Image via Wikipedia1.1 INTRODUCTION
In ordinary years, universal banking has grown in popularity in Indonesia. Bank Mandiri, for example, has taken the strategy to become a universal bank in Indonesia, the bank has also started to build an integrated financial system risk in terms of sound financial performance and enhance shareholder value. In Germany, and the most developed countries in Europe, universal banks have started operations since the nineteenth century. There is evidence that in these countries, universal banks have taken a significant portion of the loyal sector development and financial systems. In these countries, the growing number of universal banking practice is really supported by the central bank regulations.
Although, in the United States, they are tight to set the universal banks with commercial banks blocking of spicy on securities and stock market practices. They argue that the practice of universal banking may be cruel to the financial system. ((Boyd et.al, 1998) cited in Cheang, 2004) "risk" may be the main reason why the U.S. central bank is worried about the universal banking system. Because, if the central bank allows banks to adjust their operations to become a universal bank, the relationship between, banks, financial and stock markets will be closer. Consequently, this will give the uncertainty to the condition and performance of the bank. For example, if there is trouble in the stock market, banks will have problems in their financial position. As such, they will likely go bankrupt.
Besides a universal bank would also threaten the market allotment of other special institutions, because more customers will complete universal banks that offer more options for their investment. Therefore, more specialized institutions will likely be destroyed in the U.S. financial industry.
One major factor, which triggers the bank to become a universal bank, is to increase profits by increasing the fraction of their market. According to João AC Santos Bank (1998) of the universal itself can be defined as financial institutions, which enlarge the range of services in terms of offering a variety of financial products and services in one place of residence. So, with universal banking operations, banks can gain greater opportunities to expand into other locations of financial, such as financial securities, insurance, hedge funds and other
Despite the recent trend of banks tends to a universal bank, is no doubt that the law universal banks will also face further risk for a variety of financial services is strongly associated with increased risk and cost of monitoring increases. This is the main concern why banks should implement a more technological approach in terms of financial risk management. In addition, the practice of universal banks that would cause the risk of differentiated payment system for the economy. Since, the operation of universal banks is closely connected with the financial and stock markets are highly fluctuating in the short term.
To get in the fierce competition among financial institutions, banks must change their maneuvers to lead in the market. Universal banks can be a wise choice for a bank manager, because they can attract more customers with various services. Furthermore, by changing their operations to a universal banking system, banks will take advantage of the efficiencies and economies of scale.
In order to understand the practice of universal banking, this paper will demand things that are not regularly associated with the risks and benefits of universal banking. In addition, this paper will also focus the impact of all these institutions into the financial system and economy as a whole.
BENEFITS AND COSTS OF BANKING IN UNIVERSAL 1.2: IMPLICATIONS FOR THE INDIVIDUAL BANK
Common dilemmas related to financial intermediation, including universal banks and other types of banks, is about asymmetric information. This is a major pickle that causes costs to increase and affect the performance of financial institutions. At Universal banks, the problems will increase slightly different from the special banks, they are similar in that they must overcome the confusion of the risks associated with their financial sites. Although, in a universal bank, a greater risk for a variety of financial instruments which they organized. Therefore, banks should increase their spending on monitoring costs are more complicated than specialized institutions or banks in tatters.
The possibility of more victims respond to why banks to increased risk and turn it into a universal banking operations is that they want to compete and expand their market fractions, in order to seek greater profit opportunities to serve more choices to their customers. Many banks have experienced huge performance after they changed their operations, the main concern is that they can come better than the economies of scale that can cut the amount of expenditure in operating costs and also greater opportunities to save more profits. The findings of research conducted by the vendor, R. (2002, cited in Cheang, 2004) on the efficiency of income on financial conglomerates and the level of both the benefits and costs of universal banking, it has been proved that both financial conglomerates and universal banking fun getting some performance indicators of bank profitability. His findings also showed that the continued expansion of financial conglomerates and universal banking practices that can improve efficiency in the financial system.
This conception is strengthened by other experts, such as: George Rich and Christian Walter (1993). They put that universal banks are the benefits of a posse of special institutions, which could take advantage of the reduction in average costs of production and scope in banking. It is necessary for banks that operate at international level and in order to meet customer needs with a variety of financial services. They also mention a classic example of how universal banks in some countries, such as: Switzerland, Germany and European countries more have experienced the benefits of universal banking operations. In addition, they are also the location of the panic if a universal bank that would threaten the special institution has not been proven. In Switzerland and Germany, for example, specialized agencies can do a better improvement in terms of working with large banks. Universal banks is one of the potential market channels that can sell their products directly to customers, so that the specialized agencies also save an additional return due to an increase in the number of universal banks. Therefore, this proves that universal banks are not the threat of other institutions, in fact, they help the specialized agencies to market their products.
According to Fohlin, universal banking will lead to concentration of banks because it increases the number of branches. Based on the experience of Germany, such as branched-based expansion has led to efficiency in banking because it can increase economies of scale in advertising and marketing, and launching a major opportunity to increase diversification and stability to the banks.
A universal bank that has a modern location to cope with asymmetric information. As stated by Joao AC Santos (1998), that universal banks have a potential benefit in reducing agency costs and profit because of the advantages of information. Although on the other hand, universal banks also face problems related to costs, conflicts of interest and the safety and health. However, default risk, which generally occurs in financial intermediation, will decrease substantially because universal banks are easier to control their customers. Most of the universal bank lenders on their customers, so they can understand about the capacity of the information that their customers back.
Nicholas Cheang (2004) also shows how universal banks could carve out an important dilemma in financial institutions, asymmetric information. He argued that they could maintain their relationship with borrowers conclude, by collecting more relevant information to form a decision that is required for investment. Wonderful position they are also very necessary to optimize the distribution of the allocation of funds, because the bank was known where the investment that will provide more margin to them. So, they do not need too much attention concerns about the risks.
1.3 UNIVERSAL BANK AND STABILITY IN THE FINANCIAL SYSTEM
Financial institutions play a major role in the mobilization of funds in the economy. As a result, the stability of financial systems is absolutely necessary to manage by the government to prevent the wider implications for the sector reliably. Financial disaster that occurred in most countries in Asia in 1997 is a classic example of how to regulate the interests of the banks to restore the economy.
As a financial supermarket, which handles a variety of financial instruments, they have to face a greater risk than specialized institutions. As a consequence, these agencies must be monitored to prevent more implications for the economy. According to Benston (1994), which increases the risk of universal banking giants will cause scratches because it can cause pain in the financial system requires. Therefore, it would greatly increase the risk to the economy of the payment system. In other areas the length, and Strioh Rime (2001) who asked the financial system in Switzerland where universal banking is becoming more important in this country, that the misfortune in the monitoring of universal banks that big is a big power. This is the reason why universal banks should exercise more money in the cost of monitoring and manufacture of advanced systems in information technology. In other words, it can be said that the consequences of inefficient monitoring can lead to financial instability. (Cheang, 2004)
A wider range of universal banks in the financial system to channel funds from banks to customers is greater than the specialized agencies. So, the economy will be better because universal banks will help more funds. It can be seen by the fact that a practice of universal banks in Germany has sparked several advances from the company's performance in this country. (Stiglitz, 1985). It is understood that when the allocation of funds can be distributed widely and effectively to potential employers, the economy will improve. In this context, universal banks have played a key institution that mobilizes funds to potential lenders.
Edwards (1996), also have proved that the universal bank does not bias contributed significantly to the economy from external funds they provide, but also from the increased flow of information. (Quoted in Cheang, 2004) Therefore, this proves that universal banks have played a major role in reducing the risk of default by providing important information about the creditors or customers. In addition, the security of the financial system will be enhanced by the existence of universal banks.
1.4 CONCLUSION
The development of universal banks should be in line with the policy direction the central bank, because it is necessary to withstand the financial system and economy as a whole. There are three important areas that must be considered related to the operation of universal banks, such as: strengthening capital and sophisticated risk management systems. Consequently, to manage universal banks, one should realize about the original of this type of risk in universal banking. In addition, policy makers also have to believe about the implications of universal banks in the financial system.
