Commercial Banking

Global commercial banking now straddles a bewildering range of activities from the more mundane personal banking to complicated credit derivatives. It has made a relatively painless transition from a world divided on ideological lines to an inter-connected world, thanks to liberalization, deregulation and new technology. What really stands out in the last decade within this industry is a series of mega mergers, for example, JP Morgan Chase and Bank One, and the Bank of America and FleetBoston. One of the key variables driving global banking growth is new technology. The integration of technology and banking has made convenience banking and multiple channels for banking services a reality. Technology-based financial products, such as credit cards, have seen exponential growth. Technology has not only enriched commercial banking services but has also reduced costs and raised efficiency throughout the banking value chain. Europe leads on the technological front, but Asia Pacific is not far behind.

Global commercial banking grew at a CAGR of 4.4 percent during 1999–2003. This growth was driven by a booming European market, but was held back by a slump in Asia-Pacific. European commercial banking grew at a CAGR of 4.9 percent during 1999–2003. This was a marginally-higher rate compared to the rest of the world and was largely driven by the strong growth of the UK market. The European growth could have been better, were it not for the decline in German commercial banking and negative growth in the French Market. Growth in the UK was stronger than rest of the Europe. The UK commercial banking market was worth USD608.25 billion in 2003, representing an annual growth of 5.9 percent. The US commercial banking market reached USD6.46 trillion in 2003, growing at an annual rate of 1.9 percent from USD6.34 trillion in 2002.

As margins fall, commercial banks in the US and Europe have been forced to cut costs and reduce the number of branches while also diversifying into pensions, insurance, asset management, and investment banking. In fact, most US banks refer to themselves as financial service companies in their financial statements. In Canada, Germany, France, the UK, Japan and India, about four to five banks with a national presence dominate the banking sector. The US, however, has 8,000 commercial banks, 1,200 savings and loans associations and 12,000 credit unions. The top ten US banks account for about 60 percent of total assets in the country. In Canada and the UK the top ten banks account for over 90 percent of total assets. The US also has a dual banking system where banks can either be centrally chartered or state chartered. The US has about 2,500 national banks (around 30 percent) and 5,500 state banks (about 70 percent)

Issues and Challenges in Commercial Banking

Global banking faces many challenges, both old and new. Minimizing the mismatch between assets and liabilities has always, and will remain to be, been a key issue. Consumer confidence in banks has recently been shaken due to a series of scandals such as insider trading and conflict of interest issues. Millions of people watched in horror as their retirement portfolios dwindled in value. The confidence that banks enjoyed among investors, employees, regulators and stakeholders has been dented due to high profile bankruptcies. Currently, insurers and pension funds or transferees do not come under the reach of banking regulations. If these entities collapse under the burden of unsustainable credit risk, the stability of the financial system may be threatened. In terms of accountability, banks will have to consider the following issues:

• Board composition and organization: ensuring that directors have the right skills and the independence to provide effective oversight.

• Management: limiting the risk to directors while providing them with the information they need.

• Cost: managing the cost of liability insurance and producing, reporting and assuring the accuracy of the required information.

The trend towards the consolidation of branches into large branch networks has implications for customers and the banks themselves. Traditionally, customers and small businesses have relied heavily on brick-and-mortar branches to access bank services. The evidence suggests that these customers face something of a trade-off in light of the growth of very large branch networks. Larger commercial banking organizations are now in a position to charge lower servicing fees to high-value customers due to economies of scale. However, the consolidation processes must be accompanied by other measures designed to:

• Improve branch network productivity

• Strengthen customer bonding

• Renew management systems and operating processes

• Control costs in an ongoing manner

• Provide integrated services—up-selling and cross-selling wherever possible

2003 was a good year for the commercial banking industry, as their earnings rose to new heights and problems seemed to disappear. This outstanding performance of the banks is due to a recovering economy, favourable interest rates and improved risk management practices. Bank management has been flexible enough to change the composition of assets over time, which has also aided recovery.

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