The Impact of Globalization and Global Trends Essay

Globalization has become an important aspect of the real modern world system, one of the most influential forces determining the future course of our planet development. It affects all areas of public life, including economics, politics, social and cultural spheres, environmental, safety. At the beginning of the 21st century globalization as a worldwide phenomenon in economics and politics is not only gaining a high rate of development and self-affirmation, but also causes more and more contradictions and worsening social and political situation in countries with different types of political and socio-economic environment. Today the globalization of economic life appears brighter, more dynamic and its impact on various spheres of economic activity is very tangible, and not always positive. That is why it has been studied extensively by scientists and practitioners from all spheres. In this paper the impact of globalization on the banking business is highlighted.
In economics the notion of “globalization” was brought by sociologists. By the end of 20th century a whole branch of knowledge, called “Global Studies” was established (Fritz 2011). As noted by many authors, globalization and the growing instability that characterize the past decades in the world economy, is particularly clearly seen in the banking sector of the economy which is the most sensitive to external factors. Indeed, the modern bank is a high-tech financial institution that is able to handle any complex commercial transactions and projects. The essence of globalization consists in the increasing volume of international trade, financial and investment flows with their growing relationships, when the development of all spheres of economic life is increasingly determined by the action of non-national and non-regional factors, but by global ones.
Globalization is accompanied by the deregulation of banking and financial market liberalization. In this case, institutional distinction between different kinds of banking and financing activities: commercial, investment, insurance, etc are removed. As a result, the nature and forms of competition in the financial markets substantially changes. Banks are forced to compete simultaneously in many market segments, not only with each other but also with other financial institutions – insurance and investment funds, finance companies, etc.; and in terms of liberalization – not only with residents but also with non-residents. On the one hand, liberalization creates the conditions for the development of overseas branch network of banks and building international banking business, what naturally increases the competition, but on the other hand, it simultaneously activates the consolidation of banking capital. This leads to an increase in the number of mergers and acquisitions in the banking sector, to expand and increase the diversity of cooperative banks among themselves and with non-bank financial institutions and to the growth of bank alliances of different kinds.
Special role in global changes of the banking business belongs to the information technologies. Recently such information systems and technologies were used primarily to automate the collection and processing of banking information, at least, for planning and monitoring of banks and were viewed as means to reduce manual labor and bank costs. Today the information technologies have become the driving force of radical structural changes in the banking business. They overcome time and distance, opening up access to any geographically distant markets for the banks during 24 hours (Kolimon 2011).
In this case, the traditional competitive advantages of banks – the multifaceted, long-term contacts with clients and developed branch network – partly lose their meaning. A new layer of clients who are willing to use the services of Internet-banking is constantly growing. The nature of the bank’s communication with these clients is very different from the traditional. Modern multi-media tools provide a virtual interactive communication with the bank client, which is gradually replacing personal contact with him.
On the basis of new technologies the services alike banking or even directly the bank services (for example, to transfer payments) may provide the organization that is not a bank, including the telecommunication companies. The latter usually orients not to carry out certain operations, but they offer an individual package of services for each client. In these conditions banks in order to maintain competitive prices for services are constantly struggling to reduce costs by implementing cost control schemes and effectiveness analysis. However, the desire to meet the requirements of time makes them to increase spending on the introduction of new information and telecommunication technologies, to develop distribution channels in addition to the existing electronic branch network. Contradiction between the desire for cost savings and the need for large expenditures is formed. A few arguments in favor of the view that the banking activity in the globalization era is substantially modified and not always in a positive way were listed above. Banking business under the impact of globalization processes acquires new features.
The problem is that in recent decades the rapid process of forming Megabanks creates the illusion of optimizing the size of banks. Practice provides ample evidences that the size of the bank and its profitability are connected not as tough as it sometimes seems. Therefore, the structure of the banking sector will continue to attend banks of different sizes. But it’s obvious that globalization will help to accelerate the process of retracting medium-sized banks in the impact sphere of the large banking groups, which will be the main structural constituents of the banking sector.
Profitability of the banking business at the declared level of 15-20% with an average annual GDP growth rate of most western banks is 2-3, maybe 4%, seems unlikely. This is well-known that overstating the rate of the bank return may reduce the supply of loans that will negatively affect the economy as a whole. Rate of return in 15-20% may be achievable only for relatively small group of very large multinational banks (Rizvi 2011). The institutional structure of the modern banking systems is highly multifaceted and it’s too early to talk about the dominance of any model of a bank or other monetary institution, but an indication of the trend, initiated by globalization, is absolutely legitimate.
Thus, globalization creates a tendency to leveling the variety of monetary and credit institutions, making profitable the only major multinational banking. Which risk is fraught with this trend? It can be assumed that the decrease in the degree of diversification of institutions of the banking sector may complicate the passing and, particularly, the output from the financial crises for the national banking system.
As the evidence of sustainability of this trend is the fact that banking laws in most countries with a traditional “western” model of banking business is set to abolish division of financial institutions according to their functions and to universalize their activities. Along with this trend the specialization of banking institutions deepens, and this process is also quite stable and ubiquitous, and it is based on the “disintegration” of the intermediary function of banks under the influence of three main factors: the design of debt in the form of securities (securitization), deregulation of credit and finance sphere and industrialization of the banking sector (Rizvi 2011).
It is obvious that the development of securities trading has a huge impact on the banking business in recent years. The process of credit using securities is divided into several sequential steps that can be performed by different agencies. This fact and certain amount of deregulation lead to the fact that the “alien institutions”, which previously had their own business area in other industries, penetrate into the traditional banking sector. At the end of the 20th century, the largest trading companies from France and Britain have created their own financial divisions that provide various banking services in shops and supermarkets. Today this is a pervasive practice.
It turns out in practice that more often some activities (concept development, production, distribution, product enhancements, etc.) are carried out not by a bank but by other entities which in such a way make out pretty strongly stated requirements for the banking service and the bank itself, leaving him to act as a “collector”, “designer”, “closer”. To solve some problems in the banking industry that emerged due to globalization may be possible with the help of the introduced concept “breaking up the bank” developed by American economist L. Bryan, justifying the need for complete separation of the deposit and credit functions of the bank. According to L. Brian each function should be performed by legally separate financial institutions, making them more efficient in operation, since each function is performed by competent and experienced professionals in the field (Pieterse 2011).
Exactly this concept served as the theoretical basis for the process of vertical disintegration “of the bank industry” in the western countries. Today banks, retaining the final distribution of financial services, leave other functions for instance, clients’ risk management, maintaining accounts of individuals, automated cash payments, etc., to the independent firms under contract (Saith 2011). All the mentioned facts entail a fundamental change in organizational structure of banks while the principle of universality of their activities is maintained. Evidence suggests that organizational changes are moving towards the formation of large-scale diversified banking associations.
Information and communication technologies are an important factor in banking. Fundamental changes in relations between banks and customers may be possible in connection with the use of new banking technologies. In some Western countries, these changes have already begun, particularly with the advent of so-called remote banking.
Remote banking, using the telephone lines of communication and computer technology, provides clients with three types of classical banking services: the management of payment instruments, credit and savings management. Physical contact between bank employees and clients is missing. The database of remote bank will keep the information on all transactions, which are grouped by individual clients, accounts and products. In all western countries, universal banks are developing the remote service system.
Today information and communication technologies are increasingly being used to attract customers, financial services are actively offered through the Internet, and physical contact with clients was gradually replaced by e-mail and communication through computer networks. This allows achieving greater personalization of banking products offers and services and assisting their clients in any place and at any time upon their request. In this regard, scholars, experts, practitioners are increasingly talking about the formation of a new concept of a virtual bank, based on information and communication technologies.
It is obvious that globalization has had a significant and not always a positive impact on banking activities, if we consider this process from the standpoint of the interests of national economic system. It is also obvious that all these factors form a new set of risking factors, have a very significant impact on the change in the degree of controllability of the national banking system and the nature of the “occurrence” of the banking system in crisis situations, and especially running out of them. The matter of the relationships of globalization and the crisis in the banking sector deserves a separate study, especially by global business managers.