Forces Leading to Changes Literature Review

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Many large banks in the U.S. led to huge government bailouts. This happened first in the year 2008 when there was a huge credit crunch and a global banking crisis. Governments of several countries around the world were forced to bailout, nationalize or arrange fire sales for several major banks in their countries. On the 29th day of the month of September, 2008, governments of several countries around the world, beginning with the Government of Ireland, began providing wholesale guarantees which underwrote banks in order to avoid panic which would lead to bank-runs. This led to the banking industry being referred as 'too big to fail' and led to huge discussion on the moral aspects of these actions that were undertaken Gorton et al. 300()

Size of the global banking industry

The global banking industry is extremely huge. In the U.S. alone, there are over 7,000 institutions operating in the banking sector with over 82,000 branches all over the country. A reported on the banking industry in China stated that the top 4 banks in China had over 67,000 branches as of the month of November, 2009. There are another additional 140 smaller financial institutions which the report did not indicate the number of branches. Japan has 129 banks with close to 12,000 branches. In Europe, the banks in Germany, Italy and France have a combine total of more than 30,000 branches which is more than double the number of branches in the UK only.

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In terms of revenue, the European Union holds the lion's share of the growth in total assets standing at 56% as of the fiscal year of 2008/2009. This was a decrease from 61% in the previous year. The shares of Asian banks increased from 12% to 14% during this same financial period while that of U.S. banks rose from 11% to 13%. As of this same financial period, the assets of the 1,000 largest financial institutions grew by over 6.5% to a set a new record at $96.4 trillion despite profits for the same period declining to $115 billion which represents an 85% drop.

Banking regulation

Literature Review on Forces Leading to Changes in Assignment

The banking industry is heavily regulated and even though per the history of the industry, deregulation has occurred, there still remains many regulations that govern the banking sector. Banks generally require a special license to operate. This is the same for most institutions around the world. The legal definition of banks does not include lending but, however, includes acceptance of customer deposits which may not be repayable to the order of the customer Bertrand, Schoar and Thesmar 600()

Unlike other industries, the banking sector is regulated by a regulator who also participates largely in the market itself. It can either be a privately or publicly owned and governed central bank. Central banks generally have a monopoly on the issuance of banknotes to the banks. This is, however, not the case in several countries such as the UK where the Financial Services Authority (FSA) licenses and regulates banks. However, certain banks, such as the Banks of Scotland, have legal authority to issue their own banknotes in addition to those that are issued by the Bank of England which is the central bank of the UK government Gorton et al. 263()

Regulation of banks and the banking law in general is founded on the contractual basis of the relationship that exists between the customer and the bank itself. The customer in this case is defined as any entity that the bank agrees to conduct an account. There are also certain non-bank financial institutions such as credit unions and building societies which in some countries are not regulated by the banking law but have their own separate laws, most of which are similar to the banking laws Ng 879()

The banking law thus governs this relationship between the bank and its customer and states that:

1. The balance of the bank account is the statement of the financial position that exists between the customer and the bank. Therefore, when an account is in credit, it means that the bank owes the amount in balance to the customer and when an account is overdrawn, the customer owes the bank the balance.

2. The bank agrees to pay the checks of the customer up to the amount that is standing to the credit of the customer. This is in addition to any overdraft limit set.

3. The bank must not pay from the customer's account without a mandate given by the customer e.g. A check drawn and duly signed by the customer.

4. The bank agrees to the prompt collection of the checks that are deposited to the account of the customer and to act as an agent of the customer in their processing and credit the proceeds of the checks to the account of the customer.

5. The bank has a legal right to combine the accounts of the customer since each account held by the customer is just an aspect of the relationship between the customer and the same customer.

6. The bank has lien on the checks deposited to the account of the customer up to the extent that the customer has debt to the bank itself.

7. The bank must not disclose any details of transactions done through the customer's account without the consent of the customer. Other exceptions are if the law demands it, the interest of the bank require it or there is a public duty on the bank to disclose the transactions.

8. The bank must not close any customer's account without notifying them reasonably.

Above these laws, there are also certain stated or implied contractual terms and conditions that govern the relationship between the bank and the customer Bertrand, Schoar and Thesmar 599()

Forces that change the banking industry

There are several factors which shape the banking industry. From the history and the literature on the regulation of the banking industry, there are several factors that can be deduced. One of the factors arising from the history of the banking industry is regulations and deregulation. Deregulation is the process of removing or eliminating existing regulations while regulation is the imposing of legislation to govern the banking sector. There is also reregulation which is the process of implementation of new restrictions on the activities conducted in the banking industry Bertrand, Schoar and Thesmar 600()

The second factor is financial innovation. This also arises from the history of the banking industry. This represents a process of change which is systematic whereby financial institutions develop and create new policies for operating, financial instruments, and financial markets thus enabling them to be able to circumvent the regulations in place in the banking industry and thus to be able to continue experiencing huge growth in the industry Nath, Schrick and Parzinger 27()

The third force is securitization which refers to the process of conversion of assets into securities that are marketable. This has also been deduced from the history of the banking industry. This basically enables the banks to move their assets off the balance sheet and increase their income thus increasing competition for the standardized products on offer by other competitors such as mortgages and loans Mehra 309()

Another force is globalization. This can be seen by looking at the history of the banking industry and how it has grown over the years. As financial markets and financial institutions become global, firms have recognized that there is huge potential for business in other countries and that there is no geographical boundary on financial markets and transactions Bolt and Tieman 784()

Advances in technology also change the banking industry greatly. This can also be seen in the history of the banking industry and how it has developed. For example, there is the introduction of new payment technology and internet banking. Technological advances have greatly shaped the banking industry and have caused it to change to what it has become today Berger 144()


Berger, Allen N. "The Economic Effects of Technological Progress: Evidence from the Banking Industry." Journal of Money, Credit and Banking 35.2 (2003): 141-76. Print.

Bertrand, Marianne, Antoinette Schoar, and David Thesmar. "Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985." The Journal of Finance 62.2 (2007): 597-628. Print.

Bolt, Wilko, and Alexander F. Tieman. "Banking Competition, Risk and Regulation." The Scandinavian Journal of Economics 106.4 (2004): 783-804. Print.

Braunschweiger, Walter J., George Geyer, and Paul B. Kelly. "Banking." The Analysts Journal 8.4 (1952): 117-27. Print.

Gorton, Gary, et al. "Regulating the Shadow Banking System." Brookings Papers on Economic Activity (2010): 261-312. Print.

Hoggson, N.F. Banking through the Ages. New York: Dodd, Mead & Company, 1926. Print.

Mehra, Ajay. "Resource and Market-Based Determinants… [END OF PREVIEW] . . . READ MORE

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APA Style

Forces Leading to Changes.  (2012, March 18).  Retrieved September 28, 2020, from

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"Forces Leading to Changes."  March 18, 2012.  Accessed September 28, 2020.