This study analyzes the difference of the operation model of HSBC and ICBC are operating in the UK at present, and examines the advantages and disadvantages of both separated and mixed operation for ICBC (London). Furthermore, it proposes the realistic choice of operation model for ICBC (London) under the existing Chinese financial system and the market condition of UK. This paper argues that the separated operation model of ICBC and investment banks in the short term will not change.
The internally integrated operation model in terms of mixed operation which through restructuring to concurrently operate investment bank business within the ICBC (London), should be the realistic choice. The operating advantages in terms of low risk and high efficiency of the Group Banking form will be the development orientation for ICBC (London). Chapter 1 1. Introduction 1. 1 Background to the Research November 4, 1999 the U. S. Senate and House passed the “Financial Services modernization Act” to repeal the “Glass-Steagall Act” enacted in 1933(Wen, 2009).
It ends the separated operation and separate supervision to the banking, securities and insurance, and opened a new era in the financial industry to mixed operation. Also it marks the mixed operation model occupied the dominant position in the international financial community. Under the role of market forces, the United Kingdom, Japan, Canada and other western countries have also given up the major sub-sector financial management system, and re-established the mixed financial system. The establishment of British Financial Services Authority (FSA) has been practiced for ten years.
It has shown that the implementation of mixed operation and mixed supervision of the reform is successful for UK financial industry (Ojo, 2005). The integration of commercial banking and investment banking business became the global financial industry trends (Xu, 2002). ICBC is a market leader in the China in many business areas of commercial banking. It occupies the biggest market share among the big-four state-owned commercial banks in terms of capitalization, profitability and the volumes of deposit and loan.
It operates through 16,232 outlets across China, 162 overseas subsidiaries and a global network of more than 1,504 correspondent banks as well as Internet Banking, Telephone Banking and self-service banking (www. icbc. com. cn). ICBC (London) was established in 2003, and grew dramatically on total capitalization and the scope of the business. However, under the Chinese Financial Law, it still uses the separated operation model in UK. 1. 2 Significance of the Problem The operation and supervision model of China’s financial banking are different from any of other countries’.
Recalling the journey of China’s financial business operations, in 1993, the operation model of Chinese financial industry had changed from mixed operation to separated operation. Prior to 1993, China adopted a mixed operation, and commercial banks were one of the main participants at the beginning of China’s stock market established. Banks were playing a significant role in the securities market formation process which gave the support on capital, technology, personnel and organizational management.
The main form of commercial banks to participate in the securities business was built on equity securities company wholly or securities department of trust and Investment Company. Their principal business was the issuance of corporate securities and agency trading. Because of the lack of capacity of self-regulatory and constraints, there was an accumulation of risks inherent in mixed operation. In the late 1992, as investment of real estate and securities were prevailing, numerous of credit funds through bank lending into the stock market result in leading to financial chaos.
Therefore in July 1993, there was a great effort to rectify the financial order. Banking industry and securities industry had to adopt separate operation management model. Chinese government proposed separated operation and separated supervision model for financial industry. In 1995, “Commercial Bank Law” and “Insurance Law” followed the “separated operation, separated supervision” principle to regulate the financial industry. From that point, the separated operation model continues to today.
However, due to the effects of the practice of mixed operation model by the U. S. , ICBC is trialing the mixed operation model progressively in China since 2008 (ICBC Annual Report 2009). Unfortunately, ICBC (London) is still operating as separated operation model. 1. 3 Statement of Purpose In recent years, the pace of world economic development slowed down and interest rates of countries continued generally low, result in facing a serious test of effectiveness for banks whose profitability based on the main source of loan interest rate differentials.