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The Impact of Globalization on US Banking

In a fast-paced world, there has been a tremendous increase in global connectivity in every aspect of society which primarily includes both the economic and political strata. Apart from these, this global connectivity also allows people from all over the world to share resources through trade and even idealism through international relations. This phenomenon which in some way or another has created a connection between and among people all over the world making it into one unified system is coined as ‘globalization.’

According to Wikipedia, the term ‘globalization’ refers to or is considered an umbrella term which involves a unitary process inclusive of many sub-processes (such as enhanced economic interdependence, increased cultural influence, rapid advances of information technology, and novel governance and geopolitical challenges) that are increasingly binding people and the biosphere more tightly into a system. Also, the same website quoted The Encyclopedia Britannica saying that globalization is the “process by which the experience of everyday life is becoming standardized around the world.”

It has been said primarily because globalization has amalgamated into the everyday lives of men, making it more like a standard which every people conform with.

The same website also carried with it a broad definition that globalization –

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in economic terms – is the convergence of prices, products, wages, rates of interest and profits toward developed country norms. It added that the globalization of the economy depends on the role of human migration, international trade, movement of capital, and integration of financial markets. The International Monetary Fund (IMF) notes the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions, free international capital flows, and more rapid and widespread diffusion of technology. Theodore Levitt is usually credited with globalization’s first use in an economic context.[1]

One of the visible effects of the globalization trend in the United States is that American companies have migrated most of their manufacturing jobs to foreign countries where it is cheaper to do business. Furthermore, service and technical jobs are currently undergoing a large exodus to foreign labor too.

To illustrate, some leading call centers in the United States opted to situate one of their business on third world countries like Malaysia and the Philippines, where apart from paying cheaper salaries are able to deliver of-quality performance through effective English communication. With this, most American call centers now employ employees from probably all parts of the globe. The process is now commonly called outsourcing and offshoring.[2]

According to Wikipedia, the term “outsourcing” involves transferring or sharing management control and/or decision-making of a business function to an outside supplier, which involves a degree of two-way information exchange, coordination and trust between the outsourcer and its client. Such a relationship between economic entities is qualitatively different from traditional relationships between buyer and seller of services in that the involved economic entities in an “outsourcing” relationship dynamically integrate and share management control of the labor process rather than enter in contracting relationships where both entities remain separate in the coordination of the production of goods and services.

Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions, manufacturing and engineering. Consequently, a debate has ensued concerning the benefits and costs of the practice as well as how to categorize it as a phenomenon.

However, it has said that the term has been used interchangeably. But there exists really a thin demarcation line between the two. The same website compared and contrasted the two in order to be consistent. It said that in order to be consistent, “outsourcing,” in a corporate context, represents an organizational practice that involves the transfer of an organizational function to a third party. To illustrate, when this third party is located in another country the term “offshore outsourcing” makes more sense.

“Offshoring,” in contrast, represents the transfer of an organizational function to another country, regardless of whether the work stays in the corporation or not. In short, “outsourcing” means sharing organizational control with another organization, or a process of establishing network relations within an organizational field. “Offshoring,” on the other hand, represents a relocation of an organizational function to a foreign country, not necessarily a transformation of internal organizational control.[3]

The globalization is supposed to “free up” Americans to become innovators, designers, and realizers of new technologies and concepts. The offshoring and outsourcing of multinational American companies should not cause any fear for many people for this does not spell out unemployment for them. What probably causes fear to some is that opinion that America is ‘seriously and increasingly falling behind when competing economically in the global market. It has been said that something needs to be done before more Americans leave for better opportunities in foreign lands and before the American economy permanently stagnates.[4]

Meanwhile, this worldwide phenomenon has affected all major aspects of society. Much so with the major industries in each and every countries.

The banking industry in America began in 1781 with an act of United States Congress that established the Bank of North America in Philadelphia. During the American Revolutionary War, the Bank of North America was given a monopoly on currency; prior to this time, private banks printed their own bank notes, backed by deposits of gold and/or silver. Over the years, the American banking has established several hundred branch offices although theirs is not a universal banking system.

In a paper written by Mizruchi and Davis, it stated that the American banking will became globalized as manifested by nearly every major bank established or expanded its overseas operations in the next 20 years, starting circa 1980s.[5] It has also been said that the globalization phenomenon paved way for more and more commercial banks to expand its operations abroad to accommodate as much customers as it can.

According to the study, the reasons behind such a phenomenon were that the United States (U.S.) banks opted to venture internationally ‘due to a combination of institutional and regulatory changes and because of the increasing internationalization of their domestic corporate customers.’ The net result of these trends is that U.S. banking has returned from a substantial international presence to an overwhelmingly domestic business, while at the same time “financial markets have been transformed from relatively insulated and regulated national markets toward a more globally integrated market.”

The results – as manifested in the study made by Davis and Muzruchi – indicate that the expansion of the American banks outside the United States was for a combination of macroeconomic, public policy, and organizational reasons.

It illustrated tight money at home and a policy to limit lending directly from domestic offices provided the initial impetus for banks to open foreign branches. London branches provided access to Eurodollars to be lent via American branches; by 1970 22 of our 33 previously domestic banks had opened their first foreign office. In contrast, opening other branches did reflect social influences and for two possibilities.

According to the study, the American banks might follow their customers, opening branches close to the operations of their major customers (as proxied by the locational choices of their board members’ companies). Or banks might look to each other for guidance on appropriate actions for a multinational bank. Our results are most consistent with the second possibility. (In subsequent work we will examine in greater detail the linkages among the locational choices of banks and the industrial firms they are tied to over time.)[6]

In the advent of globalization, the United States banking industry is little by little adopting and keeping up with the rest of the world. However, it has not been that far-reaching making it at par with other banks in the European countries. This has been clearly manifested with the slow activities of American banks in implementing international standards such as the Basel 2.

The Basel 2 was made to establish that sort of international standard. According to the same article, “the accord was intended as a single worldwide standard. But it now threatens to be qualitatively different in Europe and America. International banks that straddle the Atlantic are in a bind and America’s large banks are especially irritated. On February 7th four of them, including Citigroup and JPMorgan Chase, wrote a letter of complaint to regulators. These extra restrictions, the banks wrote, give foreign competitors an edge, because they can hold less capital for identical assets.

There may be some truth in this. But America’s regulators are too uneasy about the Basel 2 project to lighten up. They think the accord relies too heavily on banks’ in-house risk models, which are fallible and ‘highly subjective,’ as one regulator put it. Quietly, some also worry about European banks, which already have much higher levels of leverage than American ones and hold less capital to offset it.

Others fret about a lack of transparency. Under Basel 2, national regulators can force individual banks to boost capital reserves if they see fit. But in Europe it is unclear what an unacceptable level of capital might be, or how bank regulators would react if a bank edged towards it.”[7]

In a blog, it quoted an article in The Economist titled “A Twist or Two of Basel” published on 24 Feb. 2007 where it stated that the European banks has long been “implementing the new international standards, which govern how much capital they must set aside to cushion themselves from various calamities.[8]

The same process was meant to be unfolding in America. But there the banks are struggling to get their mouths around the new accord. A great deal of money is on the line for banks on both sides of the Atlantic. The more capital they must squirrel away to satisfy regulators, the more insulated they are from untoward events—but the less money remains to be put to work in order to make profits.”[9]

Due to bank calamities like defaulted high-risk mortgages, it has been expected that banks would be so firm plans in becoming resilient to such. In Europe, it has been said that “the amount of capital – Under Basel 2 – a bank must sit on depends on the riskiness of its loans and other assets.

So those expert in managing and minimizing risk—by packaging loans into securities and selling them on, for example—can get away with a thinner cushion than others. Indeed, big, sophisticated banks will largely make up their own minds about how much capital to set aside, as long as their internal risk-management models are up to snuff. This is meant to reward the banks that already invest in cutting-edge risk-management methods, and prod others to catch up.”

Meanwhile, the American banks have been expected to embrace the same system in order for it to also gain the same capital as those obtained by the European banks. It said, “Banks in America, on the other hand, are glum.[10]

Their regulators have taken fright over studies showing that banks’ required capital could fall by an average of 16% if they embraced the new accord. European regulators are inclined to let regulatory capital fall (subject to the discretion of national authorities). American regulators are not. They have now proposed changes in America’s version of Basel 2 that will delay its implementation until at least January 2009.

Under their proposals American banks will be subject to a number of ‘safeguards’ that keep capital cushions plump. These include the ‘leverage ratio,’ a blunt measure of a bank’s lending exposure that is not linked to the riskiness of its activities.”

It has been said that the American bankers failed to implement the new international standard dubbed as Basel 2 simply because they have experienced several financial failures that resulted to millions of losses. According to the same article, since the government had to pick up the bill for many of the consequences of these failures, regulators are not eager to ease regulations aimed at preventing future financial crises.

There is no such ambiguity in America, where banks have been held to a stringent regime known as ‘prompt corrective action.’ This came into law in 1991 in the wake of America’s savings-and-loan debacle, in which more than 2,900 banks failed. Then, regulators repeatedly threw lifelines to struggling banks, which only postponed their inevitable collapse. Now, they have much less scope for leniency.

They must take specific, and increasingly severe, actions-from curbing lending to closing a bank-as a bank’s capital ratios deteriorate. The idea is to intervene before banks get into trouble, and to make the consequences of falling into the red zone clear to banks and investors well before anything bad happens. American regulators will not budge on these issues soon.[11]

Indeed, Sheila Bair, one of America’s bank regulators, thinks that her foreign counterparts should adopt something like the American approach to buttress Basel 2. A number of European bank regulators and academics agree. But politicians in Europe have reservations. They point out, rightly, that America’s approach is largely untested, because the country’s banks have enjoyed good times since 1991. They also worry that adding the leverage ratio, which disregards risk, to Basel 2 would render all their past work irrelevant.”[12]

In addition, the hesitation to implement the same standard was brought about by the fear of some American banking customers to lose money. It has been said that American banking customers are much interested in the security of their accounts than in the profitability of their bank. The article also stated that Basel 2 does not necessarily make these two positions mutually exclusive. “In fact, each side can learn from the other. The Europeans should add clarity to Basel 2.

The Americans should add a bit of urgency to implementing it. No doubt the accord has flaws, but these can be fixed later. In the meantime, it would be better to finalize a rule on Basel 2.”[13]

Until such time that the international standards such as Basel 2 would be fully accepted by the American banks, it has been said that the United States banking industry has fully accepted and embraced the worldwide phenomenon called globalization.

Globalization in its entirety does not spell out disadvantages. In fact most supporters of the idealism of globalization suggest that it would enable free trade making more efficient allocation of resources to each countries in the world. This would lead to lower prices and more economic output. Apart from these, globalization would also be ‘beneficial in the spread of liberty and capitalism.’

History says it that the world phenomenon started in the 17th century from the time the first multinational company was established in Netherlands. However, after the World War II globalization has been manifested with the ‘advances in technology which have reduced the costs of trade, and trade negotiation rounds, originally under the auspices of GATT, which led to a series of agreements to remove restrictions on free trade.’

In addition, several treatises were made allowing the free trade among nations. ‘The Uruguay round (1984 to 1995) led to a treaty to create the World Trade Organization (WTO), to mediate trade disputes and set up a uniform platform of trading. Other bi- and trilateral trade agreements, including sections of Europe’s Maastricht Treaty and the North American Free Trade Agreement (NAFTA) have also been signed in pursuit of the goal of reducing tariffs and barriers to trade.’ Aside from economic bilateral treatises, globalization paved way for nation-states to act upon and solve world problems and issues such as water pollution and global warming.

WORKS CITED:

B., Phil,.  (2007). Phil for Humanity:A Guide for the Survival of Humankind, and Improving the World, Society, and Yourself! . Retrieved 11 April 2007, from Website:http://bellsouthpwp2.net/b/e/benichou/Globalization_of_the_U.S.A..html

DeAngelis, Stephen, F.. (2007). Enterprise Resilience Management Blog. Retrieved 11 April 2007, from Website:http://enterpriseresilienceblog.typepad.com/enterprise_resilience_man/2007/03/us_banks_having.html.

Mizruchi, Mark, A.., Davis, Gerald, F.., “THE GLOBALIZATION OF AMERICAN BANKING, 1962-1981,” Dissertation, University of Michigan, 2003, (2003): 1.

US Banking Basics. Retrieved 10 April 2007, from spindle publishing company, inc. Website:http://www.americangraduateeducation.com/folder2/subfolder1/bankingbasics.htm.

(2007). Wikipedia, the free encyclopedia. Retrieved 11 April 2007, from Website:http://en.wikipedia.org/wiki/Globalization.

[1] “Globalization,” 11 April 2007 < http://en.wikipedia.org/wiki/Globalization.> :1

[2] B., Phil, Phil for Humanity:A Guide for the Survival of Humankind, and Improving the World, Society, and Yourself! 11 April 2007 :

[3] “Outsourcing”. Wikipedia: The Free Encyclopedia. :1

[4] B., Phil, . (). Phil for Humanity:A Guide for the Survival of Humankind, and Improving the World, Society, and Yourself! . 11 April 2007:1

[5] Mizruchi, Mark, et. al “The Globalization of American Banking, 1962-1981,” May 2003: 1

[6] Ibid.

[7] DeAngelis, Stephen, F.. (2007). Enterprise Resilience Management Blog. Retrieved 11 April 2007:1

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