Hasan Dincer Ümit Hacioglu Editors Globalization of Financial Institutions A Competitive Approach to Finance and Banking Globalization of Financial Institutions Editorial Advisory Board William DiPietro, Daemen College, New York, United States Toseef Azid, University of Gloucestershire, Cheltenham, United Kingdom Yutaka Matsushita, Kanazawa Institute of Technology, Ishikawa, Japan Nicholas Apergis, University of Piraeus, Piraeus, Greece Lung-Tan Lu, Fo Guang University, Taiwan, Province of China Hiroaki Ohno, Tokyo International University, Saitama, Japan Upinder Sawhney, Panjab University, India Shibley Sadique, Rajshahi University, Bangladesh Hasan Eken, Istanbul Commerce University, Turkey Oya Aytemiz Seymen, Balıkesir University, Turkey Ekrem Tatog˘lu, Bahcesehir University, Turkey Nadir Erog˘lu, Marmara University, Turkey Rahmi Deniz Özbay, Marmara University, Turkey Hasan Dincer Ümit Hacioglu • Editors Globalization of Financial Institutions A Competitive Approach to Finance and Banking 123 at www.ssbfnet.com/ojs Editors Hasan Dincer Ümit Hacioglu Beylikduzu Campus BeykentUniversity Büyükçekmece, Istanbul Turkey ISBN 978-3-319-01124-0 ISBN 978-3-319-01125-7 (eBook) DOI 10.1007/978-3-319-01125-7 SpringerChamHeidelbergNewYorkDordrechtLondon LibraryofCongressControlNumber:2013951767 (cid:2)SpringerInternationalPublishingSwitzerland2014 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartof the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation,broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionor informationstorageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilar methodology now known or hereafter developed. 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While the advice and information in this book are believed to be true and accurate at the date of publication,neithertheauthorsnortheeditorsnorthepublishercanacceptanylegalresponsibilityfor anyerrorsoromissionsthatmaybemade.Thepublishermakesnowarranty,expressorimplied,with respecttothematerialcontainedherein. Printedonacid-freepaper SpringerispartofSpringerScience+BusinessMedia(www.springer.com) Preface The concept offinancial globalization refers to the increasing interdependence of financial markets across national economies through a significant increase in transnational movement of financial instruments, services, capital, and informa- tion. Within the globalizing world economy, a country’s financial system is attached to the globalization process of financial institutions which have been contributing to global financial integration. The latest turmoil in the global financial system has once more demonstrated that the impact of globalization is associated with risk and vulnerability. The process of globalization on financial markets relies on the economic integration across national economies; whereas, international trade, banking, and supported financial systems are the pillars of successful integration. The process of globalization on international institutions and financial systems isfacilitatedbythedisseminationofinvestmentopportunitiesandtheelimination of boundaries for capital movements. Global financial crisis demonstrated that globalization of the financial system has posed both opportunities and threats bearing some risks for advanced and emerging economies simultaneously. The subprime mortgage crisis which started in the USA affected international capital movements and portfolio investments across the globe. Financial risk in capital markets were globalized while financial stress in advanced economies spreadintoemergingeconomies.Consequently,internationalfinancialinstitutions briefly experienced liquidity issues in financial markets. The 2008–2009 financial crisis had many impacts on global economic activity within the structure of the globalized financial system. In developed and emerging economies, economic stimuluspackages,whichexceeded$7trillion,wereaimedatstabilizingtheworld economy via rescuing large industries. However, the progress of economic recovery has been stalling, which is affecting global economic activity. The main purpose of this book is to discuss the related issues of globalization and the financial system from an interdisciplinary perspective. The unique approach of this publication brings together the globalization offinancial institu- tions, innovative solutions for risk assessment, and models as well as reflective behavioral approaches simultaneously. The authors of the chaptersin thispublication have accepted inclusion oftheir respective manuscripts. This book, consisting of 19 chapters, is divided into four Parts: Globalization and Financial Crisis, International Trade and Banking, v vi Preface Financial Innovations and Regulations, and Behavioral Finance and Risk Assessment. Inthe firstpart,the contributorshave also acceptedachallengefor developing ideas for introducing the globalization process on the financial system. In the second part, the authors discussed the pertinent issues related to the effects of globalization on international trade and banking. In the third part, an innovative approach to financial competitiveness and risk management in capital markets has been developed through assessing ideas of improving service quality and implications of innovation strategies on financial institutions. Consequently, in the last part of this book, the authors formulated a unique approach by developing distinguishing solutions to behavioral issues in finance and risk management. Chapter 1 focuses on the role of state in a globalizing world economy. In this chapter, it has been aimed to assess the transformation process within the frameworkofglobalizationintermsoftheresponsibilitiesbythestateineconomy. This study, which provides a theoretical framework, discusses the roles the globalizingeconomy assigns tothestate andhow thestatechangesthegoverning andfinancingtools.Inthisstudy,theroleofthestateinthetransformationprocess has been analyzed. Chapter2focusesonfinancialglobalizationandtheeffectsofmonetarypolicy. Theaimistodiscusstheimpactofglobalizationandmonetarypolicyondifferent markets and parts of the economy. In the first part of the paper, the main instru- ments of monetary policy are explained. The question of how global factors will become an important part of domestic nations will be one of the main focuses in this part. Also, the role ofcentral banks and their policieson developed countries isanotherissuethatwillbeputforth.Inthesecondpart,themainfocuswillbeon thevolatilityoftheforeignexchangerate.Moreover,the2008financialcrisiswill beanalyzedinperspectiveofEuroareacountries.Finally,themainargumentsfor recovery from the financial crisis are another issue that will be discussed. Chapter 3 evaluates the second recession and its impact on the US Economy andGlobaleconomicactivity.Thischapteradvocatesthattheglobaleconomyhas notyetfullyrecoveredfromthefinancialcrisisofDecember2007andthatsecond recessionknownasthedoublediprecessionhasaffectedtheworldeconomy.This chapter examines the major factors responsible for the emerging trends and its impact on the US economy in particular and the global economy in general. Chapter4showstheimpactofglobalizationonSub-SaharanAfrica(SSA).This chapter also examines the connection between the process of globalization and SSA with emphasis placed on its impact on growth and poverty reduction in relation to other regions. Within a theoretical framework, the existing literatures on the implications of globalization on economic growth and poverty were reviewed. This chapter argues that SSA has not fared so well in spite of the high integration of its member countries. This chapter suggests that SSA economies should try to maximize the benefits of globalization by adopting and developing strong production bases that are predicated on value-added products, export Preface vii structures diversification, development of manufactured export capacity, and the political-will to implement these policies among others. Chapter 5 is based on the claim that there is a strong relationship between the process of globalization and the transmission of financial risk. The 2008–2009 financialcrisiswhichbeganintheUSAwasoneofthegreatesteconomiccrisisin history.Althoughthecrisisstartedin2007inadvancedeconomies,itseffectsstill linger and no one can foresee the end of crisis. This chapter aims to illustrate the linkagebetweentheglobalizingprocessofthefinancialsystemandtherootsofthe global economic crisis. This chapter evaluates the roots of the global economic crisis and illustrates that liquidity redundancy, credit defaults, securitization, the lackoftransparency;thepoorevaluationsofratingagenciesandweaksupervisory entities were some causes of the global economic recession. Chapter6developsahistoricaloverviewontheissueofpoliticalinstabilityfor Turkish banking system. This chapter discusses changes in the structure of the economy,financialsystem,andbankingsectorsincetheOttomanEmpireupuntil today’s modern Turkey. This chapter provides the reader with an overview of the political instability, financial crises experienced in the country, and what has changed in the banking sector over the past 700 years. Chapter 7 demonstrates the impact of augmented FDI on the performances of Turkish Banks. This chapter investigates the relationship between foreign investmentandbankproductivityinTurkeyfrom1992to2010byexaminingand dissecting the DEA Malmquist index scores of 17 commercial banks. Four questionsarepositedatthecenterofthisstudy:Whataretheproductivityscoresof foreigninvestedprivatecommercialbanks?HowwasitaffectedbyincreasedFDI? Did foreign investors target more productive and profitable banks to invest in? What are the most important components of productivity growth: technical pro- gress, efficiency gains, better management, or the realization of scale economies? Inthischapter,majorresultsofthisstudyinclude(i)productivityscoresofforeign invested banks are higher than domestic banks before the time offoreign invest- ment,(ii)themostsignificantfactoronthetotalfactorproductivitychange(TFPC) is the technological change (TC) and bank-specific factors are important, and finally (iii) no significant relationship found between FDI and the Malmquist components. Chapter 8 analyzes the role offinancial determinants on the bank profits in the TurkishBankingSector.Acomparativeanalysishasbeenconductedtopredictthe bank profits using Support Vector Regression (SVR) and Linear Regression (LR) models. The results illustrate that Net Interest Income After Specific Provisions / Total Operating Income, Non-Interest Income / Non-Interest Expense, Provision For Loan or Other Receivables Losses / Total Assets predictors have the most relative importance on SVR while Non-Interest Income / Non-Interest Expense, Provision For Loan or Other Receivables Losses / Total Assets predictors have it onLR. Onthe datasets containing these predictors,performancesofSVRandLR models were compared based on Root Mean Square Error (RMSE) and Mean AbsoluteError(MAE)metrics.ThefindingspresentthatSVRpredictsthelevelof bank profits better than classical LR model based on both metrics. viii Preface Chapter 9 underlines the importance of calculating Turkey’s trade potential in theOICMarketthroughtheEstimatorSelectionProcess.Thischapterarguesthat computingtheactualtradepotentialcannotonlyaccountforthedynamicchange in trade orientation of the country but also presents a guideline for policy makers andfirms.Thischapterdescribesagravitymodelestimatedbymultiplealternative estimators to assure the econometric credibility. This chapter focuses on (i) choosing the most adequate estimator possible for the case through an estimator selection process, (ii) computing the trade potential ofTurkey in the OIC market, and(iii)revealingtowhatextentthetradepotentialhasbeenactualizeduptonow. Chapter10discussestheevolutionoftheEuropeanUnionasatradebloc.This chapter shows the role of the European Union as an enormous power in world trade and argues that the huge size of its market, its experience in negotiating internationaltradeagreements,thecreationofthesinglemarketandthecreationof the single currency-Euro have turned the European Union into one of the most important trade blocs in the world. This chapter examines the historical devel- opment and evolution of the European Union as a trade bloc. First the concept of trade bloc and regional economic integration are examined. In this study, the establishment of the Single Market and European Monetary Union has been evaluated. Finally the impacts of the Euro on the Single Market, the current and future strategies for the Single Market have been discussed. Chapter11buildsontheapplicationofLeanSixSigmamethodologyindesign and improvement of financial services. This chapter builds on the insights of practitioners regarding the relationship between competitiveness and the improvement of financial services based on Lean Six Sigma methodology. This chapterunderlinesthatSixSigmaisnotonlyapplicabletomanufacturingbutalso to the services sector. With growing competition in the financial services sector, SixSigmaprinciplescanbeusedtocutcosts,increaseefficiencyandtherebyhelp companies to stay afloat in the global economy. This chapter outlines how Lean SixSigmaprinciplescanbeusedtocontinuouslyimproveserviceoperationswith special emphasis on financial institutions such as Banks, Insurance Companies, IndividualPensionSystems,BrokerageFirmsandothers.Ademonstrativecaseis also provided on how the principles can be applied in the context of a Pension Company. Chapter 12 is based on the pros and cons offinancial innovation. This chapter givesanoverviewofhowfinancialinnovationhasbeenoneofthemostinfluential factorsinshapingtoday’sfinancialsystemandtheworldeconomy.Itstartswitha brief review of financial innovative literature and addresses the determinants of financial innovation. The next section examines the current debate regarding financial innovation and concludes with a discussion for the future of these new financial products and processes. Chapter 13 addresses the impacts of information technologies on financial institutions. This chapter illustrates the tools facilitating the Exchange of goods and services between economic units and information technological systems comprising of an institutional and organizational roof, operative processes and communication networks that are important for the effective functioning of the Preface ix financial system and economy. This chapter aims to analyze the role of infor- mationtechnologyanditsimpactsontheperformanceoffinancialinstitutions.As a conclusion, in this research, it has been revealed that the primary target of financial institutions, using information technology at various levels is to ensure the most appropriate data flow within the institution by these technologies, ensuring interdepartmental information exchange and coordination, swift and cheap access to information, following up on innovations, and ensuring commu- nications with service sectors. Chapter 14 includes information about the development of the regulatory framework of securities market supervision, Post-GFC. The objective of this chapter is to analyze changes in securities market supervision and regulation by investigating the impacts of the 2008 global financial crisis (GFC) on the con- ceptual framework of securities market supervision (SMS). First, this chapter identifiesthetheoreticalframeworkoftheSMSpriortotheGFC.Nextthischapter observes some key developments of SMS post-GFC. Finally, this chapter con- cludesthatthephilosophyoftheSMShasexperiencedsubstantialevolutionpost- GFC. Accordingly, a new conceptual framework of market supervision is rec- ommended. The twin-peak model is identified as the preferred model due to a wider view of systemic risk mitigation. Chapter15explorestheimpactofglobalizationonbankguarantees.Theauthor discussesthechangingroleoftheLetterofGuaranteeinbankingindustry.Inthis chapter, it has been shown that traditional guarantees such as mortgaging or accessory guarantor could not reduce the risk in the international trade and might put the business life in danger. This chapter evaluates the effect of financial globalization on attempts for unification of the rules on bank guarantees. United Nations (UN) Convention on Independent Guarantees and Standby Letters of CreditandURGR‘‘UniformRulesregardingtheGuaranteesatRequest’’hasbeen criticized in this chapter. Chapter 16 discusses and examines the financial distress and health from a behavioral approach. The purpose of this chapter is to explore the relationship between financial distress and health and financial behaviors among families in Ankara, controlling for socioeconomic characteristics, financial discussion with parents, negative financial events, and risk tolerance. The major findings of this study illustrated significant differences in financial distress levels by socioeco- nomicfactorsandfinancialbehaviors.Inaddition,regressionanalysisshowedthat savingandself-reportedhealthstatuswassignificantlyrelatedtofinancialdistress when taking into account other factors. Chapter 17 focuses on psychological factors affecting stock prices and related theories.Theauthorofthischapterarguesthatglobalizationandthepervasiveness of Internet usage enabled investors to move their funds from market-to-market. This reality leads to a more diverse universe for investors and in order to better understand their varying rationales, it is essential to take factors influencing their decision making process into account. Behavioral finance explains some of these factorsandthischapterexaminesanddiscussessomeofthemostimportantfactors and theories affecting investor behavior in the literature. x Preface Chapter18takesacontraryviewofaboard’sinvolvementinriskmanagement practices. This chapter bridges the gap between theory and practice of risk man- agementinbanksincorporatedinSaudiArabia.Themainobjectiveofthisstudyis to investigate the risk management process by assessing the level of involvement of boards in risk management practices (RMPs). This study illustrates practical implications for boards in banks incorporated in Saudi Arabia by explaining the adoptionofcertainriskmanagementstrategies,andhelpingthemunderstandhow risk management behavior can maximize operating performance. In addition, it wouldhelpregulatorsandpolicymakerstodevelopacoherentandacceptableset of risk management tools and techniques. Chapter19 demonstrates the role of leadership and innovative strategies in the banking industry. This chapter focuses on the importance of leadership and developing competitive innovative strategies in the banking sector during the 2008–2009financialcrisis.Thischapterillustratesthelinkagebetweenleadership and developing effective competitive strategies in the financial system. The most important issue for institutions in the financial system is to achieve a competitive advantage in a turbulent environment. In this chapter, leadership and innovative strategies in banking are closely connected to the success and sustainability in a competitive environment. Therootsofthe2008–2009financialcrisisanditsreflectionsoncapitalmarkets were prior to previous studies in literature. However, the fluctuating nature of the capital markets pertaining to financial globalization has not been sufficiently connectedtobehavioralissuesinfinanceyet.Therefore,itisimportanttodevelop an innovative and behavioral approach to issues in globalization of financial institutions. In this regard, the impact of financial globalization and crisis on investors’perceptionsandinstitutionalcompetitivenesshasbeenassessedfroman interdisciplinaryperspective.Theauthorsofthesechaptersinthisbookdeveloped models for innovative solutions to issues in finance and banking by assessing criticalcasestudies.Finally,thisbookincludescolleaguesandprofessionalsfrom multicultural communities across the globe to design and implement innovative practices for the entire global society of banking and finance. Hasan Dincer Ümit Hacioglu