Essay on Operations and Strategy of Financial Institutions part 2
Regardless of the separation, there have always been significant management mistakes: Northern Rock had long real estate commitments financed with very short-term resources which suddenly dried up following the subprime crisis; as regards investment banks, they had excessively developed operations that turned out to be toxic (Larosiere, 2012). Such dangerous operations and policies do not depend on the specialisation and, thus, the separation can hardly prevent banks from conducting such risky operations and policies.
Effects of the separation of the retail banking from the investment banking
Therefore, the separation of the retail banking from investment banking leading to the narrow specialisation of banks does not really mean the prevention of risks. For example, if the retail business of a bank starts stumbling, the investment business of the bank can help it to compensate losses and maintain the stable marketing performance of the bank or, vice versa, problems in the investment business may be compensated by the steady growth in the retail business.
In this regard, it is possible to refer to the recommendation of experts that directors should be primarily responsible for ensuring their bank was implementing the ringfence (Moulds, 2012). But regulators should police compliance and punish any bank found to be in breach by requiring that bank to hold extra capital (Moulds, 2012). However, such recommendation implies the government regulation that may be not enough to prevent crisis. Instead, the crisis may be prevented through responsible policies and avoidance of risky policies.
The separation may have a considerable impact on the profitability and performance of banks, such as Northern Rock. The separation will prevent the bank from the opportunity to diversify its business and, thus, expand its market through the development of the investment business. Instead, the bank will remain constrained within its retail business. Such limitation will restrict marketing opportunities for the bank to increase its market share and enter new markets as well as existing ones with investment instruments and projects that can increase the profitability of the bank and enhance its marketing performance. Instead, the bank will be doomed to focus on its retail business solely, which has already put the bank on the edge of survival. The shift toward investment banking would be too risky for Northern Rock at the moment.
However, to understand possible effects of the separation, it is possible to refer to the application of this strategy in the past, for instance, in the US during the Great Depression. In the late 1920s, the split of the retail banking from investment banking resulted in the decrease of the amount of capital available for investment banking (Casserley, 2014). Moreover, in 1929 the capital of the securities affiliates of National City and Chase National alone amounted to over $220 million (Casserley, 2014). Ten years later the total capital of the eight largest investment banks was a mere $75 million (Casserley, 2014).
In fact, the separation of the retail banking from the investment banking may lead to the overall downturn in the business and economic development that will have a negative impact on the bank’s performance and profitability. In such a situation, the bank is likely to face considerable problems with the accelerated business development and stable growth since the decline of investments, which had been traced during the Great Depression after the attempt of the separation. The slow economic growth and low capitalization of investment banks will have a negative impact on retail banks too because the lack of investments will discourage the growth in the retail banking too since economic or business activities will be low.
The introduction of the separation of the retail banking from the investment banking will not bring consistent changes and qualitative improvements in the performance of Northern Rock, which is now run by Virgin Money, as well as other banks. The problem is not the lack of separation, since the bank was specialised on the retail banking solely before the crisis had struck. Instead, it was the risky policies conducted by the bank and its ineffective management that eventually triggered the downturn in the bank’s development, which were aggravated and fully revealed by the global financial crisis.
Furthermore, it is possible to suggest considering the enhancement of the government regulation rather than separation of the retail banking from the investment banking. The government should not restrict business opportunities for banks but increase the regulation making stricter requirements to the bank. Strict requirements will discourage banks from too risky operations and decisions.
The bank should focus on the optimisation of its performance rather than separation of the retail from investment operations. For example, the bank should get rid of the risky assets and focus on secure operations along with the attraction of customers, who can help to overcome current difficulties and regain its competitive position in the market. Northern Rock can count on the support of Virgin Money so far but the wise and effective customer relations management along with reasonable financial policies oriented on minimisation of risks is the worth implementing strategy, even if the price the bank has to pay will be low profitability. The bank will stabilise its performance in several years, optimize its operations and assets and, thus, create the ground for the further growth.
In addition, the bank should come prepared that the proposal to separate its retail business from the investment one will not bring positive effects on its profitability and performance. The diversification of its operations through the development of the investment department could help the bank to become the universal bank and enhance its performance. The profitability would likely remain low because such changes of bank’s operations are costly. However, in a long-run, the bank could partially secure its assets and marketing performance through such diversification, when the bank confronts the problem of the external impact, but not internal ones as was the case of Northern Rock in 2007-2008.
Thus, the introduction of the separation of the retail banking from the investment banking will hardly bring consistent improvements to the performance and profitability of Northern Rock Bank. Moreover, this decision will hardly be able to prevent the crisis in the banking industry. The separation focuses on the strict control over the banking industry, which is of little help for Northern Rock as well as other banks. Hence, the separation is unlikely to increase the profitability and improve the performance of Northern Rock. On the contrary, this policy can trigger the downturn in the development of the banking industry and this policy can have a negative impact on Northern Rock Bank.
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