Mergers and acquisitions to set the stage for shaping large banks
View(s):The global financial landscape has changed considerably over the recent past with boundaries between banking and non bank sectors fading and financial deregulation and liberalization paving way for mergers and acquisitions, leading to the formation of intitutions of global scale, according to experts.
“Rapid product innovations have occurred through development in technology, while close integration between economies has led to the swift spread of not only technology and products, but also imbalances across borders,” C.J.P. Siriwardana Assistant Governor, Central Bank (CB) said, addressing directors of banks recently at the Bank Directors’ Symposium 2013, titled ‘Beyond a Ten Trillion Banking sector.’
Speaking on “Building Resilience”, he said that such changes pose a challenge for policymakers to continually stay abreast of development in financial markets.
The current crisis emphasized that the world is now experiencing a single global financial system and the reform agenda to strengthen the global financial system took centre stage in the global arena, he said, noting that building resilience of the financial system in the face of rapid transformations is essential towards preserving Financial System Stability.
The current global economic crisis recovery has been frail and uncertain, stifling growth prospects and affecting long term output. “The recent crisis shows that the knock-on effects on Asian and emerging economies have also been high with wide fluctuations in foreign capital inflows, rapid credit growth and possible asset price bubbles, rising inflationary pressures and weak external demand and resultant low economic performance,” Mr. Siriwardena said.
Capital and liquidity buffers
The starting point of a sound and stable financial system is robust and resilient bank which characterizes profitability, capital and liquidity and buffers good governance, he said, explaining the “three pillars” in a resilient banking system.
Capital and liquidity buffers should be considered the central pillar, where the capital provides a buffer to absorb losses during periods of stress, he said, adding that looking back at the recent crisis, it is now widely accepted that pre-crisis capita buffers of banks were neither high nor solid enough.
He stressed that banks need to maintain adequate levels of profitability to safeguard the trust of their investors and customers, especially during times of stress. “Inadequate profitability also prevents banks from building up reserves, which are crucial during periods of stress.”
Having a sound governance structure and a strong commitment to high ethical standards is essential to safeguard customer and investor confidence and this has gained importance following recent global incidents such as the LIBOR scandal. Mr. Siriwardana said that financial institutions should carefully spread their assets amongst low, medium and high risk instruments and a prudent balance should be found between risks and returns. Highlighting several challenges which still lie ahead, he broadly categorized them into four groups – consistent implementation of reforms already agreed upon, strengthening the financial system in line with medium term macroeconomic targets, completing the regulatory reform agenda dynamic and proactive oversight.
He noted that macro-financial stability requires a multifaceted approach. “Financial systems the world over have developed rapidly and increased in interconnectivity, making regulation and supervision a highly complex task. Being the lifeblood of any economy, a stable and well functioning financial system is critical towards macroeconomic stability and economic development,” he said.
While many progressive measures have been taken, he noted, the importance of stepping up efforts to achieve the targeted goals and consolidate the achievements so far to ensure that the financial system is ready to support the country’s long march ahead.
Setting out one option to consolidate the banking sector, he said that economies of scale have gained importance in the search for greater scale and efficiency in banking. “There is a need to undertake substantial costs to develop cutting edge technology, expand products and service, and attract new talent while diversifying income sources by competing in different fields and to compete with global banks.”
All these require banks to be strong and large for even though being big does not ensure success, being a small bank is a definite significant handicap, Mr. Siriwardena said. “With the need for bigger and stronger banks, efforts to create such institutions through mergers and acquisitions (M&A) need to be stepped up to be able to perform the role that is expected of them in a fast growing economy.”