Modern banking in modern times is characterized by innovations due to technological changes and changing economical drivers. In the twenty first century the banking industry has also been faced by financial crisis globally which has seen a few financial giants collapse and investors loosing their life savings.
NATURE OF MODERN BANKING
Modern banking is characterized by factors such as internationalism which is foreign investment in growing economies by multinational banks especially in the third world countries with high capital needs; this has brought about interlinking of the financial markets globally for example Barclays has subsidiaries world wide hence a customer who banks with Barclays can carry out financial transactions from anywhere in the world.
Innovation in the banking sector has also brought about growth in the financial services available which has attracted all kinds of investors requiring banks to expand the scope of products they offer their customer taking into inconsideration their different risk profile and financial returns they expect. There has also been an increase in the modes that the bank can use to offer its services without the customer having to necessary be physically in the bank for example internet banking.
According to Turners report (2009, P.21) modern banking is also characterized by changing forms of maturity transformation coupled with changing forms of securing credit, increased scope of banking activities and high levels of leverage risk.
Modern banking is also faced by increased customer expectations where customer risk profiles lean more towards risk takers with very expectations on expected rate of return. This has increased trading activities of financial assets leading to decrease in prices of the assets due to overtrading. This in return does not produce the desired results for the customers.
ROLE OF MODERN BANKS
According to Turners report (2009, p.21) one of the major roles of banks is maturity transformation through dealing with longer term assets than liabilities hence enabling other players in the financial sector to hold assets with shorter terms to maturity than liabilities. This enables them to absorb financial risk arising from uncertainties in the financial market. This also helps to influence major social and economic drivers but also generates risk in the market. Although maturity transformation should be regulated there has been increased rate of maturity transformation in recent times in the banking industry. This calls for caution and strategic management by banks because if they are not careful they could face bankruptcy.
According to H.M Treasury report (2009, p.4) banks in the twenty first century are faced by the global financial recession as a result of lack of knowledge of the impact brought about innovation in the banking sector due to technological changes by the banking fraternity and changing investor expectations which has given rise the need for reforms. Although technological changes have resulted in increased growth by interlinking international markets in the banking sector it has also brought about financial risk.
These calls for the banking sector to manage their organizations in a strategic manner. Strategic management is mostly exercised at the corporate level hence senior management in banking sector who wants to attain success in the modern fast changing environment and avoid the pitfalls of the financial crisis must exercise strategic management. This can be attained through strategic positioning through proper positioning of their service package that help them attract and retain competitive in the flooded financial industry, development of ideas to reach the consumer by incorporating new technology to build customer relationships such as through use of internet to build an ongoing relationship with customer and finally build skills for managing their business profitable manner.
Financial theory deals making sound investment decisions while taking into consideration into market factors such as risk and uncertainty. Risk is a major issue in financial theory. Risk is brought by the inability to predict the outcome or result of a particular event or activity. It brings about uncertainty hence inhibiting investors from making profitable investment decisions.
In modern banking as discussed earlier the major function of banks in modern time is maturity transformation. They have to perform this function by lending to earn interest and trading with securities such as bonds both short term and long term, swaps, derivatives and treasury bills in order to obtain return on investment which translate into profits for the banks and return on investment for customer.
FINANCIAL THEORY AS APPLIED IN MODERN BANKING
Financial theory’s application in modern banking calls for managers in the banking industry being able to critically analyze systemic risk so as to cope with uncertainties in the financial market which is already in crisis due to the economic recession world wide and achieve market efficiency. Risks are systemic if they affect all banks in the banking industry and not just one bank in isolation. Systemic risk as put in Kane (2010, p.1) requires the reorganization of the resources of financial sector stakeholders such as managers of risk, the government and other players in the market to meet the investor expectations.
Although banks can manage systemic risk individually by use of strategies such as use of derivatives and hedging against financial risk regulatory bodies need to come in help manage financial risk. According to Llewellyn (1999, P.5) regulation by non bias bodies who do not have profit making intention in the financial sector, of systemic is merited when the cost of fail of banks or other financial institutions exceeds the individual cost incurred by the banks. Banks may fail to take into consideration systemic risk and engage in risky behavior if they were in a position to incorporate all cost in their pricing. The major cause of regulating banks against risky behavior is both due to systemic and non systemic risk. Whereas non-systemic risk can be predicted and be avoided systemic risk it is difficult to analyze systemic risk because it is coupled with a lot of uncertainty hence brings in the issue of market prices for securities and could be the difference between survival and failure in the banking industry.
Banking industry in the modern time is also coupled with financial crisis; it therefore requires close monitoring and regulation in order to be able to manage systemic risk. Some measures that can put in place to monitor banks include regular disclosure by gathering market information and informing the public investors on market position. When public investors are aware of the market position and factors influencing the market prices of securities they are will make investment decisions which bring them returns and not rely so much on financial advice of staff in the banking industry who could be out to make quick returns at the expense of the investor for instance by trading anomalies to make abnormal profits because the market eventually stabilizes.
To achieve market efficiency in the modern banking sector Managers need to be very vigilant in market analysis activities and avoid practices that could lead to increasing securities risk in the long run.
H.M. Treasury. (2009). Reforming financial Markets. P.4.