Table of Contents

Topic: 1

Introduction: 1

Background: 1

Aim of the Research: 1

Research Objectives: 2

Research Questions: 2

Research Hypotheses: 2

Literature review: 2

The role of commercial banks: 3

Types of loans granted by commercial banks: 3

Functions of commercial banks: 4

Theoretical background and Conceptual Framework: 5

Research Methodology: 8

Research Approach: 9

Research design: 9

Data Collection: 10

Sampling Method: 10

Primary Method: 11

Secondary Method: 11

Data Analysis: 11

Validity and Reliability: 12

Ethical Consideration: 12

Gantt chart: 12

Conclusion: 14

References. 14

Topic:

The role of commercial banking in the financial world

Introduction:

Banks are one of the major players in the financial world today. One of the significant roles is played by the banks in various activities related to the financial and economic development in modern times. Thus it can be said that banks occupy one of the most significant positions in the modern economic world today. It can be referred as one of the major agencies of commerce as it is also necessary for trade and industry. The activities in trade and other commerce would slow down if the transactions in those sectors are not supported by banks. Economic growth and financial development is promoted by the banks by contributing in the capital formation in an economy. It is known that the global financial crisis have significantly affected the financial market in the world. Each and every economy has been affected by the major crisis. In this context the role of commercial bank in restoring the financial market can be discussed in this research study.

Background:

Commercial banks are the banks that provide various services to the industries and other economic activities (Alter and Sch\”uler, 2012). It plays significant role in the financial market in an economy. The role of commercial banks in the financial world needs to be addressed here.

Aim of the Research:

The main aim of the research study is to identify the role of commercial banks in the financial world in recent scenario. Here the aspect of global financial crisis can be drawn to address the role of commercial banking in the restoration of the financial world after the global financial crisis (GFC). In addition to this, the researcher also aims to assess whether the commercial banks are able to provide value-added service similar to those provided by the venture capitalists.

Research Objectives:

The main objectives of the research study are,

• To address the role of commercial banking in the financial world.
• To analyse the effectiveness of the commercial banking in restoring the financial market of an economy.
• To assess the ability of the commercial banks to hold equity holdings of firms.

Research Questions:

Some of the research questions that needs to be addressed in the research study are,

• What are the main functions that are performed by the commercial banks?
• How commercial banking can affect the financial market?
• How commercial banking can restore the financial market after a financial crisis?
• What are the abilities of commercial banks to hold equity holdings of the firms?

Research Hypotheses:

The main research hypotheses that can be formed for the research study are,

H₀: The commercial banking system plays significant role in restoring the global financial market;

H₁: The commercial banking system does not play significant role in restoring the global financial market in the world;

Literature review:

The term “Bank” can be defined in various ways. A bank can be referred as a person or a corporation which holds itself out in order to receive from the from the public, deposits payable on demand by cheque. The commercial banks on the other hand can be referred as a type of bank that can provide various services like offering basic investments, making business loans and accepting deposits etc. The commercial banks are also referred as a division of a bank that deals mostly with the loans and deposits from the large business corporations, as opposed to individual members of the public. The commercial banks are distinguishably different from the investment banks (Smith, Walter and DeLong, 2012).

The role of commercial banks:

Commercial banks are one of the significant parts of the financial system in present economic scenario. The regulatory framework of system governs the commercial banking system and that also affects the financial system of an economy. It can be said that the commercial banking is a significant part of the financial sector and thus the operations and decisions of the commercial banking affects the financial market (Machiraju, 2008). Now some of the role performed by the commercial banks can be discussed. The commercial banks engage in the following activities.

• Payment processing by means of internet banking, EFTPOS, telegraph transfer or other means.
• Lending money by instalment loans, overdraft and other means.
• Accepting money on term deposits.
• Issuing bank drafts and bank cheques.
• Providing securities underwriting commitment, performance binds, guarantees, and other forms of documentary on the off balance sheet exposure.
• Private equity financing and merchant banking.
• Cash management and treasury (Minns, 2012).
• The bonds are also underwritten by large commercial banks and they can make markets in credit-related securities, interest rates and currency (Smith, Walter and DeLong, 2012).

Types of loans granted by commercial banks:

Commercial banks basically grants to types of loans. They are secured loans and unsecured loans.

In a secured loan, some of the asset is pledged by the borrower as collateral for the loan. Afterwards the loan becomes a secured debt that is owed to the creditor who provides the loan. In any circumstances if the borrower commits any default then the asset that is given as collateral, is taken by creditor. A deficiency judgment against the borrower can be raised if the collateral does not raise enough money to pay the debt. The mortgage loan is one of the common debt instruments. At present the role of commercial banks in home financing is also increasing significantly (Bu\vCka and Bu\vCKov\’A, 2011). There have been changes in the banking laws which allow a more liberal system of mortgage acquisition than before.

On the other hand the unsecured loans are monetary loans that have no security against the assets of the borrower. The small business unsecured loans are credit lines of large corporate houses. These can be in the form of personal loans, credit card debt, corporate bonds, bank overdrafts etc. These types of loans are unsecured and thus there is a risk factor that is borne by the commercial banks (Scott-Quinn, 2012).

Now the functions of the commercial banks can be discussed.

Functions of commercial banks:

There are various functions that are basically performed by the commercial banks. The financial needs of various industries are satisfied by the commercial banks. The commercial banks can help in the field of trade, agriculture, communication and thus it can be said that the commercial banks are significant players in the financial and social domains of a country. In recent times the banks are becoming more customer-centred. The functions of the banks are basically divided into two categories. They are primary functions and secondary functions (Bu\vCka and Bu\vCKov\’A, 2011).

The primary functions of the banks are accepting various types of deposits from the public especially from the clients that include fixed deposits, recurring account deposits and savings account deposits. They also provide loans and various other forms of advances that include money at call, bill discounting, cash credit, overdraft facility etc. One of the most significant functions of commercial bank is credit creation (Bu\vCka and Bu\vCKov\’A, 2011).

There are several secondary functions that are performed by the commercial banks as well. The secondary functions of the commercial banks are divided into two categories they are agency services and general utility services. These functions are given as follows.

Agency services: There are certain agency functions that are performed by the commercial banks. They are,

• Collection and payment of various credit instruments
• Execution of standing order
• Securities purchase and sale
• Dividend collection on shares
• Income tax consultancy
•  Acting as a correspondent
• Execution of the standing orders
• Acting as executor and trustee

General Utility Services: The commercial banks also perform many general utility services for the community. These services are,

• Collection of statistics
• Issuing letter of credit
• Travellers cheque and credit cards
• Provision of Locker facility
• Acting as a referee
• Issuing gift cheques
• Merchant banking
• Accepting Bills of Exchange on Behalf of Customers

So these are the main functions that are performed by commercial banks in the financial operations of the economy.

Theoretical background and Conceptual Framework:

Around the globe, the banking institutions were considered as the primary source of funding towards the financial market. However, it is also noted that the public capital market is equally provided fund towards the financial market (Roten and Mullineaux, 2002). As a consequence, the question, which becomes obvious, is “How commercial banks do directly and indirectly affects the funding aspect in the financial market?”

Further, it is also remain questionable as, “Is it necessary that the commercial banks should involved in the financial markets not only for the lending purpose, but also for other services such as public security underwriting?”

Over the time frame there are several arguments; debates, etc. have been taken place regarding this particular aspect (Haas and Lelyveld, 2014). However, it is noted that when there has been significant public speaking on impending conflicts of interest when the commercial banks come together lending with underwriting, the scholarly literature on this particular aspect proliferates only in recent times (Xiang, 2012).

This particular segment of the study aimed to review the previous study as well as various models established to examine the connotations of commercial banks combining lending and underwriting in the financial market place.

It is noted that if the commercial banks involved in underwriting of a firm’s public securities; there are a number of benefits might arise. First of all, as mentioned by Santomero and Eckles, (2000), the information that the commercial banking institutions gather in order to proceed with their lending process seems to be much more valuable in underwriting procedures. Here, the fact is that in comparison with the investment banking segments, who do not usually obtain classified information in the course of lending activities, the commercial banking institutions have lower costs of information generation. As a consequence, unlike the investment banks, the commercial banks able to gather comparatively larger volume of information about their clients (Roten and Mullineaux, 2002).

Again, as studied by Benston (1990), Saunders and Walter (1994), the commercial banks might attain informational economies of scale by together making available the lending as well as underwriting activities and recycling the existing client precise data for a list of reasons. Thus it can be said that such an activity significantly reduce the level of transaction costs as well as the cost of intermediation. However, there is a list of study that contradicts this specific advantage. Taken for example, the studies executed by Kanatas and Qi (1998, 2003), Puri (1999), and Rajan (2002) explored the fact that there is no such confirmation that the commercial banks with such unrestricted competitions evidences powers that lead them to become efficient institutions. This indicates that still their remain confusion whether the involvement of the commercial banks in the financial markets together with lending and underwriting activities provides greater economies of scope.

Again, the study executed by Drucker and Puri (2006), aimed to explore whether the involvement of commercial banks in the financial market together with lending as well as underwriting activities are subject to conflict of interest. In order to execute this study, they assumed that as a rational investor, they should look forward to whether commercial banks or investment banks have a superior net certification effect (Sapienza, 2002). They also assumed that based on this particular decision, the investor should have to pay the price of the securities. This indicates that if the influence of conflict of interest is relatively high, then the price for the underwriting securities of the commercial banks will be lower than the price for underwriting securities of the investment banks (Roten and Mullineaux, 2002). On the other hand, if the influence of conflict of interest is relatively small, then the price for the underwriting securities of the commercial banks will be higher than the price for underwriting securities of the investment banks. The end result of this study explored the fact that the commercial banks evidenced comparative advantage in terms of higher security price than the investment bank. In other words, it can be said that the commercial banking institutions do not undergo with any kind of conflicts of interest and thus become efficient institution in terms of firm value while underwriting a firm’s public securities.

The study of Santomero and Eckles, (2000), indicates that in terms of both debt as well as equity financing, the borrowers exemplify comparatively cheaper underwriting fees when they employed their lending bank as the underwriter. It is therefore the fact that in recent time, several investment banks are started to compete with the commercial banks by developing a substantial lending units. However, in this context it is noted that the lending activities by the investment bank evidence noticeable issues.

Overall, the assessment of the past research indicates that there was a positive communication between the commercial bank’s lending as well as underwriting activities and the financial markets. However, the banks in the UK are permitted to grasp equity only in terms of reformation of the bad loans as well as in terms of venture capital investments. But no such research has been executed that point out whether the commercial banks in the UK are permitted to expand their activities to grasp equity holdings of firms or not. Thus, the researcher aims to address this particular aspect throughout this research work.

In order to do so, the researcher try to assess whether there be constructive effects from the communication between commercial banks’ equity holdings and the financial markets.  In addition to this, the researcher is also aims to assess whether the commercial banks able to provide value added services akin to those provided by the venture capitalists.

Therefore the conceptual framework of this study is looks like as follows:

Figure: Conceptual framework

Research Methodology:

The research methodology for any research study is one of the most significant parts of the entire research process. The research methodology can depict the composition and the components of the complete research approach, design, and the data collection process as well. It is very important to choose appropriate research methodology for the research as effective conclusions need to be drawn from the research study based on the methodologies. Thus suitable selection of the research methodology is necessary in order to fulfil the objectives of the research study. There can be divergence from the actual research study if appropriate methodology is not selected by the researcher. The research methodology must be aligned with the objectives of the research study. Here the main objective of the paper is to identify the role of commercial banking system in the global financial market. The influence of the commercial banking system in the international financial market needs to be addressed here. It can be done in terms of the global financial crisis that has been evident recently and the role played by the commercial banking sector to restore the global financial market in recent times.

Research Approach:

The research study can follow either deductive research or inductive research approach. The main steps of the inductive research approach are observation, data collection, and analysis and then the modelling of the theory. On the other hand in deductive research approach the main concentration is given on the existing theory evaluation with the help of the data analysis. For this research study, the inductive research approach can be considered. Here several aspects of commercial banking and international finance have been evaluated in the literature review section and hypothesis has been formed. The hypotheses have been tested by collecting and analysing the data in order to establish the role of commercial banking system on the international financial system.

Research design:

It is very important to choose the research design for a research study appropriately.  All the research questions can be addressed properly if there is an effective selection of the research design. A research design can be referred as the systematic plan to study the scientific problems and evaluate the market conditions for the development of a business in the future. The research design framework includes how the entire design will take place. The research questions, hypotheses formation, data collection and analysis methods are all the part of the research design. Thus it is very important to choose the research design appropriately. There are mainly three types of research that can be conducted. These are explanatory, descriptive and exploratory research (Sapsford and Jupp, 2006). The main aim of a descriptive research design is to focus on certain occasions and specific positions. The research design describes the population characteristics for the study as well as specific behaviour of the population or the sample. The exploratory research design seeks to examine a data set in order to understand the potential relationship between the variables. The acceptance or the rejection of the null hypotheses can be done on the basis of the outcome of the analysis. The present processes and opportunities are analysed in exploratory research in order to establish new processes and opportunities. In case of explanatory research, the explanation of the main reason behind a situation or a topic is addressed and explained by using several techniques of the research. In this case the descriptive research design and the exploratory research design can be appropriated.

Data Collection:

Now various aspects of the data collection method can be discussed here. In order to conduct effective research study, it is very important to efficiently conduct the data collection process by using appropriate measures. The conclusion needs to be drawn on the basis of the analysis of the data that has been collected. Thus it is one of the crucial parts of the research study. Now the sampling method for the research study can be conducted.

Sampling Method:

Sampling method is one of the vital methods for the collection of primary data.  In inductive research process the research problem needs to be stated first and then the data needs to be collected for drawing the conclusion. It is not always possible to collect the data of an entire population and thus sampling method needs to be implemented. The sample should be a representative part of the entire population. There can be certain degree of sampling error or standard error that is evident in case of sampling (Govaert, 2009).

In order to conduct the research study, a group of 10 commercial banks can be selected in the UK and a survey can be conducted on the banks regarding the financial operations that are performed by the banks. A questionnaire needs to be prepared for the survey and responses can be recorded and from the inference can be drawn after the analysis.

Primary Method:

Sampling method can be used for the primary data collection. When the data is directly collected from the source then that can be referred as the primary data. The primary data is directly collected from the source and thus it can be said that the primary method is one of the reliable methods of data collection. But the process is time consuming and the quality of data depends on the data collection tools and techniques and the researcher. In this case 10 banks can be selected and a questionnaire can be presented to the managers of the banks. The survey questionnaire can include both open ended and close ended questions and they can be rated by using the likert scale. A pilot study can be conducted as well to evaluate the effectiveness of the process. It is very important that all the problems are addressed by the researcher and mitigated during data collection (Sapsford and Jupp, 2006). A compete support and help from the researcher is required by the respondents for answering the questions. The questions can be based on the financial services that are provided by the banks to mitigate the crisis situations in the economy and the ability of the banks to act as investment banks in terms of equity holding.

Secondary Method:

Secondary data can be referred as the data that is collected from secondary sources. When the researcher collects existing data from other sources then those are secondary data. In order to conduct this particular research study the secondary data regarding operations and the functions of the commercial banks in terms of the financial system of the economy can be collected. The data can help in drawing inferences regarding the topic. The work of other researchers can be used as well.

Data Analysis:

It is very important that effective analytic tools are used for the data analysis. The research must utilise the chosen tools effectively in order to illustrate the research findings and then draw conclusion from the analysis. For this particular research study, the quantitative data analysis process has been selected. The research study revolves around the numeric data collected from the primary and secondary sources. The data is then analysed with the help of SPSS (Statistical Package for Social Sciences) analytical software. In order to test the model fit of the research, SEM (Structural Equation Model) can be used as well (Sarantakos, 2007). The role of commercial banks in international financial market is the main researched topic. Here the role of the commercial banks in restoring the financial market and their ability for holding equity like investment banks need to be addressed here. The results of the quantitative analysis can represent the main findings from the research study. The hypotheses can be tested on the basis of the findings.

Validity and Reliability:

It is known that in there can be issues faced in terms of the validity and the reliability of the data collection and analysis process. The researcher must use valid and reliable sources for the collection of the data. This can ensure the validity and the reliability of the data analysis process as well.

Ethical Consideration:

There are various ethical issues that that can be faced while collecting and analysing the data. Thus it is the responsibility of the researcher that the ethical considerations are taken into account while conducting the study. It is very important that the confidentiality is maintained in terms of the response given by the respondents. The candidates must not be coerced into taking the survey. They must provide written consent of the participating in the research study. Candidates must be informed of the entire research process, their role in the study and why the research is being conducted. Thus these are the main ethical consideration that needs to be conducted.

Gantt chart:

Conclusion:

In conclusion it can be said that there has been large amount of research that has been conducted on the implications of allowing the commercial banks in expanding their operations beyond the traditional operations. The role of commercial banks and the influence of the commercial banks in the international financial market have been addressed here. It is one of the matters of debate whether the operations of commercial banks should be extended or not as there can be conflicts of interest and thus it is very important to identify how the commercial banking system can influence the financial market in an economy. It can be said that in present economic scenario, the role of commercial banks are increasing significantly. There are also various risks in the securities and other financial market due to fluctuations in various factors in the global financial market. It also leads to global crisis in various economies on a worldwide basis. Thus the government needs to implement effective measures to limit the negative impact of such phenomena. The commercial banks also play significant roles in this context. In the research paper the role of commercial banks in the financial market is thus explored and researched.

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