Page 243 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes Self Assessment

Fill in the blanks
20. Government banks and private sector banks are adopting policies for ……………… and
………………….

21. Mergers and acquisitions in the banking sector have the capability to ensure ………………..,
…………………. and ……………………….

14.11 Global Banking Activities

Banking has become a global affair now. Since the early 1980s, bankers, in association with
national policymakers and officials at international financial institutions (IFIs), have largely
succeeded in deregulating the global banking system. As local, domestic, and international
barriers to private banking have collapsed, cross-border banking has spread dramatically, and
major banks of the world have established branches throughout the globe. While the globalization
of private banking has increased the accessibility of loans to governments and businesses and
improved the quality of banking services for some customers, its overall affect has been negative,
both nationally and internationally.

Key Points

International banking activities often result in financial imbalance and serious economic
downturns as financial markets become more open and relieved.
Competition from multinational banks has reduced the availability of credit to small- and
medium-sized enterprises, to low- and middle-income consumers, and to farmers.

While economies experience financial instabilities and declining credit, governments are
losing the means to protect their domestic markets.
The global reach of private banking has two major dimensions: cross-border lending and direct
investment in the financial services sector of other nations.
Cross-border lending occurs when a U.S. institution like Bank of America lends dollars to
the Mexican government or to a company in Mexico.
Direct investment occurs when a U.S. bank like Citibank establishes a subsidiary in a
foreign country. Banks that have subsidiaries in other countries are called multinational
banks (MNBs).
The largest U.S. banks do both: lend internationally and have an array of subsidiaries active in
the financial services sector of many foreign countries.
The direct entry of MNBs into foreign financial markets—particularly those of low income
countries (LICs)—often triggers a drop in the lending levels of domestic banks. Small- and
medium-sized enterprises, consumers, and farmers are generally the first to lose access to
affordable financing, while the least affected ones are trans-national corporations and domestic
blue-chip companies. Reduced access to credit means that firms cannot guarantee all their
investment projects, thus crushing economic growth.

The negative effects of global financial deregulation are not limited to LICs, however. To repay
their international debt, countries with ailed economies focus on enhancing their exports and
appealing the foreign investors. Workers in the U.S. undergo low-wage competition as imports
increase and U.S. companies close domestic factories to set up shops abroad. Moreover, to

238 LOVELY PROFESSIONAL UNIVERSITY