In recent times, universal banking has been growing its fashionability in Indonesia. Mandiri Bank, for illustration, has taken strategy to come Indonesia’s universal bank; this bank has also initiated to develop 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 its operations since 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 central of bank. Read about EDD banking!
Despite, in The United States, they’re strict to regulate universal banks by blocking marketable banks from engaging in securities and stock requests 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 TheU.S is upset about the universal banking system.
Since, if the central of bank 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 an query to the banks 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 option to their investment. Hence, further technical institutions are likely to be ruined in theU.S fiscal assiduity.
One majoring factor, which is driving a bank to be universal bank, is to increase the profit by enlarging their request share. According to JoãoA.C. Santos (1998) universal bank itself can be defined as the fiscal institution, which enlarges its service range in terms of offering a variety of fiscal products and services in one point. Therefore, by operating universal banking, banks could get a lesser occasion to expand to another fiscal area, similar as fiscal securities, insurance, barricade finances andetc.
Although the trend of banks has lately tended to universal banks, it’s really true that universal banks would also face farther pitfalls because a wide range of fiscal services is explosively associated with adding pitfalls and raising monitoring costs. These are the major enterprises why banks have to apply further advance 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 change in a short term.
To win in the tight competition among fiscal institutions, banks have to alter their initiative to lead in the request. 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.
In order to understand about the universal banking practices, this paper would examine the exclusive matters, which related to the pitfalls and benefits in a universal bank. Also, this paper would also concentrate the whole impact of this institution to the fiscal system and the frugality as a whole.
1.2 Gains AND COSTS IN UNIVERSAL BANKING Counteraccusations FOR INDIVIDUAL BANKS
General problem related to fiscal intermediation, include universal banks and another type of banks, is about asymmetric information. It’s the main problem that causes costs to increase and impact the performance of fiscal institutions. In Universal banks, the problems that would increase are slightly different with 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 more 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.
Possible answer why further banks immolation to the raising pitfalls and transfigure it operation into the universal banking is that they want to contend and expand their request share, in order to seek a lesser occasion gains by serving further choices to their guests.
Numerous banks has endured a 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 effectiveness in the fiscal system.Read about Jcpenney credit card!
This opinion is strengthen by another experts, like George Rich and Christian Walter (1993). They state that universal banks which cortege benefits over technical institutions, are suitable to take advantage of reduction in the average cost of product and compass in banking. It’s essential for banks that operate on a transnational position and in order to fulfill client requirements with a variety of fiscal services. They also mention a classic illustration how universal banks in some countries, similar as Switzerland, Germany and further European countries has endured benefits by operating universal banking.
In addition, they also state that the fear if universal bank would hang technical institutions has not 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 implicit request channel which can vend their products directly to the guests, so technical institutions also get fresh return 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 the number of branch. 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 unique position to attack asymmetric information. As stated by JoaoA.C. Santos (1998), that a universal bank has implicit. Benefits on the reduction of agency cost and acquires gains due to information advantages. Although in other sides, universal banking also face problems related to the 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 about 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 fiscal institution, 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 also vital to optimize. The distribution of fund allocation, because banks have formerly known which investment that 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
Fiscal institution plays a vital part in terms of marshaling finances in the frugality. Accordingly, stability in fiscal system is really important to manage by government in order. To help wider counteraccusations to the real sectors. Financial disasters which happed in utmost countries in Asia in 1997 are the classic exemplifications. How significance to save banks to recover the 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 in order to help further counteraccusations to the frugality. According to Benston (1994), the raising pitfalls in universal banking. Would lead to a great problem because it can beget generous torture in the fiscal system. Hence, it’ll greatly increase the threat to the frugality’s payment system.
In another term, Frost and Strioh (2001) who examine the fiscal system in Switzerland in which universal banking. Are getting more important in this country, state that difficulty in covering large universal banks is a major concern. This is the reason why universal bank has to spend further. Plutocrat in covering cost and develop 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 fiscal system makes the fund channels of banks. To 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 enterprises performance in this country. (Stiglitz, 1985). It’s accessible that when the allocation of fund can distribute extensively and effectively. To the implicit enterprises, the frugality will ameliorate. In this environment, universal banks have played as the crucial institution which rally fund to 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.
The development of universal banks has to in line with the policy direction of central bank. Because it’s important to keep the stability of fiscal system and the frugality as whole. To universal bank operations, similar as the strengthened of capital and advanced threat operation system. Accordingly, in order to manage universal bank. People need to be apprehensive about the unique of the threat type in universal banking. Likewise, policy maker must also consider about the recrimination of universal banks in fiscal system.
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