GLOBALISATION OF FINANCIAL MARKET

In this age of globalization, the key to survival and

success for many financial institutions is to cultivate
strategic partnerships that allow them to be competitive
and offer diverse services to consumers. In examining
the barriers to - and impact of - mergers, acquisitions
and diversification in the financial services industry, it's
important to consider the keys to survival in this industry:
1. Understanding the individual client's needs and
expectations
2. Providing customer service tailored
customers' needs and expectations

to

meet

In 2008, there were very high rates of mergers and

acquisition (M&A) in the financial services sector. Let's
take a look at some of the regulatory history that
contributed to changes in the financial services
landscape and what this means for the new landscape
investors now need to traverse.

Advent of New Economic Policy

After suffering a huge financial and economic
crisis Dr. Man Mohan Singh brought a new policy
which is known as Liberalization, Privatization
and Globalization Policy (LPG Policy) also known
as New Economic Policy,1991 as it was a
measure to come out of the crisis that was going
on at that time. The following measures were
taken to liberalize and globalize the economy:
1. Devaluation: To solve the balance of payment
problem Indian currency were devaluated by 18
to
19%.
2. Disinvestment: To make the LPG model smooth
many of the public sectors were sold to the
private
sector.
3. Allowing Foreign Direct Investment (FDI): FDI
was allowed in a wide range of sectors such as
Insurance (26%), defense industries (26%) etc.
4. NRI Scheme: The facilities which were
available to foreign investors were also given to
NRI's.

The New Economic Policy (NEP-1991) introduced

changes in the areas of trade policies, monetary
& financial policies, fiscal & budgetary policies,
and pricing & institutional reforms. The salient
features of NEP-1991 are (i) liberalization
(internal
and
external),
(ii)
extending
privatization, (iii) redirecting scarce Public Sector
Resources to Areas where the private sector is
unlikely to enter, (iv) globalization of economy,
and (v) market friendly state.

Diversification Encouraged by Deregulation:

Because large, international mergers tend to impact the

structure of entire domestic industries, national
governments often devise and implement prevention
policies aimed at reducing domestic competition among
firms. Beginning in the early 1980s, the Depository
Institutions Deregulation and Monetary Control Act of
1980 and the Garn-St. Germaine Depository Act of 1982
were passed.

By providing the Federal Reserve with greater control

over non-member banks, these two acts work to allow
banks to merge and thrift institutions (credit unions,
savings and loans and mutual savings banks) to offer
checkable deposits. These changes also became the
catalysts for the dramatic transformation of the U.S.
financial service markets in 2008 and the emergence of
reconstituted players as well as new players and service
channels. (For more on this, check out our Financial
Crisis Survival Guide special feature.)
Nearly a decade later, the implementation of the Second
Banking Directive in 1993 deregulated the markets
of European Union countries. In 1994, European
insurance markets underwent similar changes as a
result of the Third Generation Insurance Directive of
1994. These two directives brought the financial
services industries of the United States and Europe into
fierce competitive alignment, creating a vigorous global
scramble to secure customers that had been previously
unreachable or untouchable.
The ability for business entities to use the internet to
deliver financial services to their clientele also impacted
the product-oriented and geographic diversification in
the financial services arena.

Going Global
Asian markets joined the expansion movement in 1996

when "Big
Bang" financial
reforms
brought
about deregulation in Japan. Relatively far-reaching
financial systems in that country became competitive in
a global environment that was enlarging and changing
swiftly. By 1999, nearly all remaining restrictions on
foreign exchange transactions between Japan and other
countries were lifted. (For background on Japan,
see The Lost Decade: Lessons From Japan's Real
Estate Crisis and Crashes: The Asian Crisis.)
Following the changes in the Asian financial market, the
United States continued to implement several additional
stages of deregulation, concluding with the GrammLeach-Bliley Act of 1999. This law allowed for the
consolidation of major financial players, which pushed
U.S.-domiciled financial service companies involved in
M&A transactions to a total of $221 billion in 2000.
According to a 2001 study by Joseph Teplitz, Gary
Apanaschik and Elizabeth Harper Briglia in Bank
Accounting & Finance, expansion of such magnitude
involving trade liberalization, the privatization of banks in
many
emerging
countries
and
technological
advancements has become a rather common trend. (For
more insight, see State-Run Economies: From Public To
Private.)

The immediate effects of deregulation were increased

competition, market efficiency and enhanced consumer
choice. Deregulation sparked unprecedented changes
that transformed customers from passive consumers to
powerful and sophisticated players. Studies suggest that
additional, diverse regulatory efforts further complicated
the running and managing of financial institutions by
increasing the layers of bureaucracy and number of
regulations. (For more on this topic, see Free Markets:
What's The Cost?)
Simultaneously, the technological revolution of the
internet changed the nature, scope and competitive
landscape of the financial services industry. Following
deregulation, the new reality has each financial
institution essentially operating in its own market and
targeting its audience with narrower services, catering to
the demands of a unique mix of customer segments.
This deregulation forced financial institutions to prioritize
their goals by shifting their focus from rate-setting and
transaction-processing to becoming more customerfocused.

New Financial Products

The global financial system of today is vastly
more accessible by companies and households
than it was twenty years ago, or even a decade
ago. The financial marketplace offers greatly
enhanced
risk
management
properties,
particularly for credit risk pools. For example,
over the past five years the trade in credit risk
transfer instruments, such as credit default
swaps and asset-backed securities, has made
possible the sharing of credit risks among often
geographically dispersed firms and households
on a scale never witnessed before. Both the
scope and scale of involvement of non-financial
companies and households in cross-border
financial transactions are unprecedented.
Important retail financial products are now
produced and marketed globally in a manner that
is closely analogous to the supply chain we are
so familiar with for the production and
distribution of goods like automobiles or personal
computers. For example, mutual fund companies
market equity funds to their global clients that
feature not only stocks listed on the exchanges of
advanced economies, but also equity portfolios in

more than two dozen emerging market countries.

Such mutual funds are frequently managed
separately by specialist asset management
companies. And much of the communication
among firms at various points in this financial
supply chain is conducted at arm's length,
through sequences of market transactions.
As a result, the internationalisation of finance has
heightened the need for close cooperation
among those involved in supervision and those
responsible for national financial infrastructures,
as well as those who oversee critical elements of
the global financial infrastructure. The global
financial infrastructure, in turn, incorporates a
number of specialized cross-border clearing and
settlement
mechanisms,
such
as
the
continuously linked settlement system which is
designed to eliminate credit risk in the
settlement of large transactions in foreign
exchange.
But,
as
Schumpeter
would
immediately
recognise, financial globalisation is a work in
progress: it is constantly evolving through the
interaction of the financial markets, institutions
and legal systems in individual countries with the
analogous systems at the international level.
For example, even with "globalised markets" in
their present state, most capital-poor countries
seem only to be able to raise a small fraction of
the financing for capital investment that they
might be able to employ productively. By
contrast, the residents of capital-rich countries, in
the aggregate, continue to hold large proportions

of their total financial assets as exposures to

obligors resident in their own country. This
persistently high degree of 'home bias' is rather
surprising. One would, for example, expect it to
elicit negative comment in a corporate risk
management audit. For me, this challenge of
global risk management comes into even sharper
focus at the present juncture because of the fact
that net international capital flows are going in
the "wrong" direction - that is, net financial
savings from "capital-poor" emerging market
countries are currently flowing in large amounts
to finance "capital-rich" advanced countries.

Challenges
Partnerships

and

Drawbacks

of

Financial

Since 1998, the financial services industry in wealthy

nations and the United States has been experiencing a
rapid geographic expansion; customers previously
served by local financial institutions are now targeted at
a global level. Additionally, according to Alen Berger and
Robert DeYoung in their article "Technological Progress
and the Geographic Expansion of the Banking Industry"
(Journal of Money, Credit and Banking, September
2006), between 1985 and 1998, the average distance
between a main bank and its affiliates within U.S.
multibank holding companies has increased by more
than 50%, from 123.4 miles to 188.9 miles. This
indicates that the increased ability of banks to make
small business loans at greater distances enabled them
to suffer fewerdiseconomies of scale and boost
productivity. (To learn more, check out Competitive
Advantage Counts.)
Deregulation has also been the major factor behind this
geographic diversification, and beginning in the early
1980s, a sequence of policy changes implemented a

gradual reduction of intrastate and interstate banking

restrictions.
In the European Union, a similar counterpart of policy
changes enabled banking organizations and certain
other financial institutions to extend their operations
across the member-states.Latin America, the transitional
economies of Eastern Europe and other parts of the
world also began to lower or eliminate restrictions on
foreign entry, thus enabling multinational financial
institutions headquartered in other countries to attain
considerable market shares.

Transactions without Boundaries, Borders

Recent innovations in communications and information

technology have resulted in a reduction in diseconomies
of scale associated with business costs faced by
financial
institutions
contemplating
geographic
expansion. ATM networks and banking websites has
enabled efficient long-distance interactions between
institutions and their customers, and consumers have
become so dependent on their newfound ability to
conduct boundary-less financial transactions on a
continuous
basis
that
businesses
lose
all

competitiveness
connected.

if

they

are

not

technologically

An additional driving force for financial service firms'

geographic diversification has been the proliferation of
corporate combination strategies such as mergers,
acquisitions, strategic alliances and outsourcing. Such
consolidation strategies may improve efficiency within
the industry, resulting in M&As, voluntary exit, or forced
withdrawal of poorly performing firms.
Consolidation strategies further empower firms to
capitalize on economies of scale and focus on lowering
their unit production costs. Firms often publicly declare
that their mergers are motivated by a desire for revenue
growth, an increase in product bases, and for increased
shareholder value via staff consolidation, overhead
reduction and by offering a wider array of products.
However, the main reason and value of such strategy
combinations is often related to internal cost reduction
and increased productivity. (For further reading, check
out What Are Economies of Scale?)
Unfavourable facts about the advantages and
disadvantages of the major strategies used as a tool for
geographic expansions within the financial services
sectors were obscured in 2008 by the very high rates of
M&As, such as those between Nations Bank and Bank

of America (NYSE:BAC), Travelers Group and Citicorp

(NYSE:C), JP Morgan Chase (NYSE:JPM) and Bank
One. Their dilemma was to create a balance that
maximized overall profit.

Conclusion

The conclusion regarding the impact, advantages and

disadvantages of domestic and international geographic
diversification and expansion on the financial service
industry is the fact that with globalization, the survival
and success of many financial service firms lies in
understanding and meeting the needs, desires and
expectations of their customers.
The most important and continually emerging factor for
financial firms to operate successfully in extended global
markets is their ability to efficiently serve discerning,
highly sophisticated, better educated, more powerful
consumers addicted to the ease and speed of
technology. Financial firms that do not to realize the
significance of being customer-oriented are wasting their
resources and eventually will perish. Businesses that fail
to recognize the impact of these consumer-driven
transformations will struggle to survive or cease to exist
in a newly forged global financial service community that
has been forever changed by deregulation. (To learn
more about this industry, check out The Evolution of
Banking.)

Read more: The Globalization Of Financial Services |

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