Cross Selling by Banks-Part II

This is the second and concluding part of the article.

Benefits of cross selling:  In cross selling, Bank is essentially leveraging its relationship with an existing customer, to generate new business, and consequently earn more income, and profits.

The following are some of the beneifts of cross selling by Banks:

It is economical:  Cross selling results in cost-cutting.   The Bank incurs less expenditure in cultivating an existing customer than in acquiring a new one.   The Bank is relieved of the work associated with opening a new account, with all the attendent procedures with regard to KYC norms etc.   On the other hand,  Bank is familiar with the background and the prospects of an existing customer.

Economies of Scale:  With an existing customer it is easier for the Bank to offer a variety of products and services needed by the customer.   Communicating to a existing customer is relatively easy.   It is also easier for the Bank, because of familiarity with the customer, to structure a combination of products required by him, at an attractive cost.   Economie of scale can be achieved customer-wise, to reduce the overall cost to the Bank.

Relationship Building:  By tapping the existing pool of customers, and consolidating the relationship with them, with the help of a slew of products and services, Bank can build up a solid relationship with the existing pool of customers, who would stay with the Bank long term.   And also bring in new ones.

Advertising and Publicity:  When a customer avails of several services from the Bank, he becomes a source of word of mouth publicity and advertising, for the Bank.   The will help the Bank garner more business, apart from reducing expenditure.

Multiple Revenue Streams:  Multiple services offered by the Bank result in the generation of multiple streams of income.   As incomes and revenues from different sources are not uniform throughout the year, this strategy of offering multiple services to existing customers will ensure a steady flow of income to the Bank.

Branding:  Cross selling of Bank products and services leads to more visibility of the Bank, and add to the brand value of the institution.   Brand building, being a critical function for long term success of an institution, the existing cusomter is a very convinient vehicle to spread the message of the Bank.

Retention of Customers:  In the competitive environment that businesses are operating today, it is equally important to retain existing customers, as it is to acquire new ones.   Offering a bundle of products and services, at competitive rates, to existing customers, will help in retaining them.

Profitability:  In view of the benefits of cross selling discussed above, if cross selling is executed as a business strategy, with proper planning, and care, it is bound to increase the profitability of the Bank.

                                                                                                                   Concluded.

Cross Selling by Banks-Part I

The worldwide economic slump has created a situation where Banks and Financial Institutions find themselves in an unenviable position.   On the one hand, they are unble to lend freely as before, for fear of being landed with bad loans, for which they are already in the dock.   On the other hand, their own position is not any better than the corporates that they lent to.   Many of the biggest names in Banking are now living and managing on Government funds.

The current economic crisis has thrown up challenges that are difficult to beat, with conventional strategies.   New ideas, and new innovations need to be promoted to remain in business, and make profits.   Apart from new ideas, Banks should also revisit some old ideas that they may have ignored in their pursuit of zany and sophisticated sounding businesses like derivatives etc.   One such idea is the concept of “cross selling”.

Cross Selling:  Cross selling refers to the activity of garnering more business from an existing customer, in addition to the one he is availing presently.   Often, we come across a Bank customer, who has a deposit account with one Bank, and a loan facility with another.   Or a customer who has a personal loan with one Bank, and a Credit Card of another Bank.  

The idea behing cross selling is to target such customers, to structure a range of products, and at such prices,  that it becomes attractive and viable for the customer, to avail of al his banking needs at one place.  

Let us take the typical case of a family of four, comprising of husband, wife and two children.   Let us assume the husband is a Executive in a Printing Firm, the wife is a home maker, and the two children go to school.

In a case like this, the family may need one or more of the following banking services:

1. Savings accounts for all the family members.
2. Recurring deposits in the names of the children, to inculcate the saving habit, apart from such accounts for the parents also.
3. Fixed deposits for lumpsum amounts, from time to time, in the names of the family members.
4. A home loan facility for purchase or construction of a family home.
5. A consumer loan for acquisition of consumer durables, and furniture, etc, for the home.
6. A car loan for the family car.
7. Personal loans for the parents to meet any exigencies.
8. Credit cards for the parents.
9. An Educational loan for the childrens’ education.
10. Travel loans for the family to go on holiday.
11. If the wife is interested in pursuing any home based business, then a suitable loan may be considered.

The above list of services that a Bank can offer to a typical family gives an idea of how many income streams can be created with an existing custome, with who the Banks is familiar, and conversant with his financial dealings, social status, and credit history.  

In the same way, the customer is also familiar with the Bank, and once he is satisfied with the services availed of by him, he would be prepared to shift all his business to a particular Bank.   This will result in building a strong relationship between the customer and the Bank, for mutual benefit.

                                                                                                    To be concluded.

American Banks are stressed-Part VIII

This is the eighth and concluding article on the stress tests carried out on the top nineteen FIs in the U.S. recently, to determine their need for additional capital.

In the previous article, we had seen how the supervisory authorities examined and evaluated the data obtained from the nineteen FIs, and came up with their assessments, about the strengths and weaknesses of these institutions.   The data submitted by the concerned institutions was subjected to minute scrutiny, and cross checked with supporting documents, information, etc., to satisfy themselves of the authenticity of the same.   In certain cases, additional data was also called for to double check and confirm the initial submissions.

The above tests enabled the supervisors to determine the level of buffer capital required by the concerned FIs, given their ability to stave off the adverse effects of the economic crisis, in both the baseline, as well as the more adverse scenarios.   The buffer capital was intended to absorb any unexpected losses likely to be suffered by the FIs, in future, especially in the year 2011.   The quantum of such buffer capital would be sufficient to overcome the amount of expected losses in future.

After putting the FIs through the grind, if any of them were found wanting, that is, in need of more capital, especially with reference to common equity, then such institutions were expected to arrange for such enhanced capital on their own, or alternatively to accept assistance of the U.S. Treasury, through the Capital Assistance Program.   That would enable the FIs or BHCs to remain at the forefront of financial intermediation, in existing, as well as, more challenging situations and environments.

Conclusion:  That it is difficult to predict the future, is a given.   However, the SCAP has addressed the issue of strengthening the American financial system to face up to the existing and future challenges.   The methodology adopted for this purpose is quite comprehensive, and takes into account all possible developments in the economic sphere, and their effects on the financial system.

Each component of the scenarios was examined individually, and also as a whole.   Similar treatment was given to the projections, forecasts, etc of the BHCs in relation to their expected results, based on the revenue streams, expenditures, etc.   Where the supervisors were not satisfied with the quality of the data submitted, they called for additional data in support of the earlier one.  

The framework of the stress tests was designed in such a way as to bring out the pluses and minuses of the financial standing of the BHCs, into the open, and allow the supervisors to suggest, and initiate where necessary, suitable steps to improve the inherent strengths of the BHCs.

On balance, it may be said, that the supervisors have done a good job, under the circumstances, reducing the element of chance in their job, to the minimum.   But, as with any prediction, or hypothesis, an element of uncertainty is unavoidable, and only time will tell how far the above exercise of stress tests would serve the purpose for which they are intended.

                                                                                                     Concluded.

                                                                                                        

American Banks are stressed-Part VII

This is the seventh in the series of articles on the stress tests carried out on the top nineteen American FIs recently.

In the previous article, we had seen  the methodology adopted by the supervisory authorities under the SCAP, to elicit data and relevant information from the targetted FIs, to carry forward the process of recapitalization of the concerned FIs.   Based on this data, the supervisors would take a decision on which of the FIs would need additional capital, especially common equity to ensure the financial stability of the institutions. 

The supervisors called for extensive data and information from the FIs, to study the same, against the backdrop of all kinds of assumptions, and hypothetical situations.   These assumptions and hypothetical situations were intended to put the FIs to rigorous tests, as to their capacity to tide over the dire economic conditions, and still perform their normal functions, especially of lending.  

On the one hand, the supervisors studied the data in general terms, as applicable to each asset class etc.   On the other, they also analyzed the data submitted by the firms, in relation to their specific portfolios, to see if the data submitted was consistent.   By adopting this dual approach, the supervisors hoped to get to the bottom of the issue, namely the financial stability of the FIs to stand up to not only the current crisis, but a worse one than this. 

Further they checked up if the projections made by them in relation to their losses, revenues, and income sources were proper, and could be related to the actual figures.   Particularly, the resources that would be available to the FIs, at the end of 2010, to absorb the possible losses incurred in the year 2011.

The supervisors thoroughly examined the projections made by the FIs for the revenues, incomes, inflows and outflows, for the two year period of 2009 and 2010, and also possible losses they might suffer against their credit portfolios.   Against this information, the supervisors calculated the additional capital that would be required if their hypothesis,  in regard to losses that the FIs were expected to suffer were to crystallize into reality.   The infusion of additional amounts of capital was meant to act as a buffer to absorb the losses incurred in the year 2011.

The supervisors examined the results of the stress tests for each institution seperately, and then the sum of the results for all of them, to arrive at the probable overall situation.   The relative strengths and weaknesses of each institution were studied in relation to the ongoing changes in the economic situation, to understand how each of them would fare.   That would give the supervisors an idea of how the financial sector, as a whole, would cope with the economic crisis.   In both the baseline, and the more adverse scenarios.

FIs that did well in both the scenarios were to be left alone to take care of themselves, whereas the FIs that failed the stress tests were to be recapitalized, either through their own efforts, or through the intervention of the U.S. Treasury.

                                                                                                          To be concluded.

American Banks are stressed-Part VI

This is the sixth in a series of articles o the stress tests carried out on the top nineteen FIs  in the U.S.

As discussed in the previous articles, the stress tests were carried out in the context of a baseline scenario, and a more adverse scenario, and the examinees were expected to come out unscathed, with reference to both the scenarios.   Not only their capacity to weather the current economic storm was checked, but also their capacity to withstand, and, in fact, thrive, in a more adverse environment  was calculated with the help of the stress tests. 

In order to ensure the reliability of the tests, the concerned authorities created scenarios that replicated the actual situation, to the extent possible.   However, a point to be noted here is that, whereas the baseline scenario may be more realistic, in view of the real time data available to the supervisors, the more adverse scenario essentially relies on forecasts and assumptions, based on the data contained in the baseline scenario.  

If the ongoing recession takes a new turn, or lasts much longer than projected, and so on, then the hypothesis built around the more adverse scenario may turn out to be incorrect.   Be that as it may, the supervisory authorities have tried to make the best of the worst situation.   The important point is that they did not rely on the submissions of the concerned FIs, but made independent assessments of such submissions, to satisfy themselves.

The authorities in charge of the SCAP adopted a comprehensive approach to their job, with the idea of leaving nothing to chance, and playing out all kinds of scenarios, and studying the impact of each, to arrive at suitable conclusions.   Any shortcoming on part of the supervisors in effectively carrying out the stress tests is likely to put their reputations on block, apart from their careers.   Hence the insistence on extensive data and supporting data.

All the nineteen targetted FIs were asked to submit detailed information, alongwith explanations, justifications, forecasts, the methodology behind the forecasts, the underlying assumptions etc., relating to all the important parameters like revenues, losses, exposures, expenditures, income sources, and other items having a bearing on the health of the firm.   Not only the FIs were required to provide authentic data, they were also instructed to provide, where necessary, their assumptions for any forecasts, or projections that formed a part of their submissions.   

With this extensive information and data in hand, the supervisory authorities set up teams comprising of experts and specialists in each of the asset classes like stocks, fixed income securities, bonds, real estate, etc., apart from items like revenues and reserves, to examine, study, analyze, the data submitted, and come up with their assessments.   Where the data submitted by any FI was found to be inadequate, further data and supporting information was called for.

                                                                                                      To be concluded.

American Banks are stressed-Part V

This is the fifth in a part of a series of articles on the stress tests carried out on the top nineteen financial institutions in the U.S. recently.

In the previous article, we had examined the rationale for selecting the nineteen FIs, for the stress tests.   Simply speaking, these nineteen FIs are considered representative of the American financial industry, in all aspects.   These institutions may be considered as a standard, against which, various programs, techniques, etc, may be tested, to arrive at proper conclusions, and which are applicable to the entire financial industry in the United States.

The stress tests were carried out with two different scenarios in mind.   One, the baseline scenario, which corresponded to the general consensus in the economic forecasting community, about the severity and the extent of the recession, and possible duration of the same.   The second scenario, the more adverse scenario, which considered a recession more severe and lasting longer than the one in the first scenario.   With these two scenarios as a backdrop, the nineteen firms were asked to provide their projections on the following aspects:

1. The possible losses from their credit portfolio for the two years viz. 2009 and 2010.
2. The expected revenues for the same period as above.
3. The level of reserves they would need at the end of the year 2010 to absorb the losses expected in the year 2011.   Which means they had to project their expected losses in 2011 also

Apparently, the next two years are considered critical to the American economy, and its financial system, and the FIs, as the movers and shakers of the financial system, are expected to be fit as a fiddle, to play their rightful role in the process of financial intermediation.   It is for this purpose, that the stress tests took into account, a much worse economic and financial scenario, while estimating the level of capital required by the Banks.

The authorities responsible for carrying out the stress tests did not leave anything to chance, as it appears.   They sought extensive details from the FIs, in regard to their estimated revenues, and possible losses.   And they sought suitable documentation to back up the claims of the FIs.   The contentions of the FIs were put to severe test, by insisting on proper justifications and records of past performance.

The supervisors asked the FIs to submit details of all the components that went into making the larger picture of their financial health.   Even details of major items of expenditure and income, with break up of the larger amounts were sought from the FIs.

Further, the supervisors required of the FIs to submit details of domestic and international portfolios, and their composition, the methods adopted by the FIs in forecasting their revenues and expected losses, if any, and reasons for making important assumptions.

In other words, the authorities wanted to study and analyze the effect and conclusion of the stress tests, in as realistic a situation, as possible.

                                                                                                           To be concluded.

American Banks are stressed-Part IV

This the fourth in a series of articles on the stress tests carried out by American banking superviors on nineteen of the top financial institutions in the U.S.

The Supervisory Capital Assistance Program, the SCAP, seeks to identify American Financial Institutions in the big league, that might need additional capital, and to make it incumbent on them, to source out funds for the same, or alternatively, to seek assistance from the U.S. Government.

The U.S. Government is quick to point out that the Banks and financial institutions, picked up for infusion of capital in the wake of the stress tests, are not necessarily insolvent, or weak in any way.   Neither are they unviable.   The purpose of the capital infusion is to make them stronger and meaner, to face upto the worst possible scenarios of economic and financial distress.

The stress tests were carried out between February and April of this year.   The following Banks were the target of the stress tests: Wells Fargo, Bankof America, GMAC, Citigroup, Regions Financial, Sun Trust Banks, Morgan Stanley, KeyCorp, Fifth Third Bancorp, PNC Financial Services, American Express, Bank of New York Mellon, BB & T, Capital One, Goldman Sachs, JP Morgan Chase, Metlife, State Street, and U S Bancorp.

The criterion applied in subjecting the above institutions to the stress tests was that they played a very vital role in the economic and financial life of the country and were considered the biggies of the financial world.   Each of these institutions have a asset base of a minimum of USD 100.00 billion, as at the end of 2008.   The combined value of the assets held by them is about two thirds of the total assets held by the American banking industry.   Further, these nineteen institutions have exposure to one half of the total loan exposures of the American Banks.

Given these kind of figures for the big nineteen,  in terms of their assets and their exposures to credit, in the American market, it is not surprising that the American authorities chose them to conduct the stress tests on, as they are representative of the American financial system, and the results of the stress tests on these institutions could be held, to be valid, for the American financial system, as a whole.  

Indeed, these nineteen institutions play a very significant role in the banking sector.   So much so, that the American Government considers that the system of stress tests and its reliability can be assured, by applying to only these nineteen FIs, instead of all of them.  

Conversely, these FIs are also subject to a higher level of market risk.   Any market turbulence would likely affect these FIs more than the others, on account of their higher market exposures.   There is also the risk of these firms getting complacent on account of their size, which would make them more vulnerable to the predatory market forces.

On account of the above, the U.S. Government believes that, by taking proper care of these nineteen big FIs, the health of the American financial system can be assured.

                                                                                                    To be concluded. 

American Banks are stressed-Part III

This is the third in a series of articles on the stress tests conducted on the top nineteen financial institutions in the U.S. recently.

Supervisory Capital Assistance Proram(SCAP): The SCAP is a joint program of the Board of Governors of the Federal Reserve System, the Federal Reserve Banks, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of Currency.

As discussed earlier, the basic purpose of the SCAP is to assess the additional requirements of capital of the targetted nineteen financial institutions, officially called the large Bank Holding Companies(BHCs), to enable them to cruise along comfortably, regardless of the chaos around them.   To impart necessary strength to these institutions, through capital increment, to enable them to stand up to the market forces, and come out on top, even in the worst possible scenarios.  To build a sort of financial fortress, that can withstand all kinds of attacks from the market forces. 

The SCAP has two scenarios in mind, when it considers the needs of the BHCs for additional capital. One is the present state of affairs, and the other, a situation even worse. These two scenarios are presently applicable to a time frame of two years, viz. 2009 and 2010, which is essentially a short-term exercise. Apparently, the U.S. Government is constrained to address the immediate needs of businessess, industry, and the consumers, in general, given the surprising  speed with which the system started disintegrating.   Until recently, these very institutions were being held up to the world at large, as a shining example of the success of free markets.

The parameters under consideration for implementation of the SCAP relate to the estimated losses, revenues, and reserve needs of the BHCs. The idea is to calculate the effects of the various levels of economic, and financial distress, on the BHCs, and to decide which of them would need fresh injection of capital, to withstand the worst possible scenario. This fresh injection of capital would act as a buffer that would absorb the shock of the actual materialization of the above scenario.   The buffer capital would take care of the losses that might be sustained by the institutions the next year.  

The fresh infusion of the capital would also enable the Banks to function normally, and thus, contribute towards stabilizing the system. The sight of American Banks going about their jobs in a cool, calm, and methodical fashion, amidst a disorderly and chaotic market situation, is what the American Government would like to see emerge from the SCAP.

The goal of the SCAP appears to be to make the American Banks immune to the economic and financial turbulence, and fashion them into instruments, that would actually reduce and eliminate such turbulence, through their overwhelming capacity to deal with such situations.

                                                                                                                  To be concluded.

 

 

 

 

American Banks are stressed-Part II

This is the second in a series of articles on the stress tests carried out by supervisory authorities, on the nineteen big financial institutions in the United States.

Stress Tests:  The purpose of the stress tests  is to determine the additional capital required by the targetted financial institutions, to continue to play their designated role, as financial intermediaries, even in the face of dire economic conditions, resulting in higher than expected losses.

The Fed Reserve, is, in fact, convinced, that most American Banks have more than the required level of capital.   Such comfortable level of capital, may,  in the normal course, be considered very conservative.   And in times of economic boom, such levels of capital would be considered a burden, and affecting the profitability of the institution.   But the times now are far from normal.  

The continuing recession is battering the life out of Corporate America, and American Banks and Financial Institutions are caught in the maelstrom of economic and financial disintegration, with the weaker among them blown away, as it were, and the stronger ones just about surviving.   The sight of tottering giants of the American financial world, that were not long ago, held up as an example of corporate excellence and success, to the rest of the world, has saddened and angered the American public no end.

The massive infusion of capital by the American Government, that caused a lot of heart burning, and resentment, among the American tax payers, has somewhat stabilized the Banking system.   However, the very fact, that the Government had to intervene, to save the Banks,that were until recently considered invincible, has led to diminishing public confidence in these institutions.   And expert opinion is divided about the propriety of infusing public money into failing Banks, that should be allowed to die a natural death and replaced by more robust organizations.

As a matter of fact, perhaps, for the first time, there is a serious debate on the chances of survival of Capitalism itself!   The American public is unable to comprehend, how such venerable institutions, that made them proud of being American, could fall like nine pins.  

Though official announcements on the state of the American economy are cautiously optimistic, practically, the American Government has decided to take no chances, when it comes to the Financial Institutions, and their ability to lend, even in the worst case scenario.   As a matter of fact, no one is really sure when the good times would return, and one could, perhaps, go back to one’s bad old ways!

The crisis has left the American financial system badly shaken, and unable to perform to its peak capability, further adding to the all-round deterioration in the financial system.   Public sentiment is so badly affected, that Banks are unable to find equity partners, even at throwaway prices, for once prized stocks.

It is to address this situation, that the American Government decided to initiate the Supervisory Capital Assessment Progam.

                                                                                             To be concluded.

American Banks are stressed-Part I

Introduction:  The U.S. Federal Reserve, alongwith other supervisory authorities recently carried out what are called as “stress tests” on nineteen of the top American Financial Institutions, that are said to hold upto two thirds of the assets, and one half of the loans held by the American banking system.

What are these stress tests about?   Why these tests?   What is the purpose behind these tests?   What does the American Government hope to achieve with these tests?   In a series of articles on this subject, we shall study these issues, one by one.

Background:  The present economic crisis, triggered, in good part, by Bank failures, has smashed the myth  of the invincible American Banking Behemoth.

In order to address this realilty, and to take suitable steps, not only to revive the industry, but to prevent the crisis from recurring, the American Government initiated several steps.   The stress tests for the American Banking industry is one such initiative.

Who is being tested:  The stress tests are restricted to the nineteen largest financial institutions in the U.S., with an asset base of USD 100.00 billion each.   These nineteen institutions form the core of the U.S. financial industry, and their health is a reliable indicator of America’s financial health.   The American Government decided that these nineteen institutions are too important and critical to America’s well-being, and hence cannot be allowed to fail.   These institutions are expected to be all-weather warriors, able to keep fighting fit, till the end, and come out victorious.

Why the tests:  The stress tests are said to be designed to identify Banks, among the nineteen tested, that might need further infusions of capital, to withstand further economic downturn.   What the Fed Reserve wants to know is, if these nineteen biggies of the American Banking Industry have enough cash reserves, to address their current needs, as well as in the worst case scenario, where there would be further loan defaults, coupled with economic contraction.

The Fed Reserve is looking for clear cut and satisfactory answers to this key question.   Perhaps, it does not want to be misled by the industry “experts” and “specialists”, about the health of the U.S. Banks, and wants to make sure of it.

Another important purpose of these tests is to restore dwindling public confidence, in the American banking industry, on account of the failure of some of the largest names in American banking.   The apparent ease with which these giants fell by the wayside, in the current crisis, is something the tax paying public is unable to comprehend.   And the sight of the American Banks greedily lapping up the billions of tax payers’ dollars, to reward themselves with bonuses and other benefits has truly shattered the confidence of the American public.

The American Government, sensing the public mood, has acted swiftly to address the various issues dogging the American Banks, especially in relation to the current crisis, and to initiate corrective action to save them.

                                                                                      To be concluded.

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