10 Banking Market Complexities Clarified

When it comes to the banking market, there are various complexities to be considered. Here are ten market complexities and why are they important.
  1. Large number of offerings - The financial services market now comprises a vast array of product offerings, instruments and/or services, which shows every intention of increasing. These new product offerings include derivatives contracts, which now go far beyond covering traditional risk classes of interest and exchange rates, and equity and commodity prices. Derivatives are attractive to investors to hedge their risks deriving from real estate, macroeconomic data releases, credit and even the weather.
  2. Increases to costs of support - When banks increase their numbers of product offerings, they also increase the cost to support those products. These costs include everything from staffing to office supplies, equipment, training, promotion and publicity - above and beyond the cost of the products themselves.
  3. Complexities of mortgages and loan modification programs - Of particular concern in light of the decline of housing prices, mortgages and loan modification programs are likely to become even more complex in the banking market with forecasts of more foreclosures and delinquencies. A report by Credit Suisse estimates that by the end of 2012 about 8.1 million households will be in foreclosure - or about 16 percent of the total households holding mortgages.
  4. Proliferation of nontraditional intermediation - These include the activities of venture capital firms, hedge funds, prime brokers, private equity funds, and central clearing banks. Innovative means of securitizing cash flows is another activity in this category. Such proliferation allows access to new financing sources as well as the benefits of new financial products to many more borrowers and investors.
  5. Acceleration of global banking markets - As the world shrinks, the acceleration of the banking market continues unabated. According to some predictions, notably that of Price Waterhouse Coopers in their report "Banking in 2050," the so-called emerging banking market, comprised of E7 countries, stands poised, to overtake the G7 markets by 2040. Chief among them is China, with its huge population and changes in education and investment markets.
  6. Acceleration of integration of banking markets - Taking into account the increase in net capital flows from trading partners and the opposite, the increasing current account deficit (seen over the past several years), the acceleration of banking markets globally adds to the complexity of the financial market.
  7. Demand for U.S. assets by trading partners - Countries want U.S. assets, led by China's high savings rates and those of other emerging countries. These entities also seek to build a hard currency cushion against a repeat of the 1997 Asian financial crisis.
  8. Changes to benchmarks - Financial crises have led to changes in benchmarks, particularly those with respect to risk pricing. These include default spreads, term spreads, and implied market swings.
  9. Banking market regulatory policy - Experts recommend reliance on market discipline to encourage sound risk management practices. The challenge for regulators is to design structures that encourage market discipline and efficiency.
  10. Emergence of long-run issues and short-term policy changes - No one holds a crystal ball with respect to what the future will bring. However, it can be argued that banking market complexities include the emergence of yet-unidentified long-run issues and short-term policy changes, each of which can change the landscape of the financial market.