Roles of Deregulation on Banking Sector Essay

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What roles have deregulation, innovation, and globalization played in changing the character of bank management in recent decades? Has the overall outcome of the changes been greater stability in the banking sector? Discuss the respective roles of asset and liability management in modern banking.

Deregulation, innovation and globalisation has changed the way banks run from asset management to liability management, as well as the change from ‘mono’ to ‘multi-tasking’ and the increased competition in the sector as well as risk. The banking system has evolved drastically from the traditional mono-tasking institution to what it is now. This change in roles of asset and liability management could be one of the main reasons behind the global …show more content…

2) The second phase sees the ending of the sharp distinction between banks and NBFIs (non-banking financial institutions). In the 1980s, banks were given the right to compete in the mortgage market and building societies allowed to compete in the market for consumer credit; i.e. both allowed in each other’s markets. Whereas in US, banks were not allowed to compete in the field of investment banking and insurance until 1999.

3) The third phase allowed increased competition within the financial sector and from outside it. NBFIS and other new kinds of financial institutions attached to other financial operations provided new kinds of services such as online banking (within the financial sector). Firms from outside the financial sector also entered the financial services market including Tesco, Marks and Spencer (UK), and GM and GE in the US (General electric’s financial arm makes 1/3 of its profits!).

The three phases of deregulation is the main driving force for banks and NBFIs to compete aggressively and take on excessive risk (through actively searching out liabilities) to gain higher profit margins. By expanding their balance sheet through liabilities, they increase exposure to credit risk and become highly sensitive to the state of the economy i.e. more defaults during downturns of the economy.

Apart from deregulation, financial innovation

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