I am now going to focus on a few financial services organisations and identify how they are coping with the current ‘credit crunch’ and recession in our economy and the different problems they are facing in the global market. More importantly, I will look at how effectively they are coping with these problems. First of all, it is important to note that “financial services have also grown very rapidly in the last twenty years and now account for about one in five jobs” (ONS 2003).
This quote explains how the financial services industry is expanding rapidly and has become a very successful industry generating income and employment. The two main reasons for growth of this industry is high income elasticity, which means “consumers have become increasingly wealthy and the demand for financial services has grown” (G. Arnold, 1998, p. 31). The other reason is international comparative advantage. The first financial institution I will look at is HSBC. “HSBC is one of the largest banking and financial services organisations in the world [which] is headquartered in London” (HSBC website, 2008).
I have chosen HSBC as one of my financial institutions to identify how big organisations deal with consequences and implications of globalisation. As they are a big international company, they will have to face many global forces on a much wider scale. Therefore, the impact may be greater or shorter impact on them. HSBC provide a range of financial services worldwide. “HSBC Global Banking and Markets is an emerging markets-led and financing-focused business that provides tailored financial solutions to major government, corporate and institutional clients worldwide” (HSBC website, 2008).
At present, the banking industry isn’t in a good position and is experiencing a ‘rough time’. This is a result of banks being “hit hard by the recent slump in the financial market” (The Workplace Law Network website, 2008). As a result the Government has introduced a i?? 500bn bank rescue plan which is “intended to stabilise the banking system, with a plan to reduce the financial burdens of businesses as a partial consequence” (The Workplace Law Network website, 2008). This shows the banking industry is declining and its financial performance is detrioating.
This has a significant impact on HSBC as consumers will be loosing their trust and faith in banks which results in a poor repuatation and a fall in demand for products. In November 2008, HSBC incurred a i?? 2. 7bn loss as a result of the US housing market crisis. “HSBC said its US losses reflected the continuing weak housing market and rising level of unemployment” (The BBC Business website, 2008). These are two global forces that have had a major effect on HSBC because the US economy isn’t performing financially well.
This is having an impact on HSBC’s activities as demand for financial services is falling. After the announcement of their i?? 2. 7bn loss, HSBC announced they were “cutting 1,100 jobs worldwide because of the current financial turmoil” (BBC Business website, 2008) to help deal with the large loss. However, in despite of their i?? 2. 7bn loss and 1,100 job cuts, HSBC’S operations in Asia had helped recover and balance out the large loss. “The bank said that its asset sales and growth in Asia helped offset the worsening US economy” (BBC Business website, 2008).
The next financial insititution I am going to look at is the American International Group Inc. (AIG) which “is a holding company; it is engaged in insurance activities including general insurance, life insurance and retirement services. The group primarily operates in the US and Far East region” (AIG Corporate website, 2008). AIG is a global financial service organisation with operations in more than 130 countries. As the company primarily operates in the US, the US economy will have a big impact on its activities. Depending on how well the US economy is, will affect AIG’s performance in the US.
According to the BBC Business Website, in September 2008, The US Federal Reserve announced a “$85bn (i?? 48bn) rescue package for AIG, the country’s biggest insurance company, to save it from bankruptcy”. The BBC website states the cause of AIG loss comes from “the collapse of US investment giant Lehman Brothers, which caused share prices to plummet across the world’s financial markets”. Prior to this bail out from The US Federal Reserve, Rob Young (2008) reported that “AIG had posted losses in each of the last nine months …
it was badly affected by the collapse of the US housing market … owing to the underwriting payments it was forced to make when customers defaulted on their loans. This article shows that the failing US housing market has had a major impact on AIG especially as they are based in the US. As the US economy is financially declining, the demand for AIG’s insurance products is falling because consumers cannot afford the insurance payments. As a result of the second Government bailout, “AIG announced a salary freeze for its top seven executives ….
the pay freeze comes in the wake of two government bail-outs, which saved the insurance giant from bankruptcy this autum” (G. Farrell, 2008). AIG responded to this bail out from the Government by reducing their costs, thus freexing the excuetives salaries in the hope of recovering some of their losses. At present, AIG are receiving a poor repuatation from US taxpayers because of the rescue plan made to them from the Government. Mr Liddy, AIG’s chief executive said that “The taxpayer is going to do very well out of this deal” (F. Guerera, 2008).
At present the UK economy is experiencing the credit crunch and we can be considered to be going through a slight recession because our economy isn’t growing that well. The teach me finance website defines the term credit crunch as “a sudden reduction in the availability of loans and other types of credit from banks and capital markets at given interest rates”. This definition explains how banks are being very cautious with whom they lend money to and are reducing the number of loans and credit that is available for consumers making it harder for consumers to lend money.
“Where banks lend, they will charge higher rates to cover their risk” (D. Budworth, 2008). This is because banks are in a very weak financial position at present. To some extent, I think quite a lot of globalisation factors has lead to the cause of the credit crunch. However, I think other non-globalisation factors have also contributed to it as well. For example, one of the biggest globalisation factors that have had a major impact on the credit crunch is the collapse of the US housing market, which has lead to it being a weak market.
Also the rising costs in oil and also the UK’s declining housing market can also be considered to be a cause because house prices are rising and consumers are finding it harder to obtain mortgages. On the other hand, globalisation factors cannot be considered to be the cause of the credit crunch. This is because in some ways, globalisation can be seen as a positive process for many industries/countries as it can bring many benefits. For example, it generates income and employment, which is particularly helpful for poor/less developed countries.
Thus it helps sustain and build their economy and generate wealth. Also for the businesses this means cheap labour which leads to a reduction in their costs and a rise in their profitability. P. Dickens (2007) explains how “growth of the global economy …. has dramatically increased the well-being of many people”. Thus is another argument that globalisation factors haven’t significantly lead to the cause of the credit crunch because globalisation can be considered to help build and grow economies and generate wealth, not cause a credit crunch.
However, all in all, I do think at the present time globalisation factors are the cause of the credit crunch because many industries, markets and economies are declining because the globalisation process is failing. This is because global companies are operating in the wrong places where their economies and industries are failing. This is leading to a decrease in the demand for products from consumers For example, businesses operating in the US will not be performing as well because the US economy is declining and losing money.
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