Commercial bank problems

Question

For an enhanced understanding of banking industry, it is significant to look at the atmosphere in which commercial banks operate. Production growth and globalization are two main forces reshaping the banking industry nowadays. The following two questions are associated to such two issues.

a) Explain one of the new banking services provided to customers by numerous local banks. Discuss the potential profits and challenges to such banks which are brought about by the introduction of this latest service.

b) Hong Kong is an international financial centre and numerous foreign banks want to set up their presence in the city. In view of public welfare, must the government impose more restrictions against the entry of foreign banks into the Hong Kong? Elucidate the rationale behind your reply.

Answer 1

Part (a):

Banks in Hong Kong were keen to develop investment services to their clients. By means of investment services, commercial banks offer stock broking, FX dealing and various types of fund and trust services to their retail clients. Despite the fact that there were mis-selling probe by locals on the structured products linked to Lehman Brothers, structured products distribution remains to be a key part of investment service offer by commercial banks to retail clients in Hong Kong. The rationale behind the banks is to boost the non-interest income. As the low interest rate environment is likely to persist in current economic condition, it is therefore difficult to banks to obtain decent net interest margin from conventional personal loans and deposits.

By offering investment services to retail clients, banks are capable of offering clients a one-stop shopping as banks can then provide banking and investment services to clients. Clients are inclined to use integrated banking service which can give banks opportunity to obtain additional market share from domestic brokers.

On the other hand, the introduction of investment services for banks poses several challenges. First of all, the case of Lehman-linked structured products had a serious impact to the image of banking industry. Banking industry had an image of high integrity and professional services before the Lehman scandal. However, it is difficult for banks to maintain high integrity of their staff when their marketing staff increases and their performance is linked to commission.

Part (b):

It is better off for consumers with a greater degree of competition among banks. Local banks operate in an environment of monopolistic competition which banks are offering similar but a range of products to consumers. From the model of monopolistic competition in classical microeconomics, when there are more firms entering into the market, the equilibrium price of the product decreases and the total welfare for the society increased. Intuitively, when there are more banks entering into the market, it intensifies competition among banks to gain business and the cost of consumers is likely to be reduced. Moreover, with more banks entering into the city of Hong Kong, it is likely to attract more skilled banking professionals to relocate to Hong Kong to seek for opportunities. Therefore, it is better off for both consumers as well as the industry as a whole.