Banking Industry in Recession - Coursework Example

Banking Industry in Recession The international financial crisis initiated in the United States’ mortgage market and causes a liquidity deficit within the United States’ banking system, the full blow of which began to be felt during the mid of 2007. It resulted in the collapse of various financial institutions and in huge government involvement to stay away from a contagion effect within their economies. The United States credit market default that started the global recession all over the world has changed the financial setting significantly. Since that time, concerned officials have been attempting to come up with solutions to the difficulties that the banking industry as well as the global financial system is facing. The banking industry has also been going through a process of reformation lasting over two decades. Market liberalisation, as well as the induction of latest information technologies led to a strong trade growth resulting in several mergers and acquisitions in addition to off shoring potential. Seeing the trends of previous years, reformation in financial institutions is persistent. Reducing the consequences of this recession has been easier for nations and workplaces with well-built channel of communication (Downey, p. 94, 2011). The recession started several mutual projects of social associates. During the year 2009, 93 percent of the companies within the banking industry initiated joint bargaining against an average of 84 percent within other industries. Another consideration within the banking industry is that a works council covers 97 percent of companies that have more than 50 workers. Markets will have to go through a period of reformation to consider the facts of the impact of recession. Bank liquidity is currently known as being a lot more significant within the banking concept than in the previous years, when banks gave unsatisfactory attention to the need to expand financing sources. Market participants should become responsive to the changing wave within the banking industry as well as adjust their policy and approach consequently. A need for stronger guideline is predictable as an increase in guideline is the rational outcome of a recession. Now, there is only the aim to inflict more guidelines on the banking industry although its precise form is not as confirmed yet. The most competent approach would be for the United States as well as for the European Union to synchronize their course of action; or else, “banks will concentrate operations in the jurisdiction with the least restrictive regime” (McLean, p. 36, 2010). In the initial instance, the market requires to stay away from the development of another ‘Shadow Banking system’. Moving ahead, one can look ahead to that any organization that takes influential positions within financial instruments will be positioned under the control of the state supervisory body. Any business or legal entity that operates like a bank or operates like a channel for a bank will be put through the regulatory system. Barclays resisted the financial recession by declaring solid returns; regardless of the banking industry recession, Barclays made pre-tax returns of £ 1.6 billion during the last quarter in the year 2009. This takes its earnings of the same year to £ 4,646 - 18 percent less than a year ago - because of £ 5.9 billion of bad debts (McLean, p. 36, 2010). However, while Barclay's United Kingdom retail section witnessed returns tumble, its investment as well as commercial banking division goes on to do well. Moreover, with the profits from the sale of its International Shareholders division still to come, Britain's second largest bank seems to heading in the right direction for a record-breaking year. It has sustained sturdy profits momentum during the third quarter, mainly in Barclay’s funds and all over the global activities of International Retail and Commercial Banking, letting the bank to get constant prosperity during the initial three quarters of 2009. This performance confirms the flexibility as well as diversification of its range of businesses. The renewal of the bank's wealth indicates that several Barclay’s dealers can look ahead to huge payouts by the end of the year. However, the return of the period of buffer dividends will annoy taxpayers, who dedicated more than £ 1trillion in life support for Britain's falling banking industry. The super bonus culture is held responsible for supporting the massive risk taking, which cause the financial crisis, and professionals notified that there is the actual threat of it happening for a second time (Ackrill, p. 138, 2008). Returns at its investment bank almost trebled during the period, despite the fact that earnings plunged 46 percent at its retail bank, as clients were unable to carry on with their repayments. However, market analysts think Barclays' returns could reach £ 6.3 billion this year - a similar level to previous year, when the bank given an approximate of £ 1 billion in bonuses on workers. Barclays did not play a part in taxpayer- financed bailouts during the year 2008, which witnesses the Government get domineering stakes in ‘Royal Bank of Scotland, Lloyds TSB and Halifax Bank of Scotland’ (Ackrill, p. 138, 2008). However, it has leaned greatly on the taxpayer- financed plan that lets banks in the United Kingdom to exchange mortgages for gold- coated Government bonds. In spite of the enormous support, British banks carry on to deny companies for the credit they want to endure the recession. In the United Kingdom, more than a million individuals could lose their employments between now and subsequent leap in the financial damage that has followed the financial crunch. Many businesses are closing their functions each week because of the lack of reasonably priced loans. Lending to company plunged 80 percent to £ 7.9 billion during the five months until April, whereas loans to clients dropped by almost 92 percent, according to latest Bank of England statistics. As they do give consent to offer a loan, banks are thrashing businesses as well as family units with huge arrangement cost along with other charges in an attempt to revamp their tattered finances. A senior official of Barclays acknowledged that now the bank is making more money from loans to clients and companies. In spite of the Bank of England leaving interest rates on an all time low of 0.4 percent, the rate of borrowing stays persistently high. In accordance with ‘the Forum of Private Business’, more than three out of every ten businesses seen a raise in banking charges during the last six months. A lobby group states that the raise has included more or less £ 30 per month to the rate of business banking, compounding the hurt of the financial collapse. In the United Kingdom, Barclays has gained from the plight of ‘Northern Rock’ with sturdy expansion in credits, as well as savings. However, it will result in striking by compensations made to clients who confronted its overdraft charges. These cost it £ 89 million during the first half of the year 2009, and even though cases against all the banks were frozen during the mid of the same year until a court case hearing against the Office of Fair Trading, it is expected to have taken an additional considerable hit during the second half (Freidman, p. 287, 2010). However, according to Barclays, ‘charges against bad debts on unsecured lending’ in the United Kingdom goes on to fall as clients acted in response with vigilance to the latest rise in interest rate as well as impairment charges on the credit business were insignificant. Barclaycard developed strongly, mainly in the United States where it will shift into revenue, and general saw write- downs from bad debts sinking. At Barclays International Investors, there was a sturdy expansion in earnings as well as profit before tax in US dollars, which turned into excellent development in sterling terms. Barclays Capital, the investment banking division, rushed 36 percent to £ 1.9 billion, covering United Kingdom banking as the group's biggest revenue producer for the first time. Barclays decreased its exposure during May 2009 (Krugman, p. 183, 2009) as the lodging market all over the Atlantic mitigated and default rates started going up. For the meantime, a merchandise and foreign exchange trading explosion during July 2009 facilitated BarCap returns to continue getting better in comparison with the same time previous year. The division's 20 percent to 22 percent annual development objective is unaffected (Krugman, p. 183, 2009). In the United Kingdom, Barclays followed its opponents by leaving behind £ 90 million to resolve customer claims for overdraft charges. As it flagged during February 2009, bad debt write- offs have peaked, decreasing 10 percent to £ 281 million. However, its United Kingdom retail division increased returns 9 percent to £ 1.7 billion facilitated by expansion in savings accounts. Additional six million Barclaycard clients have signed up in a foreign country since 2004. Branches are being started in ‘Portugal, Italy and Eastern Europe’. Barclays Plc will shift its Africa head office in Dubai back to Johannesburg, which will have an effect on ‘123 workers’. Employees will be provided with the option to change their location or leave the bank earlier than the closure of Dubai office by the end of 2011. Barclays Africa head office was situated in South Africa until 2006, and then it was shifted to Dubai. The bank made a number of ‘job cuts’ during its United Arab Emirates functions last year as it decided to cut back its retail division and concentrate on its investment business. Barclays Commercial Bank has initiated a new plan, known as ‘Turning the Corner’, to facilitate United Kingdom companies during the recession. The plan is an intention to help the bank’s 85,000 business customers in fighting the recession, and merges practical assistance, short courses, business debates as well as networking events. It will provide business owners as well as managers with the particular expertise and awareness that will help them in meeting the exceptional challenges, and recognizing possible opportunities, the existing recession creates. According to the bank, ‘Turning the Corner’ is a usual step in the direction of advancing the way it supports businesses, mostly when joined with improved business lending as well as support of Government schemes, for instance, the ‘Enterprise Finance Guarantee (EFG)’. Barclays Commercial Bank Managing Director, England and Wales, David Marks said, “We are acutely aware of our responsibilities in the current environment and we remain committed to creating and maintaining a platform for our clients to succeed” (Foster, p. 102, 2009). The plan as well has a website with content related to recession to help decision making in areas like workforce, ‘supply chain management’, ‘foreign exchange’ and other investment and administration disciplines. The website will incorporate third party assistance from a variety of business professionals, along with a Barclay’s point of view on market situations and advancements. Fiscal results of Barclays Commercial Bank’s, publicized during the last month, shown sturdy lending expansion, growing 18 percent during 2010 to GBP 62.2 billion. Barclays as well intends to be the primary bank in United Kingdom to make the most of its whole ‘EFG lending quota’ (Foster, p. 102, 2009). The banking industry crisis has led to the fall of key financial institutions and is currently staring to affect the financial system in the developed economies. As this recession is continuing, credit markets seem to be ‘drying up in the developed world’ (Kolb, p. 342, 2010). With the substantive raise in financial globalization, these developments will greatly influence the emerging market economies (EMEs). Lastly, to overcome the recession, the banking institutions, such as Barclays will have to start lending money again; however, by implementing efficient risk management policies. Lending will allow the business organizations to increase their capital, and subsequently, increase consumer spending. Conclusively, the paper has analyzed some of the significant aspects of banking industry in the period of recession. It is an expectation that the paper will be beneficial for students, teachers, and professionals in better understanding of the topic. References Ackrill, M. 2008. Barclays: The Business of Banking. Cambridge University Press. Downey, K. 2011. The Financial Crisis Inquiry Report. PublicAffairs. Foster, J. B. 2009. The Great Financial Crisis: Causes and Consequences. Monthly Review Press. Freidman, J. 2010. What Caused the Financial Crisis. University of Pennsylvania Press. Kolb, R. 2010. Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future. Wiley. Krugman, P. 2009. The Return of Depression Economics and the Crisis of 2008. W. W. Norton & Company. McLean, B. 2010. All the Devils Are Here: The Hidden History of the Financial Crisis. Portfolio Hardcover. Read More