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Finance Globalization Impact Analysis

 

We are witnessing the emergence of a truly global financial marketplace. While the origins of this phenomenon were in the globalization of the non-financial products and services markets, financial globalization has taken on a life of its own, transforming every financial institution and impacting everyone who works in, with, or for it—whether they realize it or not.

Globalization in financial services followed the globalization of business. As companies expanded their operations outside their domestic markets, they needed a broad range of international financial services such as transactions processing (to receive money and pay bills in local currencies); foreign exchange services to convert foreign currencies back to their home currency; lending products and capital-raising services to acquire funds. Financial institutions were also there to help these companies identify and manage the financial risks of doing business globally.

The impact of globalization on financial institutions is enormous—new competition, new customers, new risks, new opportunities. I realize that this observation won’t get me the Nobel Prize, however, don’t underestimate the impact of this tried and true change force.

When asking professionals about globalization, we hear a lot of “Back to basics,” “Stick to the fundamentals,” “Block and tackle,” and quite a few “We have come full circle.” Here is a relevant one from an insurance industry veteran:
We are a worldwide organization, so we are looking at supporting our member companies as they move to the global plain. For example, my old company, New York Life, is now expanding into a multitude of countries. It used to be all over the world back in the 1800s. And then came World War I and people started pulling back; now it has come full circle with people trying to figure out how to get global again. So a lot of our members are out there trying to fight to position themselves in a global nature.
So after all this, what are the key implications for financial services firms and its people?

Impact 1: Change in Competitive Landscape
Just when you thought it was safe to play in this market . . .
■ New retail and institutional customers. One of the major attractions of globalization is to be able to reach out and extend product and service offerings to a wider range of customers. And once you have your global infrastructure in place (no small feat), economies of scale kick in.

The cost of adding another global customer plummets on a per unit basis, resulting in significant profit potential.

■ New competitors. The other side of the story is that institutions are now facing a whole new set of competitors. You know those new global customers you can’t wait to get your hands on? Well, you’re going have to take them away from the institution that’s got them now. And while you’re out there hunting, there is a whole new set of competitors knocking on your customers’ doors.

■ New partnerships and dependencies. Moving into global markets may require institutions to form new alliances with local firms and professionals to implement product and service strategies. Here’s an example from the insurance industry.

And it certainly becomes complex. And you better have the people who can pull this off.

Impact 2: Establishing and Maintaining a Global Presence
There are no easy answers in this business. Let’s Make a Deal
You are the CEO of a major financial institution. You and your management committee have decided that your firm needs to enter the global financial arena. You’ve even decided in which business you want to play and where you want to be. For $1 million and whatever is behind door number 3—how are you going to get there? You have a number of different options.

■ Mergers/acquisition. Join forces with an existing player and combine your operations. Or buy someone outright and send them your company’s Employee Handbook.

■ Partnerships. Bring your people together; do a team-building offsite; generate lots of revenues and distribute profits according to a predetermined plan. And don’t ruffle anyone’s proverbial feathers.

■ Strategic alliances. Form an iron-clad, blood-brother (or sister) pact with another institution. Refer business, provide services, share a vision and keep your eyes peeled for an even better deal.
Addressing this kind of change within your country is tough enough. Add in the complications of implementing these arrangements in a global setting, and you know it does not come easy.
With the breakdown of national barriers, transnational mergers are becoming commonplace. And yet, they remain among the most poorly understood phenomena in the business world. On the outside, the newly merged colossi pose as robust, computer-generated giants with
the market power and sales forecasts to strike fear into the hearts of the competitors they dwarf. On the inside, however, they are more like turbulent weather formations caused by the collision of tropical and arctic air masses.
What to do? What to do? What to do?

Impact 3: New Risks and Uncertainties
Globalization creates new risks and uncertainties for financial institutions and their employees.
Certainly, as institutions have gotten larger and spanning across greater geographies and spanning across greater product mix, there is simply a greater level of complexity that comes to bear and the greater sophistication that people are trying to achieve as they seek to manage risk.

Remember—it’s all about people. People managing a multinational underwriting syndicate. People introducing sophisticated insurance products to foreign customers. People approving loans to global institutions.

Given the idea behind Shifting Risks as a major change force is that there is something new in town:
■ Stock and bond market volume and volatility numbers are changing.
■ There is a restructuring of players in the market (e.g., individuals playing a bigger role, financial institutions operating in new markets) that is altering old assumptions about market behavior.
■ New markets are opening up to issuers and investors due to Global Mobilization creating new risks and uncertainties.
■ An increased emphasis on risk management is changing the behavior of market participants.
■ Given the changed political environment after September 11, 2001,
can we ever look at risk the same way?

Shifting Risks Impact Analysis
Impact 1: Dealing with New Market Realities
If we truly are entering a new risk environment, then we cannot trust the rules we lived by in the past. Check your assumptions at the door. Institutions and individuals must reexamine their approaches to where they play, how they play, and with whom.
Impact 2: What’s Your Special This Week?
A wide range of issues capture the attention of regulators and the markets as various events unfold, often resulting in a wave of new procedures and safeguards that wreak havoc and disrupt business as usual. September 11 caused insurers to focus on the diversification of physical assets. Enron created an existential crisis in financial services—can we ever trust our perceptions of reality in the market again? Here are more examples:
■ The globalization of financial markets has resulted in an increased awareness of foreign exchange and other associated risks.
■ Even before September 11, 2001, there was an increased focus by regulators on operational risk. What will be the long-term fallout?
■ As the industry evolves into a deregulated world of financial superpowers, how will the regulatory system evolve? What will be the Next Big Thing? As the industry moves to rely more heavily on intellectual assets, will institutions be required to reserve capital against the risk of losing people and their knowledge, skills, and abilities?
Financial service professionals must continue to do their job with an eye out for the next crisis.
Impact 3: Increased Uncertainty
As the market continues to change, the level of uncertainty rises. Banks are going into the securities business. Securities firms are buying banks.
Insurance companies are demutualizing to beef up and get into the acquisition game. Moving from a world of probabilities to a world of uncertainties forces institutions and professionals to change the way they think about risk taking and decision making.
As you can see, the industry is being whip-sawed by a number of significant forces. Last (well, almost last) but certainly not least is the change forces of all change forces: Rewriting the Rules.

 

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