Transcript Financial Services and Industries Neill Gilbride and Richard Hagen Presentation Outline      The structure of the financial industry Technological innovations and the financial industry The role.

Financial Services
and Industries
Neill Gilbride and Richard Hagen
Presentation Outline
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The structure of the financial industry
Technological innovations and the financial industry
The role of the state
Corporate strategies in financial services
The Geographical structure of financial activities
Basic Concepts
 Financial Services: mediate; abbreviate the
exchange process within the economy
 Currency is the most traded product on earth
The growing disparity
between foreign
exchange and world trade
Source: based on Eatwell
and Taylor, 2000: 3-4
Structure of the Financial
Service Industry
 The structure functions by financial intermediation,
which is the pooling of financial resources by those
with surpluses to those who choose to be in deficit, that
is to borrow. Projects can be financed by surpluses
generated elsewhere
 Thus financial intermediation has constituted the basic
function of banks from the very beginning.
 Banks have a certain sequence of development and
order of events that occur to take a bank from a local
lender to an international competitor.
The sequence of
development of
the banking
system
 New innovations and information technology have
made the financial industry increasingly complex. The
result has been the development of different types of
financial institutions, each with a specific function
 Certain services are concerned with the creation and
distribution of credit in various forms.
 Others are concerned with different forms or risk, like
insurance companies.
 Certain facilities certify the accuracy of financial
accounts.
Technology and innovation
 Information technology and more specifically
communications technology are fundamental to the
financial services industry. This is because the speed
of transaction is the greatest added value to financial
service products.
 “It is much easier to move $41 billion from London to
New York then it is to move a truck load of grape from
California to Nevada.”
 Since speed of transaction is so important, large
corporations spend a lot of money on research and
development.
 The mid 1990’s: The top 10 USA firms spent $10
Billion on IT technology.
Three key technologies: that have transformed the
financial services industry,
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Computers- For hundreds of years, all payments and
transfers were done by coins or credit notes.
Progressively cheques entered the market. Since
the 1970’s, computers have made money electronic.
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Microprocessors- are responsible for the socioeconomic shift known as the credit card revolution.
Allowed for plastic cards to represent large sums of
money.
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Satellites- Allow for global electronic communication.
 Trends that have occurred as a result of these 3
technologies
 Increased productivity
 Altered relationships from firm to firm and from firm
to client
 Increased velocity, which has saved billions in
interest payments
 Increase in loan activity internationally
 Securitization: loans and borrowings may be bought
and sold on the market
Technology and Globalization
 Globalization has produced winners and losers. The
global integration of the financial market has created
jobs in certain areas and eliminated jobs in others.
 “The increased interconnectedness and vulnerability of
the world economy is tightly bound up with
developments in the financial system.”
 A few pros and cons concerning globalization of the
financial industry:
 institutes are able to instantly respond to exchange rates
 Shocks in one geographic market spread instantly around the
globe
 There is a major decline in the volume of clerical processing
work
The Nature of skills in the
financial sector
 Progressively the industry is seeing the disappearance
of low skill jobs. Employees must be able to work in an
ill-defined and ever-changing environment. There is a
need for a better understanding of the financial system
as a whole. Isolated, specialized work is transforming
into less specialized flexible work that involves groups
of workers.
Product Innovations
 There are two main types of innovations, those that
increase the speed of transfer and those that create
new methods of lending and borrowing.
Role of the State
 Finance is the vital all encompassing network
surrounding technology and production. Investments
have an enormous impact on the well being of entire
national economies.
 The role of the state has always been present. Since
finance is central to sovereignty.
 Therefore financial services have been the most tightly
regulated of all economic activities.
 2 major forms of government regulation are:
 Governing relationships between different financial
activities.
 Governing the entry of firms (foreign of domestic)
into the financial sector.
 In the 1970’s and 80’s the “walls began to crumble”
due to TNC’s finding gaps in regulatory systems.
 Along with International technology and new
telecommunications technologies.
 Plus Banks and financial firms desire to operate in a
less constrained environment- both domestically and
internationally.
 Therefore the globalization of finance has been largely
correlated to Government Deregulation world wide.
Major turning points
 1960’s- the creation of offshore markets.
 1970’s- USA made it easier for foreign banks to enter
the domestic market
 1981- USA allowed international banking facilities to
infiltrate the market
 “Big Bang” The UK removed financial barriers and
allowed foreign bank entry
 “Little bang” France- similar to the big bang, opened up
their stock exchange
 NAFTA and the European Union
 1995- WTO guarantees access to banking between 30
countries
Corporate Strategies
 The financial services industry is influenced by 3 major
elements.
 The shifting patterns in demand- for financial services
 Technology innovations-affect how services are delivered
 Changing regulatory frame work ie. Deregulation
 A fourth element is the actions and strategies of
corporations
 Actions are profit motivated. A profitable environment
is maintained by corporations investing their surpluses
and hedging against foreign currency fluctuations.
Concentration and consolidation
 trends towards concentration though
mergers and acquisitions
 1990’s saw heavy merger activity = less
international firms
 Statistically, mergers have not lead to
significant improvements in efficiency
and thousands of jobs have been lost.
 How many created?
World’s top
banks, 1989
World’s top
banks, 2000
Transnationalization of Banking
Operations
 There was some internationalization of banking in the
colonial period under the Dutch, British, French, and
Germans
 And further expansions in to foreign market by US banks
in the early twentieth century
 The true explosion of transnational banks follower the
growth of TNCs in the 1960s and 1970s
 This surge was dominated by the US, due to its postwar dominance of international finance
 But by the 1980s and after the European and
Japanese banks began gain a market share
Growth of the number of
overseas bank affiliates,
1960 to 1985
Source: Based on OECD
Observer (1989) vol. 160,
p.36
 Though there may be different reasons for the
internationalization of banking there is a general pattern:
 In the post WWII period only a small number of US
overseas banks existed. With the expansion of the US
TNC in the early 1960s the number of US overseas
banks exploded.
 The second half of the 1960s featured a growth of the
Eurodollar market. The result was a market developed
outside of US control, this allowed US banks to raise
money there by re-lending overseas
 As banks from non-US countries internationalized the
process became self-reinforcing. All large banks had to
operate internationally and have a presence in all
leading markets
 In the 1970s two new movements of capital occurred:
the vast amounts of capital acquired by the OPEC
countries and the dismantling of the exchange controls
of Germany, Japan, the US, and the UK
Diversification into new Product
Markets
 This is next logical step for global financial services
following their expansion into the global market place
 To diversify financial services must offer a complete
package of related services. A number of services
provided by a leading bank would be:
-banking
-corporate finance
-credit cards
-mortgages
-travellers’ cheques
-fund management
This has led to many of the leading global financial providers
developing into “financial supermarkets”.
Diversification into new Product
Markets: How and Why?
 Though there has been some in house expansion for
some financial services, the majority of the
diversification of firms has occurred through acquisition
and merger.
The major encouragement for this has been deregulation
and the advantages of economies of scale and scope:
 The advantages of scale is the larger a company the lower
costs tend to be.
 The advantage of scope is the bank doing business in all
major cities will find it easier to serve clients than a regionally
concentrated bank.
 The argument for this diversification of financial services
is that a company can now offer a “one stop shop” to
customers
 This allows the company to maximize their profits from
each customer because they provide a variety of
services
 Another advantage of the development of a large and
diverse financial firm is the customer recognition which
can be developed
 With the reassurances on the quality of service through
advertising a financial firm can become a trusted brand
name
 this would result in attracting new customers due to the brand
recognition
Geography and the Nature of
Financial Products
Three types of financial products which have distinctive
geographic properties are:
 Transparent Products- are produced where trading
volume is large enough to make small markets
economical. It is based in large global centers and
considered the “apex” of global trading. ie. stocks
 Translucent Products- rely upon economies of scale to
assemble and maintain the information systems
necessary to identify, assemble, and maintain the
various investments within a fund. Creates
opportunities for a secondary level of financial centers.
ie. various funds
 Opaque Products- are those where design and
production is surrounded in some mystery to an outsider
and local knowledge is needed for confident trading. The
information about these products is specialized, this
results in local markets. ie. property trust
Financial products
and their
geographical
characteristics
Source: Based on
Clark and O’Connor,
1997: Table 4.1;99104
The Global Network of Financial
Centers
 In general financial services tend to be concentrated in
metropolitan centers around the world
 These important financial centers are connected with
other centers across national and physical boundaries
 The financial system has certain stable features, one is
the dominate tri-polar axis of Tokyo-New York-London
• But all financial
centers may
change their status
in the network in
response to
changing financial
conditions
•An example is the
change in the
status of Tokyo
following the
Japanese financial
crisis
 There are four basic location determining processes for
financial centers:
 The character of the business organization involved in
international financial centers
 The diversity of markets in international financial centers
 The culture of international financial centers
 The dynamic economies of scale which arise from the sheer
size and concentration of financial and related service firm in
such centers
 As a result a small number of cities control the world’s
financial transactions
 ie. Tokyo, New York, and London
 Along with the large financial concentration, these
same cities are the corporate and regional
headquarters of TNCs
 With such a concentration in these cities, they be
called the control points of the world economy
Offshore Financial
Centers
“[s]cattered across the globe, a series of little places
islands and micro-states- have been transformed by
exploiting niches in the circuits of fictitious capital.
These places have set themselves up as offshore
financial centers; as places where the circuits of
fictitious capital meet the circuits of ‘figurative money’ in
a murky concoction of risk and opportunity. Fugitive
money is ‘hot’ money that seeks to avoid regulatory
attention and taxes.”
-US Department of Commerce (2000: 9)
 With very few exceptions these areas are set-up to
provide services outside the reach of national
jurisdictions
 These tax havens result in the setting-up of large
number of businesses, ie. the Virgin Islands with
300,000 companies
 But the majority of these businesses are but fronts with
no real activity, ie. the Virgin Islands were only 9,000 of
the 300,000 show signs of local activity
Developments in offshore
financial centers
 There has been a recent drive to make offshore
financial centers (OFCs) more accountable
 By enforcing greater disclosure and removing preferential
treatment for foreigners
 35 countries in these OFCs have resisted regulation
 But following September 11, 2001 the US has led an
effort to improve the anti-money laundering controls
Presentation End
 Game Time
“I pity the fool who
didn’t listen caus’
now its question
time”
Questions
1.
2.
3.
4.
5.
Currency
The pooling of financial resources by those with
surpluses to those who choose to be in deficit, that is
to borrow
Computers, Microprocessors, and Satellites
Clerical Processing
Governing relationships between different financial
activities.
Governing the entry of firms (foreign of domestic) into
the financial sector.
Questions
6. US, Europe, and Japan
7. Firm diversification
8. Transparent Products, Translucent Products, Opaque
Products
9. Metropolitan areas (cities)
10. Offshore Financial Centers