Banking overview - Modern Banking

Banks in developing countries/emerging markets reflect diverse political and economic histories, but all share two characteristics. The first is that banks are the key (and in some cases only) part of the financial system by which funds are channelled from saver to investor. As noted before, banks in the industrialised world have evolved over the last two decades in the face of disintermediation. As a financial system matures, agents find there are alternative ways of raising finance, through loans, bond issues and the stock market. Banks find they are competing with other financial houses for wholesale customers by offering alternative means of raising finance through bond issues and/or going public – selling stocks in the firm to the public. One consequence of disintermediation is that while all banks continue to profit from offering retail and wholesale customers the core intermediary and liquidity services, universal banks have expanded into off-balance sheet activities, investment banking and non-banking financial services such as insurance.

In emerging market economies the fledgling bond and stock markets are very small, if there at all. Commercial banks are normally the first financial institutions to emerge in the process of economic development, providing the basic intermediary and payment functions.

They are the main channel of finance. For example, in several socialist economies, the central bank also acted as the sole commercial bank. With the breakup of the Soviet bloc and the introduction of market reforms in Russia and China (see below), the commercial and central bank functions were separated. Stock and bond markets have begun to emerge to varying degrees, but they remain small. This means traditional banking continues to dominate the financial systems of emerging market economies.

Developed economies constitute quite a homogeneous group. Emerging countries do not. For example, national income per head, at current exchange rates, is up to 100 times higher in the richest emerging countries than the poorest. In the most prosperous emerging economies, banking is extensive and sophisticated, sharing much in common with North American or Western European banking systems. In the world’s poorest societies, most people live on the land and have little use of money, let alone banks. Banking there is urban and very limited. These countries are at different stages of financial evolution. They also vary widely in their degree of financial stability. Some, such as Malaysia and Thailand, have experienced relatively short-lived periods of financial instability while others in Latin America (Mexico, Argentina, Brazil) and some former Soviet states suffer from chronic bouts of crises. Many of the transition countries (e.g. Kazakhstan, Estonia, Latvia and Lithuania) emerged from the post-Soviet era and quickly transformed their financial systems – with relatively stable banking sectors and reasonably liquid, transparent stock and bond markets. In China, financial reforms have encouraged the development of small stock and bond markets. Under the World Trade Organisation (WTO) agreement reached in 2001, all trade barriers, including those in the banking sector, are to be lifted by 2007.

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