Strategy and Organization of Corporate Banking

Strategy and Organization of Corporate Banking

Giacomo De Laurentis (Editor) Strategy and Organization of Corporate Banking With 12 Figures and 49 Tables 4y Springer

Professor Giacomo De Laurentis Institute of Financial Markets and Institutions Bocconi University Via Sarfatti, 25 20136 Milan Italy giacomo.delaurentis@unibocconi.it This book is based on a research developed in the Center for Financial Innovation of Bocconi University (Newfin-Bocconi) and sponsored by Banksiel spa. Research and experience made by the authors at SDA Bocconi School of Management have also strongly contributed. Cataloging-in-Publication Data Library of Congress Control Number: 2004112290 ISBN 3-540-22797-0 Springer Berlin Heidelberg New York This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer-Verlag. Violations are liable for prosecution under the German Copyright Law. Springer is a part of Springer Science+Business Media springeronline.com Springer Berlin Heidelberg 2005 Printed in Germany The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Hardcover-Design: Erich Kirchner, Heidelberg SPIN 11310839 42/3130-5 4 3 2 1 0 - Printed on acid-free paper

Foreword Reinhard H. Schmidt The impressive development of the finance literature with its emphasis on asset pricing and the formal modeling of incentive systems during the past three decades, has largely relegated the business and operational aspects of banking as an industry from the agenda of academic research. Though this is understandable, it is especially regrettable in view of the dynamic developments in the banking industry which have started about a decade ago and are currently in full swing. Fortunately, there are now signs of a change to the effect that banking is back on the research agenda. The present book by Professor De Laurentis and his co-authors is a highly innovative and interesting manifestation of this reorientation. Banking is an important part of any financial system, and it is especially important in the financial systems of the countries of Continental Europe, such as Italy, France, and Germany, which have been bank-based for decades and which are, in my view, likely to remain bank-based for the foreseeable future. There are many reasons, based on empirical and theoretical considerations, to believe that strong banks are not only important for the banking industry itself, but also for the respective national economies. This situation makes it highly important to deal with the question of how banks of a given country can and do face the competitive pressures which come from the banks of other countries, from truly global banks, from "non-bank banks" and, last but not least, from the capital markets, and adapt to the new structures in the corporate world. In particular in a subfield of banking which one can call corporate banking there is a need for banks to find new and appropriate ways of meeting the demands of their clients. If they fail in this respect, they will lose these clients to their competitors. But banking is more than a part of the respective country's financial system. It is also an industry, and industries under pressure are forced to adapt to changing circumstances. It is the common ground between the fields of industrial organization, strategic management and organization which holds considerable promise to help banks in this situation. Fortunately, industrial organization and strategic management are currently developing in a way which seems to lead to a fruitful synergy. Moreover, there is now a closer relationship than there has ever been between the thinking on strategy and on organization. An established doctrine in the three overlapping

VI Reinhard H. Schmidt areas, which goes back to the seminal writings of Raymond Chandler, is that "structure follows strategy". This view suggests a linear or hierarchical relationship of what determines what. It sees strategy in the leading position and suggests an adaptation of the organizational design to strategy, and it assumes that strategy is determined by factors which are beyond the influence of individual organization and that, moreover, it is largely clear what the optimal strategies are. With due respect to Chandler and those like Oliver Williamson who have built on his foundations, one can take issue with this view. Banking is an industry in which the strategic imperatives are anything but clear, and this holds all the more with respect to banking services for business or corporate clients. Therefore, it would be a delicate matter to take bank strategy as the conceptual starting point. As an alternative and more modest view one can argue that, in order to be successful, a number of strategic options are available to large and important banks. But what ever the option may be which is finally selected - with strategy selection being a difficult issue in itself, and one which has also not received the attention which it deserves - one thing is imperative to understand: strategy and organizational design are complementary elements of a business system: there is a relationship of mutual determination. In order to be successful, any large economic institution needs to create and maintain consistency between strategy and organization as two core elements of its value-creating system. In simple words, consistency is given if the elements of a system are such that they fit together well in the sense that they mutually reinforce their respective positive effects and mitigate their negative effects. Complementarity is a relationship which has in recent years been "discovered" in a number of fields, including some which are of primary importance to the topic of the present book. These fields include strategy, as emphasized recently by Michael Porter; business systems, as elaborated extensively by Milgrom and Roberts; organizational design, as argued convincingly by Brickley, Smith and Zimmerman; and finally financial systems, as Hackethal, Tyre 11 and myself have tried to show. In all of these areas, complementarity is very important, and consistency seems to be an indispensable requirement for success. To me the present book offers ample support for this "systemic" approach and its main lesson: It may be more important whether strategy and organizational design of a bank are consistent than the choice of strategy itself. In their book, Professor De Laurentis and his co-authors take only a cautious look at the banks' choice of strategy. Though they use strategy as a point of reference, they do not regard it as the overarching determinant of

Foreword VII organization, and they take the declared strategic choices of the large Italian and European banks in their sample as given instead of arguing which strategy would seem best to them. Not surprisingly, they find a wide variety of strategic orientations in large Italian banks. Instead of on strategy, their focus is on the macro- and micro-level organization of the banks and the way in which, and the extent to which, strategies and organizational designs are consistent. As the individual chapters demonstrate in great detail and supported by their extensive empirical research, the authors come away with rather sobering results: The banks in their sample seem to agree that in general divisionalization is the right approach to accommodate corporate banking better than in the past, but disagree widely on the specific form and the extent to which lines of business are in fact separated. Even on the normative level, the optimal form and degree of divisionalization is an open issue. After all, there are certainly merits in not going too far in splitting up different functions and business areas and instead maintaining elements of a universal bank not only for the large banking groups as a whole but also on the operational level. Even for various forms and degrees of divisionalization, the authors find again and again that the individual banks which they have investigated at great length do not fully appreciate the importance of properly aligning - or creating consistency between - strategies and the way in which the bank as a whole and its subunits and its processes are organized. It is very good to have this documented in a sober academic study, even though I do not think that this critical assessment should be all that surprising. After all, the need to adjust organizations to - possibly new - strategies is a very recent challenge and the strategy-adjusted organization of banks is an area in which neither banking practice nor academic research have yet come up with convincing and general rules and recommendations. In view of this situation, one should not take it as a criticism of the banks that one can observe a great deal of experimentation in the way in which large banks in Italy and many other parts of the world reorganize their structures and processes. It is indeed a highly worthwhile academic undertaking to observe and critically but cautiously comment on these experiments. We can learn a lot from the kind of clinical studies which Professor De Laurentis has summarized in this book, and hopefully this learning will eventually make a contribution to improved business policies. Reinhard H. Schmidt Professor of International Banking Goethe-Universitat, Frankfurt, Germany Frankfurt, July 2004

Table of Contents Introduction 1 Giacomo De Laurentis 1 Theoretical Drivers of Divisionalisation 9 Ozlem Yildirim 2 Corporate Banking Strategies: Products, Markets and Channels...37 Stefano Caselli 3 Organizational Structures 63 Paola Schwizer 4 Corporate Banker's Role and Credit Risk Management 107 Giacomo De Laurentis 5 Operating Mechanisms 139 Paola Schwizer 6 Information Systems 155 Severino Meregalli 7 Conclusions 167 Giacomo De Laurentis References 183 List of Contributors 191