Effect of Economic Power Shift from Europe to Asia on UK Banking

1.1: Overview

In the present world, the key moving force is the economic power. But, before understanding economic power, it is very important to understand the meaning of power. Earlier power was associated with only political scientists, but in reality, power is very subtle term. Generally power is considered as force to influence other so that they obey the society exercising power. But, it is very difficult to define power in terms of economy as it depends on many parameters such as size of the economy; whether the power is exercised directly or indirectly in the economy and many other factors (Hannabuss, 2010). Thus, that economy can be considered as economic power which achieves growth in all the aspects of economy such as its currency power, its industrial growth, surplus balance of payment, developed society, etc. There are three main elements which govern the economic power; these are:

• Size of the economy
• Willingness of other economies to corporate with the powerful economy
• Soft power consideration or reputational power (The great thrift shift: a survey of the world economy, 2006)

In last few years, the world economy has faced lots of movements. Many nations of the world which were considered to be the world power have seen lot of turmoil in their economy and many other activities. In the views of many economists, the economic power is going to be shift from Organization for Economic Co-Operation and Development (OECD) countries to the Non-Organization for Economic Co-Operation and Development (NOECD) countries. OECD countries include the current world power such as the United Stated and the European Region, while, NOECD countries include India, China, Brazil, Turkey, Nigeria, etc. Earlier, US and UK were considered to be the most powerful nations of the world just because of their developed economy and prosperous society. These countries have ample of resources and were capable enough to exploit these resources, not only to fulfill their requirements, but needs of many other countries as well which were dependent on them. But some recent activities in those countries have shattered their economy and these countries are still struggling to overcome from the effects (Weerakkody, 2012).

In such scenario, economies of India and China, among all the developing economies, are least affected and are performing well consistently. Presently, China is considered as market leader in the field of global manufacturing. On the other hand, India has emerged as international hub and is delivering its services to the entire world. India has made some huge development in the field of information and technology and has evolved as one of the biggest outsourcing market in the world. India’s information and technology and outsourcing market accounts for approximately US$50 billion (Weerakkody, 2012). Growth in the economies of these countries has opened ways for many other economies also such as Pakistan, Thailand, Indonesia, Vietnam, etc. They are also emerging as manufacturing market apart from China (Kunnanatt, 2011).

Many recent reports show that the contribution of emerging powers from Asian region has been huge in the world economy. According to them, presently Asia Pacific region has contributed around 38% in the world economy, followed by Europe at second position and North America at third. More specifically, India, China and Japan are the three main contributors from the Asia Pacific region and out of 38%, majority of the contributions have been made by them (Cox, 2012).

So after assessing the contributions made by the eastern countries in the world economy, it can be sensed that economic power is shifting from east to west once again. Five centuries ago, there was dominance of Asia on the world economy. Near about 50% of the world’s gross domestic product was represented by the India and China, while the contribution from the North America and Western Europe was only about 20%. But, then came the industrialization, the era of industrial revolution shifted the balance of economic power from these Asian regions to Western Europe and North America. In 1950, the contribution of western region in the world’s production was around 50%, while China and India accounted for only around 8%.  At that time, Japan was also emerging as a key player in the world economy and by 1980 there was complete dominance by the developed economies (Das, 2009).

But once again, there has been transformation in the economic power. The population growth in the developed economy is started declining but the growth in the emerging market has been large. The GDP per capital level of India and China started rising with a swift pace and today they are proving a threat to the developed economy. Presently, they both accounts for 20% of the world’s total GDP and very soon they will surpass the world power. This change will affect the working of all the major sectors of the economy in the European and American region; banking industry is one of them. Apart from this, other factors that have contributed in the economic power shift are the crises faced by OECD regions like Europe and America (Fatas and Mihov, 2012). Sub-prime crisis of 2008 in the United States devastated the economy of the America and the country is still struggling to come out of its effects. Same happened with the European countries. Their main area of concern is euro crisis. As the credit crunch affected the economy of America, in the similar manner, euro crisis shattered the economy of entire European region. Apart from this, to some extent, property bubbly has also contributed in the falling economic growth of this region. Thus, 2008 credit crunch in the US, euro crisis, property bubble and tremendous growth of CHINDA (combination of India and China to represent emerging economies) are some of the main reasons contributing towards the economic power shift from west to east (Engardio, 2007).

Issues such as euro crisis have significantly affected the banking industry of the entire European region, specially, the banks of United Kingdom. The Bank of England, which is the central bank of England, has recently published a statement citing that the banking sector is witnessing decline in its growth rate. Earlier the growth rate of the UK’s banking industry was around 1.2% which is fallen down to 0.8%. The central bank still feels that euro crisis is the biggest challenge for the banking industry of entire European region, and the industry will take some time to come out of it. The euro crisis resulted in the credit loss, due to almost all the banks of the UK lost huge sum in the form of loans and are not able to recover those amount. This has significantly affected the revenue of the banking industry of the UK and the banks have recorded declining revenues (Gray, 2012). This shift in power will further worsen the conditions of the UK banking as the International Monetary Fund (IMF) indicates that the growth in European region will remain slow and there is no certainty in the US economy. Although, the financial packages to some of the banks of Britain will help them to continue their operations, but still there will be liquidity crisis. The report by PricewarerhouseCoopers shows that, the GDP of China will keep growing with the rate of around 9% and that of India by 7.5%. Further, if the emerging keeps growing with the same pace, very soon they will overtake the G7 nations. Further, most of the investment then will be made in the emerging countries; it will also impact the performance of British banks (Gray, 2009).

There has been decline in the customer’s confidence about the banking industry of Britain. This has resulted in decline in the demand of credit or loan and other investment products offered by the banks. Moreover, this shift in addition to low interest rates in some other countries will further make the condition worsen for the banking industry of the Britain. Banks are finding it difficult to maintain their revenue levels. According to a report, in the first half of the 2012, the statuary profit of the entire banking system of the UK was increased by 20% in contrast to the last year, but as compared to 2011, the profit levels were down by 17%. All these factors indicate that the banking industry is affected by the economic power shift. Further, the rickety market conditions lower lending rate and stiff regulations will further add to the injury. And because of all these reasons, returns of banking industry are very low as compared to other utility companies (Hedley and et. al., 2010).

1.2: Focus and Purpose

This study focuses on the performance of three different banks incorporated in UK but operating in different market. The first bank is Lloyd TBS which is UK incorporated and is functioning in UK market only. The second bank is Standard Chartered Bank which is again incorporated in UK but its functions are based in the Asian markets, and the third bank is the HSBC which again is incorporated in UK but functions across the globe. So, the work focuses on the performance of these three banks ever since the economic turmoil and their profit generation since then. The current study highlights the past five years and future five years study of these banks that how they survived during the tough time and how they will overcome from the problem of power shift. It emphasis over the facts that what opportunities the emerging markets such as India and China can generate for the banks of UK and also evaluates the impact of globalization of RMB currency on these banks. Finally, it focuses on their planning related to FDI in the next few years in the emerging markets. Thus, it focuses how the economic power shift will impact different banks incorporated in UK but based in different markets.

Aim: The main aim behind conducting this research is to identify the threats and opportunities that the economic power shift from west to east will offer to the banking sector of UK.

Objectives:

• To compare the performance of three UK incorporated banks operating in different markets
• To study the past and future strategies of UK banks
• To study the impact of globalization of RMB currency on UK banks
• To analyze the future trends in UK banking sector

The main purpose of this study is to collect knowledge about the world economy and contributions made by the different economies in it. Many studies have been conducted on the world economy and its impact on developed and developing nations. The report highlights the main reasons behind the economic power shift from western to eastern nations and how it can prove to be opportunities or threats for the banking sector of Britain. The economic growth is very sluggish in the European region, and on the other hand, growth of the emerging markets have been tremendous, so banks functioning in only UK region will feel the heat while the banks operating across the world and in the Asian region can take it as opportunities.

1.3: Research Questions

In order to attain the objectives of the research, some questions are to be answered such as:

• What are the factors that are responsible for the power shift from European region to Asian region?
• What impact will this power shift will have on the UK’s commercial banking sector?
• What are the challenges that UK commercial banking sector can face and what are the opportunities it can avail from the economic power shift?
• What consequences it will have on the Asian commercial banking industry?

1.4: Framework and Analysis

Research report’s framework and analysis segment mainly furnishes details of the different steps in which the study will be conducted. The framework section provides an elucidation of the several research approaches, strategies and methodologies executed for carrying out the investigation. It basically gives a practical outline of different methods of research applied in the study. Explanations of distinct research techniques, data collation methods, sampling and evaluation methods are given. This section carries substantial information as the legitimacy and genuineness of the dissertation is determined through this. A comprehensive analysis plan is considered as vital as it assists the scholar in determining and assuming the right track while carrying out his investigation. Below mentioned techniques for the given methods have been applied in the present report:

Research Design – This aspect encompasses the process and methodology deployed for carrying out the investigation. It is of three types i.e. casual, descriptive and exploratory. In the current research exploratory research has been made use of. This design is applicable here as the topic in hand is quite new and not many studies exist on this subject matter (Sobh and Perry, 2006).

Research Philosophy – Research philosophy assists the scholar in identifying a particular pattern of research. Both positivism and Interpretivism philosophies have been applied in the current case (Adcroft, A. 2008).

Research Approach – Research approaches are of two types – inductive and deductive. Inductive research approach has been deployed in the present case as no hypothesis formulation and testing are involved. In addition to this, specific theories will be broken down into more general form. Hence, deductive approach will not be applicable in this case (Oyegoke, 2011).

Research Type – The research type of the current dissertation is both qualitative and quantitative as interviews will be carried out along with presentation of quantitative facts and figures.

Data collection method – Both primary and secondary methods have been used for the current report. Primary data has been collected by means of interviewing the managers of the three banks i.e. HSBC, Standard Chartered and Lloyd’s Banking Group. On the other hand, secondary data has been collected by way of online reference materials, books, journals, government publications, newspapers and magazines (Rowley, J. 2012).

Sampling technique – For this research probability sampling technique has been used. Under that systematic random sampling method has been made use so that the whole population can be divided into specific numbers. As, this study concentrates on the commercial banking sector of United Kingdom, therefore systematic sampling is the most appropriate method (Pors, 2000).

Data Analysis - For the present report, data accumulated from several sources has been evaluated by means of both quantitative and qualitative techniques of data analysis. Quantitative analysis has been done using data analysis tools like Microsoft Office Excel and SPSS. On the contrary, qualitative analysis has been done using thematic analysis (Rowley, J. 2012)

1.5: Potential Significance

Present research has lot of significance for the commercial banking industry of the Britain, as it shows the impact of economic power shift from East to West on the banking sector. It tells what all opportunities those UK banks can avail which are operating across the world through this power shift. Further it also highlights the threats which those banks have to face which are functioning in European region only. This study has lot of implications for the Lloyd TBS, HSBC and Standard Chartered Bank as the present work is entirely focused on these banks. Through this study they can draft better strategies to keep on performing well. Further, by referring this work they can plan how they can grow by diversifying the service and product portfolio. This study provides them an opportunity to identify new markets and new customers so that they can expand their customer base. Through this study they can understand the economic conditions of the entire world, especially that of European and Asian regions. They can also assess the market conditions of the emerging markets. Apart from European banks, this study has lot of significance for the Asian banks also as they can assess the opportunities present in the Asian markets. Moreover, this work is of lot of meaning for the customers also as they can evaluate the economic and market conditions of both the region before associating with either Asian bank or the European bank. In addition to customers, it has implications for many Asian companies who want to associate with any of the bank under consideration. Before taking service of any UK bank, they can evaluate their performance and can decide whether to bank with them or not. Companies can identify potential advantages and risk related to associating with UK banks. The study also focuses on impact of globalization on the USD and how it can affect the functioning of UK banks. Thus, banks can also plan their investments.

The study will clarify that there is difference between a commercial banks and an investment banks and further, a commercial bank can be an investment banks, but an investment bank can’t be a commercial bank. Finally, it work has meaning for the teachers and the students who want to gain some knowledge on the concept of power shift and would help the scholars who want to pursue research on related topic.

REFERENCES

• Adcroft, A. 2008. A snapshot of strategy research 2002-2006. Journal of Management History. 14(4). pp.313-333.
• Cox, M. 2012. Power Shifts, Economic Change And The Decline Of The West?. International Relations. 26(4).
• Das, D. K. 2009. Dynamic growth of the Indian economy. Is the spurt sustainable?. Journal of Indian Business Research. 1(3).
• Engardio, P. 2007. Chindia: How China And India Are Revolutionizing Global Business. McGraw-Hill.
• Fatas, A. and Mihov, I. 2012. Global economic balance shifting east.
• Gray, D. 2009. Financial contagion among members of the EU-8: A cointegration and Granger causality approach. International Journal of Emerging Markets, 4(4).
• Gray, D. 2012. Baltic States and the Euro: a spectral analysis of the 2007 financial crisis. International Journal of Managerial Finance. 8(2).
• Hannabuss, S. 2010. The Princeton Encyclopedia of the World Economy. Reference Reviews. 24(2). pp.22–23.
• Hedley, J. and et. al. 2010. The critical consequences of project drift – a case study in the UK banking sector. Business Process Management Journal. 16(4).
• Kunnanatt, J. T. 2011. Global business chain and twin advantage: Strategic opportunities for developing countries. Competitiveness Review: An International Business Journal incorporating Journal of Global Competitiveness. 21(4).
• McDonald, H. 2003. A comparison of online and postal data collection methods in marketing research. Marketing Intelligence & Planning. 21(2).

UPTO56%

Avail The Benefit Today!

To View this & another 50000+ free

Enter Email

Submit