1.1 Preface
In recent times, universal banking has been growing its fashionability in Indonesia. Mandiri Bank, for illustration, has taken a strategy to come Indonesia’s universal bank; this bank has also initiated to develop of an intertwined fiscal threat system in terms of sounding fiscal performance and adding shareholder value. In Germany and utmost advanced countries in Europe, universal banks have initiated their operations since the nineteen century.
There’s mounting substantiation that in those countries, universal banks have taken an important part in the development of real sectors and the fiscal system. In those countries, the growing figures of universal banking practices are really supported by the regulation of the central banks. Read about EDD banking!
Despite this, in The United States, they’re strict to regulate universal banks by blocking marketable banks from engaging in securities and stock request practices. They argued that the practice of universal banking might be dangerous for the fiscal system. ( (Boydet. al, 1998) cited in Cheang, 2004) The” threat” might be the crucial reason why the central bank of The U.S. is upset about the universal banking system.
Since, if the center of banks allowed banks to acclimate their operation to be universal banks, the relationship among, banks, fiscal and stock requests would be closer. Accordingly, this would give a query to the bank’s condition and performance. For illustration, if there were a disaster in stock request, banks would get problems in their fiscal positions. Therefore, they would tend to be insolvent.
In addition, universal banks would also hang the request share of other technical institutions because further guests would choose universal banks that offer further options for their investment. Hence, further technical institutions are likely to be ruined in the U.S. fiscal assiduity.
One major factor, which is driving a bank to be a universal bank, is to increase the profit by enlarging their request share. According to JoãoA.C. Santos (1998), a universal bank itself can be defined as a financial institution, which enlarges its service range in terms of offering a variety of fiscal products and services at one point. Therefore, by operating universal banking, banks could get a lesser occasion to expand to another fiscal area, similar to fiscal securities, insurance, barricade finances and etc.
Although the trend of banks has lately tended to universal banks, indeed, universal banks would also face further pitfalls because a wide range of financial services is explosively associated with adding pitfalls and raising monitoring costs. These are the major enterprises why banks have to apply further advanced technology in terms of fiscal threat operation.
Also, the practices of universal banks would beget significant pitfalls to frugality’s payment system. Since the operation of universal banks connects nearly to the fiscal and stock requests that are veritably changed in a short term.
To win in the tight competition among fiscal institutions, banks have to alter their initiative to lead in the request. The universal Bank could be the wise choice for the bank director because they can attract further guests with a wide range of services. Likewise, by altering their operation to the universal banking system, banks would get benefits from the effectiveness and husbandry of scale.
To understand universal banking practices, this paper would examine exclusive matters, related to the pitfalls and benefits of a universal bank. Also, this paper would concentrate on the whole impact of this institution on the fiscal system and frugality as a whole.
1.2 Gains AND COSTS IN UNIVERSAL BANKING Counteraccusations FOR INDIVIDUAL BANKS
The general problem related to fiscal intermediation, including universal banks and other types of banks, is about asymmetric information. It’s the main problem that causes costs to increase and impact the performance of financial institutions. In Universal banks, the problems that would increase are slightly different in specialized banks; they’re analogous in that they should manage the pitfalls problem associated with their fiscal position.
Although, in universal banks, the pitfalls are bigger due to the wide range of fiscal instruments that they organized. Thus, banks have to increase their spending on monitoring costs that are more complicated than technical institutions or conventional banks.
A possible answer why further banks’ immolation of the raising pitfalls and transfigure its operation into universal banking is that they want to contend and expand their request share, to seek lesser occasion gains by serving further choices to their guests.
Numerous banks have endured great performance after they alter their operation, the main enterprises are that they could reach better husbandry of scale which can reduce the quantum of spending in functional costs and also a lesser occasion to get further gains.
(2002, cited in Cheang, 2004) about the effectiveness of profit in fiscal empires and the position of both profit and cost in universal banking, has proved that both fiscal empires and universal banking contain good performance in several pointers of bank profitability. His finding also suggests that the sustained expansion of fiscal empires and universal banking practices may increase the effectiveness of the fiscal system. Read about Jcpenney’s credit card!
This opinion is strengthened by another expert, like George Rich and Christian Walter (1993). They state that universal banks which cortege benefits over technical institutions are suitable to take advantage of the reduction in the average cost of products and compass in banking. It’s essential for banks that operate in a transnational position and to fulfill client requirements with a variety of fiscal services. They also mention a classic illustration of how universal banks in some countries, similar to Switzerland, Germany, and further European countries have endured benefits by operating universal banking.
In addition, they also state that the fear of the universal banks would hang technical institutions has not been proven. In Switzerland and Germany, for illustration, technical institutions could achieve a better enhancement in terms of cooperating with big banks. Universal banks are one of the implicit request channels which can vend their products directly to the guests, so technical institutions also get fresh returns due to the increases in the number of universal banks. Thus, this proves that universal banks don’t trouble other institutions; in fact, they support technical institutions to vend their products.
According to Fohlin, universal banking would lead to a bank’s attention due to the increases in the number of branches. Grounded on Germany’s experience, similar branching-grounded expansion has led to the effectiveness in banking because it could increase husbandry of scale in advertising and marketing, and open an enormous occasion to enhance diversification and immutability for banks.
A universal bank has a unique position to attack asymmetric information. As stated by JoaoA.C. Santos (1998), a universal bank has implicit. Benefits on the reduction of agency cost and acquires gains due to information advantages. Although on the other sides, universal banking also faces problems related to cost, conflict of interest, and safety, and soundness. But the dereliction threat, which is generally happed in fiscal intermediation. Would drop mainly because universal banks are easier to control over their guests. Utmost of lenders in universal banks are their guests, so they can understand the capacity of the guests from the information that they gather.
Nicholas Cheang (2004) also points out how universal banks could reduce a pivotal problem in the fiscal institutions, asymmetric information. He argued that they could save a close relationship with their borrowers. By gathering more applicable information to make an important decision for investment. Their profitable positions are also vital to optimize. The distribution of fund allocation, because banks have formerly known which investment would give further perimeters to them. So, they do not need to worry too important about the threat.
1.3 UNIVERSAL BANKS AND THE STABILITY IN THE FINANCIAL SYSTEM
The fiscal institution plays a vital part in terms of marshaling finances in frugality. Accordingly, stability in the fiscal system is really important to manage by the government in order. To help wider counteraccusations to the real sectors. Financial disasters which happen in utmost countries in Asia in 1997 are the classic exemplifications. How significant to save banks to recover frugality.
As the fiscal supermarkets, which are handling a variety of fiscal instruments. They must face a lesser threat than technical institutions. As a consequence, this institution needs to be covered nearly to help further counter accusations of frugality. According to Benston (1994), the raising pitfalls in universal banking. This would lead to a great problem because it can beget generous torture in the fiscal system. Hence, it’ll greatly increase the threat to frugality’s payment system.
In another term, Frost and Strioh (2001) examine the fiscal system in Switzerland in which universal banking. Are getting more important in this country, stating that difficulty in covering large universal banks is a major concern. This is the reason why the universal bank has to spend further. Plutocrat in covering the cost and developing an advanced system in information technology. In other words, it could say that the consequence of hamstrung monitoring could lead to fiscal insecurity. (Cheang, 2004).
A wider range of universal banks in the fiscal system makes the fund channels of banks. The client are larger than technical institutions. So, the frugality will ameliorate because universal banks will support further backing.
This can be seen by the fact that a universal bank practice in Germany has started. The progress of some enterprise’s performance in this country. (Stiglitz, 1985). It’s accessible when the allocation of funds can distribute extensively and effectively. To the implicit enterprises, the frugality will ameliorate. In this environment, universal banks have played the crucial institution which rallies funds the implicit lender.
( Cited in Cheang, 2004) Thus, this proves that universal banks have played a significant part in terms of reducing. The dereliction threat by furnishing important information about the lender or guests.
1.4 CONCLUSION
The development of universal banks has to be in line with the policy direction of the central bank. Because it’s important to keep the stability of the fiscal system and the frugality as a whole. Universal bank operations, similar to the strengthened capital and advanced threat operation system. Accordingly, to manage the universal banks. People need to be apprehensive about the uniqueness threat type in universal banking. Likewise, policy maker must also consider the recrimination of universal banks in the fiscal system.