s capability to embrace the failure of a large financial organisation. In this respect, these restructurings go past improving the reliability of distinct banks and comprise of a micro-prudential or system-wide perception of risks to the solidity of these institutions (Catarineu-Rabell, Jackson, and Tsomocos 2002). Some of the regulatory policies are already enacted whiles others are still in transitional arrangement and ought to be presented in the next years.

The significant rudiments of bank policy reforms revolve around the following issue: an improvement in the quality and quantity of principal via stringent risk-weighted necessities. A non-risk weighted proportion was enacted as an additional element to limit leverage and reduce model risk. The implementing bodies can also activate a macroprudential countercyclical safeguard for all financial institutions in a state as risk piles over the credit cycle and therefore plummeting procyclicality.

New guidelines for globally systematically central banks; most states have enacted stringent principal, and other rules for banks deemed systematically vital for their respective economies, which involves stress-testing requirements. The regulations on liquidity have been passed with a focus being two facets; first is the liquidity coverage ratio (LCR), and secondly, the Net Stable Funding Ratio (NFSR). The former targets to facilitate the short-term pliability of financial institutions liquidity outlines, while the later intends to ensure that the financial institutions preserve a stable capital framework for all their resources and off-balance sheet transactions (Schüler 2003).

A general methodology for retrieval and resolve has been formed. Particularly, G-SIBs will require adequate total loss-absorbing capacity (TLAC), as well as an amount of debt that can be bailed in the event of future disaster. Most states including the United Kingdom are reviewing their national regulations to give room for a more orderly resolution of their institutions, including changing the banking laws and the necessities for financial institutions to have when planning their retrieval and wind down (Giammarino, Lewis, and Sappington 1993, p. 1523). In some authorities, intercontinental monitoring changes might have been complemented by state ingenuities. Most prominent are strategies that address the construction of banks’ events and progressions like the limits on patent trading. Some jurisdictions (UK excluded) have restrictions on the remuneration banks give to their staff. Given the essence of local institutions and the domestic cost of financial crises, macroprudential frameworks are majorly made by the national authorities. Regarding the essence of local institutions in the internal cost of financial crises, macroprudential guidelines are majorly formed and enacted by the local authorities, while being coordinated internationally where relevant.

These reforms also comprise of facets that are not directly related to banking. Regulatory and procedure systems have been framed for a systematically non-financial institution. These guidelines have been established to carter for market-base economics, guarantee that bank-like jeopardies outside the conventional banking arrangement, which are subjected to the suitable oversight and directive, which comprises of dealings to decrease the money market funds’ vulnerability to rounds. Other variations in most jurisdiction have comprised of obligatory defrayal of some standards.

More stringent regulation to financial institutions in reaction to the predicament has been convoyed by more rigorous bank regulation, especially for the most significant banks in the system. The alteration has had immeasurable features, which includes larger engagement between financial controllers, bank managers and stricter use of supervisory stress tests. Administrations have also adopted more control over banks in their roles as heritage shareholders after the global crisis by necessitating a precise change to approaches and operation. Besides, there have been substantial supervisory fines for delinquency at some banks in the pre-crisis period and after the predicament (Goddard, Molyneux,and Wilson 2004, p. 1069). These measures have also increased stakeholder scrutiny. Financial institutions have faced constant pressure from their stakeholders, reflecting on the current frail performance in various banks as well as modifications in the stakeholder risk attitudes. The process has generally impacted banks’ cost of funding and the needed incentives for change to their commercial frameworks. For instance, evaluation authorities are more fixated on the degree of depositing funds. Even with these stringent measures, banks can still make substantial profits from the market as discussed in the subsequent sections

Even with such tight regulations, Banks can still maximise their profits using the following factors can enable banks to maximise their benefits in the industry

The size of any financial institution, in this case, is evaluated by the total number of assets that financial institutions owns. Any researcher has not statistically proved the argument that the size of a bank could help it in maximizing profits, however before the implementation of Basel III, large financial institutions majorly depended on short-term extensive funding to support their commercial transactions. The fact that short-term financing is economical than long term capital, especially when assessing it from a rising sloping yield curve perspective, larger banks could have relished more returns by borrowing at lower charges in the era before the implementation of the Basel III (Tanaka 2003, p 217). However, after the implementation of this policy, banks are now required to change their capital frameworks from the volatile short-term funding to a long-standing funding system. Goddard, Molyneux, Wilson, and Tavakoli, (2007, p. 1920) gorged that the size of a bank affects its efficiency in business through two possible ways. First, Larger banks have high market power and can negotiate for lower borrowing rates, unlike in the case of small banks. Besides, their bargaining power, large banks have the capability of spreading their fixed costs, which results to reduced operational costs and at the same time, they attractable to attract a specialised task force which generally enhances their effectiveness in the market. Two fundamental ideas can be drawn from these arguments; that is big banks operating in emerging economies have the advantage of economies of scale, and secondly large financial institutions can utilise their market power to derive more revenues from the market. Therefore, even under these stringent measures, a bank can maximise its earnings if it can increase its asset base and have a leading position in the market.

A study by Goodhart, Sunirand, and Tsomocos (2005) revealed that there is a direct association between management competence and the performance of financial institutions in the market. Since the ratio of cost to income evaluates the management efficiency, an increase in this proportion means that prices are increasing at a higher percentage than the income, which generally points out to reduced operational efficacy, which leads in decreased profitability. Conversely, if the income is increasing at a higher percentage than the costs, profitability is increased or remain the same. Therefore, banks in the United Kingdom should consider increasing their management efficacy to improve their overall profitability.

A study by Goddard et al. (2004) revealed that credit risks negatively affect the success of banks, both in developed markets and in the emerging ones. Färe, Grosskopf, and Weber (2004, p.1739) added that an upsurge in non-performing credits corrodes the projected productivity in a financial institution. The proportion of non-performing loans to gross loans shows how well the managers are handling their respective loan books. The fact that income from loan interests is the major source of revenue to financial institutions, an increase in non-performing loan, definitely reduces a bank’s profitability. A study by Färe et al. (2004) conducted in Europe during the last economic recession between 2011-2014, the results revealed that during this time banks in Europe lent to the public, past the settlement capability of their debtors, which led to difficulties in collecting the outstanding debt. Borio and Shim (2007) explained that it is hard to enforce loan agreements when the economy is in recession because of both the time and expenses that are tangled in the whole procedure. Moreover, the execution of collateral regulations are scrawny in Europe due to the legal reports, which lead to adjournments when recovering or retailing the guaranteed assets to recover the amount that had been loaned out. Generally, in the United Kingdom, it takes a period of two years or more to seize and auction the pledged assets. Lack of proper information about a borrower is also another facet that limits effective credit assessment. At least the presence of security registries and credit agencies helps financiers to acquire the appropriate evidence to assess the soundness of possible borrowers. Besides, there are possibilities of manipulating accounting statements in the case of corporate borrowing. Such factors affect the proper assessment of risks, which leads to high rates of non-performing credits, thus corroding incomes of commercial institutions in the market.

A study by Maudos, Pastor, Perez, and Quesada (2002, p. 35) revealed that credit risks negatively affect the effectiveness of banks, both in developed markets and in the emerging ones. Färe, Grosskopf, and Weber (2004, p.1739) added that a growth in non-performing credits corrodes the projected profitability in a financial institution. The proportion of non-performing loans to gross loans shows the efficacy of managers in handling their respective credit books. The fact that income from loan interests is the primary source of revenue to financial institutions, an increase in non-performing loan, definitely reduces a bank’s profitability. A study by Catarineu-Rabell, Jackson, and Tsomocos (2005, p. 537) conducted in Europe during the last economic recession between 2011-2014, the results revealed that during this time banks in Europe lent to the public, beyond the payment capability of their defaulters, which led to problems in accumulating the outstanding debt. Borio and Shim (2007) explained that it is challenging to impose loan agreements when the economy is in recession because of both the time and expenses that are intricated in the whole procedure.

Moreover, Pesaran, Schuermann, Treutler, and Weiner (2006, p. 1251) asserted that the execution of collateral laws is weak in Europe due to the judicial proceedings, which lead to delays when repossessing or selling the pledged assets to recover the amount that had been loaned out. Den Haan, Sumner, and Yamashiro (2007, p. 918) stated that generally in the United Kingdom, it takes two years or more to seize and auction the pledged assets. Lack of proper information about a borrower is also another facet that limits practical credit assessment. At least the presence of collateral offices and credit 1uagencies helps moneylenders to acquire the applicable information to assess the solvency of possible borrowers. Besides, there are possibilities of manipulating accounting statements in the case of corporate borrowing. Such factors affect the proper assessment of risks, which leads to high rates of non-performing credits, thereby corroding earnings of financial institutions in the market.

According to Sharma, Chami, and Khan (2003), specialisation can be restrained as ratio of credits to the entire assets. The authors concluded that most banks that specialised in giving loans were more profitable than those that did not. The same arguments are consistent with the theory of specialisation, which contends that financial institutions that traditionally specialised in lending are more profitable. The justification for such cases is the datum that the net interest revenue from credits is the primary source of income. Shleifer and Vishny (2010, p. 206) explained that loaning is a more lucrative venture to financial institutions, as compared to further transactions. Therefore, commercial banks operating in a highly controlled environment should actively participate in the lending business so that they can increase their profits.

Normally profitable banks are apt towards conventional monetary intermediation that involves receiving deposits from their clients and altering these deposits to credits. Financial institutions that are successfully capable of converting payments into credits tend to be more profitable. From a contravening point of view, given that deposits make up a considerable percentage of bank’s backing. As stated prior, banks are always capable of borrowing at lower rates and offer the same credits at modest prices to create more earning. Segoviano and Lowe (2002) stated that deposits in developing economies frequently fascinate interests’ charges that are below the market rate. From the empirical results, it is clear that bank can capitalise on low deposit rates so that they can increase their profits.

Gross Domestic per Capita measures a country's economic situation typically. A study by Aspachs, Nier, and Tiesset (2005) reported that economic growth tends to reduce the profitability of banks, especially when conforming to the stipulated regulations. An explanation of these outcomes could be that banks seem to be in caution in their loaning. Evidence suggests that banks tend to over-lend during the periods of economic boom. However, most of these loans are adequately offered because these institutions give loans without a thorough credit assessment and collected ensuing in high loan defaulting rate and eventually high credit fatalities, which reduces their viability. Therefore, in regards to attaining high profits banks prerequisite to lend carefully in times of decent economic periods. A second clarification of the outcomes might be that most economies have been in a recovering position after the last financial crisis, where the losses incurred in terms of bad debts given through the predicament, which are still affecting these banks. Therefore, in times of economic booms, banks should avoid giving excessive loans to the public to increase their long-term profitability.

Kashyap and Stein (2004., p. 32) purported that tightening of the monetary policy, besides the existing regulations negatively affects the financial institution’s ability to make more profits. The effects can be assessed through the centric view of the monetary policy, which is also denoted to as the bank loaning channel. Thurner, Hanel, and Pichler (2003, p. 311) detailed that fiscal policies limit leads to abridged bank loaning because a contractionary fiscal policy is likely to deplete the reservoir of banks, which ultimately diminishes their deposit bases and the capacity to lend. Such a transition framework hinges on the effect of policy rates on standard interest rates. In consideration to the fact that the central bank is the gauge rate that is being used by financial institution to establish the applicable lending rates; an improvement in policy rates are likely to lead to an increase in banks’ lending charges, which leads to a low demand of bank advances by both household and commercial units. Since revenues realised in banks is hugely influenced by lending volumes a decrease in the supply chain of credits could result in reduced profitability in the banking sector. As per these arguments reveal that fiscal policy impacts on the financial institution’s loaning channels of viable banks.

The main aim of improving balance sheet management is to align the bank’s risks better finance and performance. The main objective of any balance sheet is to establish the appropriate balance between the expected return and uncertainty, which ultimately maximises risk-adjusted profitability with the limitation of ensuring institutional safety. Asset Liability Management has generally focused on interest, but in the current market it ought to examine the exchange, credit, and liquidity risk in tandem with macro interest rate ideologies. Most entities have focused on the common dangers that have been known for a long time (De Fontnouvelle, DeJesus-Rueff, Jordan, and Rosengren 2006, p. 1823). The risk assessment processes must observe various systematic approaches to anticipating the unpredicted and emerging risks. Therefore, the management ought to evaluate the probability, impact, persistence and response around different events, and establish any adverse reaction that either prevents high-impact event from occurring or fortify the institution form a high impact event, which negatively affects a bank’s profitability. Realising critical risks when its too late is likely to drain a bank’s resources, lead to additional vulnerabilities and erode the value of the brand, which boils down to negative profitability.

After the global crisis, banks were required to exceed a specific liquidity requirement so that they can satisfy a potential cash outflow in a constrained environment. Currently, a risk management system needs an approach to Fund Transfer Pricing that would purely reflect on the interest rates and maturity profiles, the behaviour of customers and sophisticated product features. Devoid of a holistic effective enterprise-wide framework for liquidity, risk management, banks could potentially face meres of ensnared liquidity across the business and an decreased capability to move the balanced funds to where they are required (Edwards, 1977). Using the right strategies is essential to improve an organisation’s capacity to support the daily liquidity needs and maintain its processes during phases of increased stress. Various approaches have been used to support liquidity; however, one primary requirement is the ability to spot the current tendencies, outlines and adjustment in large quantities of evidence from diverse sources in a manner that is easy to examine. The existence of a holistic management strategy to liquidity regulations can benefit groups to make better, and conversant business verdicts on how and when to announce liquidity and gain more profits from such proceedings.

Previously ALM emphasised more on interests’ rates, and in most cases did not consider crucial consideration like governance, reporting and more analyses. Due to the increasing regulations in the current regime, successful bank management demands that a comprehensive understand the current and future business profitability. Breaking down silos within internal department can be seen as a step in the right to a fully encompassing and integrated risk management approach.

In an organisation there are various silos in an organisation that are aimed at managing risk for example insurable risk, IT and treasury among other units. Silo mentality prevents effectual distribution of resources and management of common risks across the enterprise. When many functions are managing different roles requires a standard system that will asses the need for a Chief Risk Office, comprising that individual’s role authority and reporting lines, increase organisational transparency by establishing quantitative and qualitative measures of risk management.

By using competent and technical information informational systems, banks can examine various financial documents from different angles, which allows financial managers to define and adapt different points. Such a framework allows a bank’s business framework to work dynamically by keeping a close touch to the cost of cash. A holistic view devoid of the isolated silos can assist in managing the market, the banks' liquidity and credit risk. Accountants and financial experts in a bank ought to have an all-round view of assets and liabilities so that they can comprehensively know their customer’s needs, borrowing trends, investment trends and that capability to save (Crotty 2009, p. 571). Aligning a company’s risk and general financial performance allows an institution to have the bigger picture and make more informed and appropriate decisions. Banking institutions should depend on agile and flexible remedies so that they can navigate complex financial environments.

Zicchino (2005) argued that banks face global pressures to increase profitability, and one approach to attain this strategy will include reducing the business cost. One of the most promising ways to reduce operational costs is by increasing profitability. Use of automated software has proven to be a better and intelligent approach to cost reduction. It is the best chance an organisation can use to increase its services to potential and actual customers, while systematically reducing costs. In the current world the cost of implementing and maintaining a computer system has decreased massively, rendering most systems cheap to acquire and sustain if compared to the cost of human operation which can be as high as 71% of the total cost.

Lastly, any organisation aims to expand and grow. Productivity has developed to become a more significant concern in the business environment. Usually, as other business areas information technology increases the productivity and effectiveness of an organisation while the managers do not spend a lot of time planning. The propagation of desktop efficiency tools has established substantial gains in the office and Human resource environments (Salvador, Pastor, and de Guevara 2014). These systems have ensured that most complex tasks are completed with the least number of employees in an organisation. For larger organisations, such strategies do not only reduce costs but ensures accuracy and are faster as compared to human labor.

Moreover, most businesses are going digital and clients have also embraced the digital space. Therefore, the company have no otherwise, other than to turn to the digital space for marketing, customer service, branding and commerce. The same platform also massively increases organizational profit.

Conclusion

The adoption and enactment of banking regulations in different countries and the associated adjustment of the FSAP and ROSC processes remains a subject that banks have yet to understand are continuously learning. More emphasis will need to be focused on how these policies are being established, assessed and the communications on compliance in different countries and the international markets. Such a framework will help the emerging economies that have had different systems and problems but have not been given enough chance to participate in formulation process of these procedures, and how they are being assessed. As much as these measures have deemed to be more stringent as compared to the previous ones, it has been proved that banks can still make profits from this environment from the strategies discussed above.

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