System and Structure

1. System and Structure • OECD Banking System • Emerging Market Banking System • Structure of International Banking Operation • Scope of Foreign Bank Activities

2. Introduction • To make a comparative view of banking system around the world, banks are divided into two broad groups; • Those within the OECD group of countries. • Those within the emerging markets. • Although these terms are not exact, they serve as a rough dividing line between more developed banking systems than those that are less mature and open to greater risk (though OECD banks are certainly NOT exempt from market volatility & crisis).

3. OECD (Organization for Economic Cooperation and Development) Emerging Market Countries Banking Systems

4. OECD Banking Systems • Include those with the most developed economies in the world. • OECD was established in the postwar era by the most economically developed countries to conduct economic research & help provide a policy framework for economic development – the club of industrialized nations. • By 1990s – membership expanded beyond the major G-7 economies (USA, Japan, Germany, France, Italy, UK & Canada) • OECD country – higher level of economic development & sophisticated banking system.

5. Commenced in 1780s 1913 – established the Federal Reserve Great Depression in 1929 through 1930s – stimulus for major restructuring because of stock market crash, bank’s involvement in securities industry & inherent conflict of interest. The Glass-Steagall Act separated commercial and investment banking & the implementation of a deposit insurance system, FDIC. Modification of the Glass-Steagall Act – limited powers to undertake securities operation with adequate firewall. Until 99 – could not directly act as underwriter and dealer but can offers securities brokerage, trust services or act as a dealer in US government & municipal securities. Creation of holding companies – greater scope with supervision made by Federal Reserve & Securities Exchange Commission. US banking system converging into a community of commercial bank with the declining existence of thrift and saving banks. National chartered bank & state-chartered bank. The United States

6. The United States • Depository Institutions • Commercial banks • Saving institutions • Credit unions The Financial Service Industry Finance Companies Mutual Funds Securities Firm & Investment Banks

7. Divided into a number of bodies; The Office of the Comptroller of the Currency (OCC) national chartered bank. Attached to the Treasury Department Work with Federal Reserve Board (FRB) which has authority over bank holding companies State-chartered banks are supervised by state bank supervisory agencies, while their holding companies under the supervision of FRB. The Office of Thrift Supervision responsible for savings & loan associations and saving banks. Banks are subject to supervision of FDIC & various committees of the US Congress E.g intergovernmental cooperation is the ICERC – supervises the foreign loan exposure of US banks. ICERC membership composed of the OCC, FDIC and Federal Reserve. Treasury Department (including OCC) & Federal Reserve – new financial conglomerates. SEC – securities subsidiaries Foreign bank supervised by the federal & state authorities. And are given a level playing field with their US counterparts. Regulatory Bodies

8. Divided into two: Commercial banks Investment banks Central bank - BOJ Structure: Highly segmented & specialized City Banks (9) e.g: Bank of Tokyo-Mitsubishi, etc Segmented Nationwide operations Affected by merger, cohesive banking culture, technology, competition with non-banks &foreign banks Regional banks Segmented into: Traditional regional bank Smaller than city banks Conduct majority operation within prefecture Tied to local economy Also have international banking business Former Sogo bank Smaller than traditional regional bank Second tier Mutually owned institutions specializing in banking activities for SME Specialized banks Long term lending & trust activities Main bank characteristics = keiretsu Japan

9. United Kingdom • Building Societies • Significant share in resident • mortgage market • declining due to regulation • Clearing banks • Dominate UK • financial services • significant role as • international bankers • have nationwide • branch networks • activities include • trade services, corporate • finance, forex, • advisory services • e.g: Barclays, • National Westminster • Bank ets • Investment banks/ • merchant bank • Lending and medium • term finance for exports • to overseas project • finance, investment • management • & corporate finance 4 Major groups • Foreign banking sector • easy access, open policy

10. Since late 1980s – undergone considerable change (privatizations & consolidation) Universal in operation & regarded as leaders in the area of bancassurance. Traditionally divided among savings institutions, retail banks, and specialized banks. 1980s – push to change the French banking system resulted in nationalization of the national banking sector. Major trends – push for consolidation,implementation of new technology and innovation. Deregulation lead to increasing lending capacity especially to a speculative real estate industry. 1992-1993 recession – bad commercial & property loan and restrictive labor law. Changes in banking law & collective agreements with trade union - +ve impacts Primary bank regulator is Commission Bancaire (attached to Banque de France) Two others are CECEI & CRBF. Banque de France coordinates activities of CECEI, CRBF & Commission Bancaire. France

11. Germany’s banking system is universal Universal banks involved in taking deposits, providing loans and mortgages, underwriting securities, & investing directly in securities including equities. Constitute on of the most powerful groups in IB based on the strongest Euroland economy. Primary supervisory authorities are the federal banking Supervisory Office & the German central bank. Three major groups: Commercial banks Savings banks & their regional giro institutions Cooperative banks & their regional giro institutions Other banking institutions include specialized banks, building savings banks and investment funds Around 600 saving banks & 194 regional banks. CB are most actively engaged in IB – The Big Three Germany

12. Emerging Market Banking System • A number of banking systems crises throughout the 1980s & 1990s underscore the danger of poor supervision and regulation – the impact of bank failures on local, regional and international economies • Includes the Asian economic crisis in 1997-1998 (banking crisis) which led to the lengthened of economic downturn due to lack of credit. • Despite the periodic systemic banking crisis, not all countries have fallen victim to such downturn. • For example: in Chile & Argentina, sound macroeconomic policies, prudent supervisory actions and foreign investment help create relatively sound banking system. • In Asia, effort made to upgrade local banks to increase their level of competitiveness internationally & locally.

13. Universal banking system & open to foreign banks Since 1982 – undergone nationalization, privatization, economic crisis, near collapse & restructuring. i.e. nationalization of 58 banks to control declining economy, private investment, selling 18 banks (6/ 91 - 7/92 ) Post privatization problems – excessive credit. 1994 – peso crisis hit the Mexican banking sector so hard. Combination support – re capitalization, loan restructuring, debtor’s support & improve bank’s supervision. 1997-1998 – emerging market turmoil forces the government to restructure the banking sector Future trend = further consolidation, greater foreign bank involvement and gradual recovery. Central bank = Bank of Mexico plays an important roles as key force in monetary policy, issuer of bank notes, operates as a reserve bank, last resort lender & perform visitations. Mexico

14. Still in recovery period after collapsed in 1990s after a rapid expansion during 1980s due to strong economic growth & financial liberalization. Universal model of banking Number of banks rose dramatically – became overbanked Problem - lack of transparency and disclosure, weak nature of credit analysis (often political nature of lending) 1997 – Asian economic crisis led to the declining of banking sector. Reforms made in 1999 – strengthen the central bank’s supervisory role. Central bank of Indonesia play roles as being to: Protect the stability of national currency Ratify and implement monetary policy Regulate and maintain a smooth payment system Regulate and supervise bank. Forming of Indonesia Bank Restructuring Agency (IBRA) Indonesia

15. India • Universal banking system • Reform of the banking sector has been slow – domination of the government lead to political and social concerns • Publicly owned banks dominate banking system – State Bank of India, Industrial Development Bank of India, Industrial Finance Corporation of India, Industrial Credit and Investment Corporation of India and Export-Import Bank of India. • Important segment of banking – retail banking. • Challenges faced by banking sector are; • Weak credit culture • Political interference • Low level of technological innovation

16. Cont’d… • Strong employee unions – negative impact on the quality of services & limitation in range of products offered. • Primary regulator – Reserve Bank of India (recapitalization, BIS) • Future Challenges; • Pressure for change • Interest margin pressure – product diversification • Diversification in treasury and capital market activities, infrastructure lending and retail banking. • Volatility, new financial products & MNA • Bank’s reformations.

17. In transitory mode. State bank is no longer dominate the banking sector Established policy bank to rationalize the banking system Mid 1990s – state bank were commercialized thus new commercial banks emerged. Consist of 3 policy banks, 4 state commercial banks, 10 joint-stock commercial banks, 88 city-based commercial banks, 3240 urban credit cooperatives, 41500 rural credit cooperatives. Dominated by the big-four banks (owned by Ministry of Finance) – Bank of China, Agricultural Bank of China, China Construction Bank, Industrial and Commercial Bank of China. Limited foreign bank participation with restricted operations Future challenges: Need more skilled bankers and regulators Portfolio improvement within public owned banks Technological improvement Maintain the role of disintermediation (nonbank financial institutions) China

18. One of the most sophisticated banking system - emerging market Conglomerates and universal banking system Commercial and investment banking Securities trading Derivatives trading Underwriting Fund management Short-term insurance products Has an advanced technology and system, sophisticated financial and risk management techniques, stable competition, low levels of problem lending and solid bank supervision. 44 registered banks, 4 mutual banks and foreign banks. 6 largest banks dominated nation’s banking business, covers 85% of total banking assets with the big-four domination (ABSA, First National, Nedcor and Standard – too big too fail) Sensitive to international market forces – Asian economic crisis (higher interest rate environment. Banking supervision – Bank Supervision Department of the South African Reserve Bank (1921) under the control of the Registrar of Banks. South Africa

19. In transformational mode - Communism to a market economy Communism system: State had power in allocation of credit, interest rate determination, growth priority rather than creditworthiness, poor corporate governance. Banking sector was reformed in early 1990s and become on of the strongest in Central Europe. System: Large commercial bank (universal banking) Smaller credit institutions Heavy foreign banks involvement (65.3% of assets) Major challenges: Consolidation New technology Provide credit to major companies. Hungary

20. Has been marked by considerable volatility since the fall of the Soviet Union in1992 (state monobank dominations) Russian banking system functioned as: Cashier for government Channeling credit Open to political pressure Explosion in the number of banks after the fall of Commmunism Shifting to market-oriented economy Dominant institutions are state-owned banks (Sberbank & Vneshtorgbank) Remains in a state of transition – not smooth with recurrent crisis. Also because of lack of banking expertise – bank failure. Central bank –Bank of Russia (bank supervision and regulation) – track record as supervisory agency has been difficult (flow of credit,bad debts) Challenges ahead: Lack of sophistication in financial matters Limited pool of talent Transitional nature of the economy Foreign bank competition New technology Lack of coordination between regulators, legislators & prosecutors. Lack of confidence of the population Russia

21. Structure of International Banking Correspondent Bank Representative Office Edge Act Bank Branch Office (Foreign Branch) International Banking Facilities Agency Foreign Subsidiary & Affiliate Offshore Banking Unit Joint Venture or Consortium Bank Offshore Banking Centers Shell Branches