Unit 3 Topic 6 Flashcards
How can individual personal finances be affected by major changes and long-term trends in external factors?
Individual personal finances can be affected by major changes and long-term trends in external factors around the world. Many developments and events in global politics and economics, as well as social, cultural and demographic changes, affect the financial services industry and the environment, both nationally and internationally, and these effects eventually filter down to affect every financial services consumer. These factors also affect the sustainability of individual personal finances.
How has the impact of ethical and environmental issues on financial services providers and consumers been considered?
The impact of ethical and environmental issues on financial services providers and consumers were rarely considered by politicians or the business community until the 1960s. At that point, some academics – management experts, economists and scientists – began to raise questions about the damage that economic activity might be doing to the environment. Environmental concerns were then highlighted in the 1970s by political pressure groups such as Greenpeace and Friends of the Earth, and were taken up by a handful of concerned business and political leaders. The environmental consequences of a relatively high rate of economic growth are now taken very seriously by the majority of politicians, business leaders and the general public.
What is globalisation?
What are the factors fuelling globalisation?
What happens in one country is now more likely than ever to affect what happens in other countries (globalisation). Some of the factors fuelling this globalisation are as follows.
◆Travel between different countries is now easier, and it is both quick and relatively cheap to move around the world.
◆Communication is faster now than it has ever been, and information communication technology (ICT) has made contact between people and between financial markets almost instantaneous.
◆Businesses frequently trade across borders because of the ease with which goods can be transported and with which people can get in touch with each other, eg US manufacturers may buy their raw materials from Asia and export their goods to Europe, while an individual in one country can buy goods from another country using internet shopping.
◆People from one country often migrate to live in another and, because people take a part of their culture with them when they move, many individual countries now have much more diverse local cultures than they used to, influencing demand for various goods and services, eg food and fashion.
◆Many businesses – particularly financial services providers – have expanded their activities to span national borders. They conduct business in more than one country and often have offices in many different places. For example, many of the major banking, insurance and investment businesses operating in the UK have offices all over the world. In many cases, the parent organisation is based abroad, even though we think of it as a UK household name. Takeovers and mergers between providers have also created very large multinational organisations.
Give an example of a banking group that reflects globalisation.
HSBC – once the ‘Hongkong and Shanghai Banking Corporation’ – is one example of a banking group that has expanded into over 65 countries and territories, sometimes by setting up its own offices in those countries, but often by buying a local financial services provider. Usually, that local provider has been rebranded with the HSBC name to reflect its new ownership.
Define globalisation.
This international integration of business, industry and society through developments in technology, communication and migration is what we mean when we speak of ‘globalisation’.
There is no agreed standard definition of the term, but it is commonly described as: ◆the trend towards a single global economy and society; or
◆a process of increasing international networking, which means that communities and economies that used to be isolated are increasingly linked and affected by what is happening elsewhere in the world.
What is the international monetary fund?
How does it describe its aims?
How does the IMF describe globalisation?
The International Monetary Fund (IMF) is an international body comprising 189 countries that aims to promote international co-operation on exchange rates and other economic matters.
It describes its aim as: . . . to help member governments take advantage of the opportunities – and manage the challenges – posed by globalisation and economic development more generally.
The IMF describes globalisation as ‘the process through which an increasingly free flow of ideas, people, goods, services, and capital leads to the integration of economies and societies’ (IMF, 2002). It confirms that the major factors in the spread of globalisation have been increased trade liberalisation and advances in ICT.
What is the main feature to globalisation?
Why is this /globalisation seen as a good thing?
Why is this /globalisation seen as a bad thing?
One of the features of globalisation is the existence of increasingly large organisations that span several countries. They usually set up similar operations in each country by importing their own brand values and sticking to them consistently.
Some people think that this is a positive trend – especially if it leads to an improvement in the standard and range of products, and to consistency in services.
Others see globalisation as a bad thing, because they feel that it undermines the local culture in those countries and they do not like the depersonalisation that they believe results from it. They feel that they are getting a ‘one size fits all’ solution that may not take into account the way in which people like to do things in their own country. Another aspect of globalisation that some people dislike is that it supports increased offshoring.
How do financial services providers avoid the depersonalisation aspect to globalisation?
Give an example.
Many financial services providers, especially those that rely on good relationship management to keep their customers loyal, try hard to avoid the impression that they do not adapt to local needs. Such providers may try to combine the virtues of being global with the virtues of being local as well. HSBC, for example, used to describe itself as ‘The world’s local bank’, emphasising that while it has a truly global spread and international capabilities, it also understands each of the local markets in which it does business. In the wake of the 2007–08 global financial crisis, however, it has refocused its branding and dropped the tagline.
What is the key point to globalisation?
The key point is that what happens in one part of the world affects people in other parts much more than used to be the case. As well as being affected by our local economies, we are affected by what is happening in the world as a whole – and this is particularly true in the financial services arena, where the strategic decisions made by UK providers are often taken in the context of their wider operations.
How did globalisation contribute to the 2007-08 financial crisis?
What were the causes of the crisis?
Describe the crisis.
When the sub-prime mortgage crisis in the United States came to a head in the summer of 2007, it sent financial shockwaves around the world. For some years, US lenders (and lenders in other countries) had been agreeing rising numbers of mortgages, even for people who really could not afford them and who were at high risk of default (known as the ‘sub-prime market’). When interest rates rose, many of these high-risk borrowers on low incomes could not afford to keep repaying their loans, and so they defaulted and their homes were repossessed. At the same time, house prices fell: the banks were no longer able to sell the repossessed homes for enough to cover the outstanding mortgage debts. In the meantime, however, the banks had ‘repackaged’ these mortgage debts into securities (a type of financial instrument) that were sold on to investors, including other banks. These securities fell in value once the defaults began, and banks and investment funds around the world, which were left holding what now became known as ‘toxic debt’, suffered huge losses. Because the exact value of these securities was unknown, there was also a lot of uncertainty in the markets and banks stopped lending to each other – one of the reasons why the crisis gave rise to what is known as the ‘credit crunch’. The first UK bank to be hit was Northern Rock, because it relied so heavily on borrowing on the world money markets to fund its mortgages. Other UK banks also had to write off large amounts of debt for the same reason. The threat of systemic collapse of the UK banking system, which led the government to inject funds to prop up the failing banks – ie bailouts – stemmed from a failure in the US financial system. Unethical banking practices among US lenders infected banks in many other countries – banks that do business with one another on a daily basis in what is now an integrated global banking industry. In other words, a failure in financial services in one part of the world threatened the survival of the financial services system as a whole.
Give a disadvantage of globalisation (in terms of competition).
Yet another criticism made of globalisation is that it has led to the emergence of very large multinational companies, which can dominate markets and be so competitive that small local businesses fail. There has been a lot of integration in the financial services industry and some of the very large international banking corporations have, indeed, taken custom from their smaller rivals.
What is the impact of globalisation causing larger firms to rival smaller firms?
In many cases, corporations have bought smaller rival companies, adding to their own size and power by means of these mergers and acquisitions. When these happen, they often result in redundancies because the combined operation has more staff than it needs to carry out the work. On the other hand, many would argue that these larger corporations entering new countries have brought with them increased employment opportunities. It is generally accepted, however, that there should be some limit to mergers and acquisitions, so that there remains enough competition to give consumers choice. Following the financial crisis, the UK authorities are particularly keen to encourage more competition in the country’s financial sector.
Give an example of when mergers and takeovers have been positive.
One example of the positive impacts of such acquisitions (mergers and takeovers) is Abbey, which was purchased in 2004 by the Santander Group, a Spanish bank. While there were job losses at the time of the takeover, Santander was not so badly hit during the financial crisis as other financial services providers and so Abbey (now rebranded Santander) was better protected than many other lenders in the UK.
Give an example of when a merger or takeover has been negative.
An example of an ill-advised acquisition is the takeover of the Dutch bank ABN Amro by a consortium in which Royal Bank of Scotland (RBS) was one of the main participants. ABN turned out to be less valuable than RBS had thought, and so RBS was forced to declare huge losses in 2009 and to accept government funding to keep it afloat.
How do these issues of globalisation affect the strategic decisions that providers make and what is the effect on their customers?
◆Increasing globalisation means that UK providers face competition from overseas providers, which may set up operations in the UK or simply offer their products via the internet, as a comparatively low-cost way of finding and serving customers. Local providers will need to decide how to respond to these pressures. The increased competition between providers should mean that consumers enjoy better services and lower prices than would otherwise have been the case.
◆At the same time, it also means that UK providers may decide to expand overseas (or may already be part of international organisations). They must decide how much of their resources to commit to the UK market in light of the opportunities elsewhere in the world – which, conversely, may mean that UK customers see a reduction in the standard of products and customer service. The losses suffered during the financial crisis, however, have forced some banks to pull out of foreign markets: in January 2009, for example, RBS sold its equity stake in Bank of China.
◆UK providers also need to understand the cultural, regulatory and other constraints that may affect how successful they will be overseas: will a UK brand be effective in the French market or do the French prefer to ‘buy local’?
