Last weekend World Bank delivered two interesting messages:
- Banks should strengthen their efforts of risk-management
- World leaders called for urgent action regarding soaring food prices. This also in the context to avoid local conflicts (like the current one in Haiti)
The messages seem to be independent from each other. But are they really distinct?
The subprime crisis is still responsible for a lot of actual banking business messages. Also other industry segments are not free from negative impacts. As all these messages are about the same trend: “the effect of subprime isn’t under control yet” we might ask ourselves about the regulations based on the “Basel II accord”. Last weekend the World-Bank called the banks to manage their risks better as they did in the past.
Its recommendations are completely in line with the statements of the Basel II accord, so the actual question can be cited as:
- Is Basel II already acting? Does it deliver already value? Do we need to extend the scope of Basel II towards the regional and local acting banks?
- Or do we need something on top of the Basel II accord (something like a Basel III or so)?
I believe there isn’t a unique answer to this question/alternative. Clear, one might argue that subprime crisis was already an integer part of the bank’s business (but not yet transparent) at the moment, where the associated implementations of Basel II regulations went. So that crisis wasn’t preventable?!?. Looking more into details, we see that Basel II doesn’t describe the execution of a specific business. Basel II describes the handling of the associated risk of that business. But that means that risk associated with banking business should be transparent and known, otherwise bank capital can’t cover that risk.
Asking for transparent business in banking industry calls for organizational workflows and methodical defined business processes. This isn’t only restricted to the description of services and interfaces, or software features and functions, it demands also for integrated workflows among people and departments, applications and platforms, and between the banks acting international, global, regional and local.
To manage this change of the banking business isn’t easy, but there isn’t an alternative to it. Looking into other industries, almost all had similar industry-related global challenges in their past. Most of them got them managed in one or another way. It can be recommended to reflect on lessons learned from other industries. The blog series “adoption of trends” targets to deliver some of these cross-industry expertises. Also SAP’s initiative “IVN for Banks”, which will become soon an independent organization “BIAN”, targets to support effectiveness of industrialization of Banking industry (see Does Industrialization require Standardization?).
The other part of the introduction of this contribution comes from customer services delivered by banks. Banks follow and support their corporate customers in their international business. Therefore there is almost no bank without one or another type of international business. Doing international business with banks is sometimes very tangible to politics of emerging and developing countries.
Over last 20 years a couple of banks extended their international network of affiliates and satellites in those countries. That banking business was not only related to international corporate customers to assist them in building commercial relationship to corporations in those countries, but also related to domestic customers (corporate, private, retail). The number of such banks isn’t small.
Well-known is the relationship between banking industry and governmental development of countries. Most of these economical initiatives are clearly win-win based. The directions and implications for the to-be-developed countries are under considerable influence by the rich countries.
Probably a major surprise for most readers of this contribution is the influence of sustainability in the context of energy consumption. To manage the provisioning of energy resources western countries target to increase the use of biomass. As agriculture space in western countries is limited the provisioning of energy out of biomass demands an import of such resources from abroad. The emerging and developing countries perceive this as a very interesting financial resource. Not only has the replacement of jungles by palm-oil plantings a heavy impact to nature and wild-life. Also the local competition between energy and food production causes dramatically changes in food prices. This in itself is very contra-productive regarding education, employment, and international collaboration. The biomass production is commented in other blogs, also hyperlinked to governmental research.
Banking industries are facing a large variety of major challenges. The export of the western business models most probably exports a next crisis into emerging and developing countries as well. An increase in performance and efficiency at western banks might unlock free financial resources to support other countries development.
The other side of the coin: some banks from these emerging countries are at the threshold of starting their business in western markets (see page 11 of the article). What type of issues they will import in our societies?