Challenges within European banking

Date: 2015-10-07; view: 439.

Designing a good organizational structure is a major challenge for Europe's banks. First of all, they will have to address consumer groups with different cultures, needs and behavior. Also, banking regulation in Europe is still a national prerogative, which means that banks have to adapt to each country individually.

Meanwhile, some banks, despite having obvious global ambitions, retain structures that are at odds with their strategy. Their international activities are not consistently integrated. Many banks, for example, are still divided into business units such as ‘retail banking,' ‘corporate banking,' ‘advisory services,' etc., along with an ‘international division.' Very often, however, the international division duplicates some of the functions of the other units. In such cases, coordination problems become chronic.

Outsourcing and offshoring will play an important role in determining the form banks take in the future. So far, only a few banking activities have been exposed to offshoring. However, as developing countries join the world market, offering highly qualified labor willing to work for relatively low wages, banks will be able to outsource departments such as financial analysis, research, or even advisory services.

Corporate governance issues pose another serious challenge. The many changes the industry has undergone make it imperative that banks executive committees be equal to that challenge. There are certain aspects of the business that make banks special. Risk management is one of them. There is great complexity involved in operating in a regulated industry without any protection against competition. Market pressure is a clear threat to established banks. The need to make a profit may drive some of them to pursue unacceptably risky transactions. Banks need executive committees that understand this danger and have the necessary prudence and skill to deal with it.

Also, in universal banks there is a typical conflict of interests. Their advantage over more specialized rivals is assumed to lie in the fact that they can simultaneously offer both lending and advisory services for major business deals (takeovers, IPOs, etc). The question is, though, how much risk should a bank take when lending money to a customer in the hope of earning substantial advisory fees? Some banks may end up financing transactions that are contrary to their long-term interests.

Banks' boards of directors must oversee the work of the executive committee. Increasingly, the banking industry requires people with the highest possible qualifications. If a board lacks those qualifications, it may find itself sidelined by an executive committee that not only knows the business inside out, but also how to use increasingly sophisticated financial tools, concepts and valuation techniques accessible only to the initiated. To adequately supervise banking activities, directors must have a very solid background in the business.