Deregulation And Globalization in the Banking Sector
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Globalization refers to the process by which economies, cultures and societies integrate through global networks such as communication, trade and transportation. Economic globalization is the most famous form of globalization. Economic globalization refers to the integration of regional and national economies into a common international economy by engaging in trade, spread of technology, migration and direct foreign investment. In the economic sense, globalization refers to the elimination or removal of barriers on the national borders with the aim of facilitating smooth flow of goods, services, capital and labor (Agdish, pg 101).Globalization leads to emergence of global financial markets and access to external funding. The global recession of 2007-2010 is an example of financial instability occasioned by globalization. The industrial production blossoms due to globalization that makes it possible for economies to access to foreign products with particular reference to the movement of goods and materials across national borders. Deregulation on the other hand refers to the elimination of government regulation or rules that hinder free operation of the market forces (Velde, pg 85). It means limiting government control on the trade and business processes thus promoting free trade. Globalization and deregulation have an impact on the optimal boundary of financial institutions in Turkey such as Finans Bank, Dexia, Akbank Turam Alem Bank, EFG Euro bank and NBG. This paper highlights the effects of deregulation and globalization in the banking and financial sector and its impact on the optimal boundaries of companies and firms in the financial sector.
Deregulation and globalization are some of the external factors that encourage and promote consolidation in the financial services sector thus affecting the optimal boundaries of firms in financial and banking sector in Turkey. The need to recapitalize financially in challenged institutions is the driving factor of consolidation. Deregulation and globalization leads to rise in competitive trade that promotes restructuring in the financial sector services as a strategic response. Turkeys' banking and financial sector has its own experience of effects of globalization and the effects of deregulation on the optimal boundary of firms in these sectors. The free market forces or the pull and push factors encourage entry of foreign banks in the host nation's financial market. The low level of competition, the potential of accessing new markets in the host countries especially in developing countries is equally responsible for the entry of foreign banks (Velde, pg 87).
There are benefits and costs of entry of a foreign bank in the financial and banking sector of the host nation. The benefits include bringing new technology, financial support for needy banks and new techniques of risk management. Other benefits include the continuation of lending to economies experiencing shocks that have potential of adversely affecting the banking sector and cushion the financial capital that may leave or flee the nation during crisis. The entry of foreign banks tends to boost the quality and performance of corporate governance thus enhancing efficiency of the host nation's banks hence stabilizing the economy. However, the entry of foreign banks and financial institutions carry with them certain risks such as negative shocks leading to instability thus weakening the local banking sector and the failure by such foreign banks to provide financial assistance in times of crisis. The regulations in host nations many a times do not control the activities and operations of foreign banks (Pascual, pg 44).
Turkey experiences increase in the entry of foreign banks into the country due globalization and deregulation that attract such financial institutions. The host countries such as Turkey view deregulation and entry of foreign banks as a solution of solving the problem of high levels of debt. The urge to boost international trade and improve technology in a bid to modernize the local banking sector informs the decision by countries such as Turkey to pursue deregistration as a method of enhancing trade. The host country, which is Turkey, hopes that entry of foreign banks may spur savings and widen the service and product base.After financial crisis; countries try to attract foreign investment from banks that may be able to take advantage of the low prices in the host nation's market. The concept of foreign banking is informed by the fact the banks enjoy the information and contacts with the manufacturing firms in the host nation at a lower cost. The removal of regulations and effects of globalization makes it easier for a foreign bank to enter in the host country (Velde, pg 88).
The financial crisis of 2000-2001 resulted in restructuring of the banking sector in Turkey that really affected the optimal boundaries of firms in the banking and financial sector. This financial crisis provoked the interest of foreign banks to take over the local Turkish banks at a cheaper price. During the crisis, the foreign banks engaged in mergers and acquisitions that increased their share by 0.66 percent. The Shares of the foreign banks have continued to increase because they purchased through the stock exchange. The growth of EU banking system has been a motivating factor for consolidation of banks. The American banking system led to big financial institutions, as JP Morgan's Chase that took over Bank One. These big American institutions have reached their optimal level in America and are currently seeking opportunities in foreign countries like Turkey that have high growth potential(Caprio ,pg 96).
The participation of foreign banks in the privatization process and in Turkey is likely to increase in the future and equally increase the foreign share in the local or domestic market. The foreign banks focus on local banks that provide home and consumer credits besides serving the corporate clients. For example, the Finans Bank was able to attract National Bank of Greece due the high quality of its retail products that includes consumer loans, checks, insurance and car loans. Dexia purchased the Denizbank to improve its customer base that grew to 1.4 million customers in Turkey. The Citigroup too bought 20 percent equity interest in the Akbank to strengthen is hold and position in Turkey. These firms were able to improve their optimal boundaries due to globalization and deregulation. The push factor for some of these foreign firms now operating in Turkey was the low level of profitability in their home countries. These banks equally moved in to Turkey in order to diversify their operations and client base (Agdish, pg 102).
The urge to boost international trade and subsequent investment inform the decision by some banks to expand abroad. For example, the entry of Greece firms in Turkey was to invest in certain sectors such as tourism, navigation and industry. The small size of banking sector in Greece makes their banks to expand into countries such as Turkey .The ING bank for example continues with its activities of leasing and involvement in the insurance sector while Sekerbank continue to invest in the agriculture, construction and tourism sectors following its financial deal with Bank Turam Alem. EFG Euro bank and NBG have interest in clients dealing with commercial and industrial enterprises (Agdish, pg 103).
There are effects of deregulation and globalization on financial institutions and banks in Turkey and this affects the optimal boundary firms in these sectors positively or negatively. The level and degree of effect on financial institutions vary depending on the nature and size of their assets, the level of risk aversion, government support and their ability to manage the changing financial environment. Some banks benefitted from such financial conditions while others continue to experience adverse effects. Structural changes in the banking sector are some of the results of entry of foreign banks in the Turkish financial sector as they influence credit analysis, operational and financial planning, human capital and marketing (Ali, pg 56).
The financial market in Turkey improved with the entry of foreign banks thus making the domestic banks to withstand the financial crisis. The decline of interest rates, technological transfer, improvement in risk management and transparency are some of the benefits of entry of foreign banks to the optimal boundary of banks such as Turam Alem Bank, EFG Euro bank and NBG. The services offered in the banking sector have continue to increase in variety such as the internet banking and other financial instruments, efficiency increases with the entry of foreign banks into Turkey due to increase in the use of computer technology and less man power. These foreign banks facilitate the entry of foreign capital in Turkey and continue to fund large-scale projects due to their relationship and link to the global financial markets (Ali, pg 57).
In conclusion, it is important to note that deregulation results in free flow of goods, capital and services without any manner of interference or control by the government except in cases where the firms engage in fraudulent activity. Deregulation is a key feature of free market economy and has direct impact on the optimal boundary of firms in the banking and financial sector in Turkey .Globalization leads to minimal national border barriers this affects the optimal boundary of banking and financial firms in Turkey , which increases competition and easy entrance into new markets. Stock exchange is one of the common features of free market concept since foreign banks are able to engage in business with their local and domestic counterparts through trading on the stock exchange. It is equally important to note that globalization and deregulation can have positive or negative impact on the performance of the financial and banking system depending on the strategies and strengths of firms. The entry of foreign banks into Turkeys' banking sector resulted into restructuring of the financial sector due to the transfer of information and technology.
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