The three major factors influencing the `Financial Sector' in the
last decade are: Globalization, IT and Telecommunications, and
Convergence. Globalization facilitated the flow of funds across different
markets. In the financial sense, globalization implied the capability of
investing in a jurisdiction, getting the benefits of such investments in the
form of interest/dividends/capital appreciation and exiting from the
investment any time. In other words, unrestricted entry and exit for funds
were suggested.
IT and telecommunications facilitated faster transfer of funds
between locations, and between customers and institutions. It also facilitated
record keeping and paperless transactions. The third factor created what
are called `universal banks', which provided a one stop shop for different
financial products like fixed deposits, mutual fund schemes, pensions,
insurance, etc.
Post-meltdown, in the global financial system, questions are
being asked about the usefulness of convergence, since many entities lost
heavily in activities which were not germane to their original task, like AIG in
derivative products, when its main area of activity is insurance.
But still there is a clamor in terms of size, particularly in banking
institutions, since it is felt that a bigger balance sheet facilitates in
conducting activities in different sectors and jurisdictions. Also, muscle power
is larger with a larger balance sheet, since it helps in taking faster
decisions on large sized exposures. Even the largest Indian banks are
considered to be relatively small in relation to banks in Europe or the US.
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