Class 1

Introduction to Comparative Banking & Global Banking Landscape

Reference: Heffernan, M. (2005). Modern Banking, Chapter 1
Course: Comparative Banking (B-206)
Instructor: Md. Johir Rayhan
Class Duration: 1.5 hours
Aligned Course Learning Outcome (CLO1): Compare the structure and regulation of
banks across UK, USA, Japan, and EU
I. Class Objectives
By the end of this session, students will be able to:
1. Understand the importance and objectives of comparing banking systems across
countries.
2. Explore the methodological approaches to comparative banking.
3. Distinguish between universal and specialized banking models.
4. Recognize the major regulatory philosophies in global banking systems.
5. Familiarize with key institutions and regulatory acts shaping modern banking.
II. Why Comparative Banking?
Comparative Banking refers to the academic and analytical process of studying,
evaluating, and contrasting banking systems across different jurisdictions. Understanding
comparative banking is critical due to the following reasons:
• Global Financial Integration: Banks operate in multiple countries. Cross-border
regulation and risk management are vital in an interconnected world.
• Crisis Prevention and Learning: The Global Financial Crisis (GFC) of 2008
exposed how interconnected and fragile financial systems are. Studying how
different systems responded helps design better policy.
• Policy Transfer and Reform: Developing countries often learn from reforms
implemented in developed economies (e.g., Basel Accords, Dodd-Frank Act: It was
designed to reduce risks in the financial system, enhance consumer protection, and
prevent future economic meltdowns). Comparative analysis supports evidence-
based reforms and innovation in local contexts.
 • Structural Diversity: Banking systems vary based on history, legal traditions,
market development and policy priorities. No one-size-fits-all approach; comparing
systems helps identify strengths, weaknesses, and best practices.

III. Methodological Approaches to Comparative Banking

1. Institutional Approach:
o Examines the ownership, size, functions, and historical development of
banks.
o Example: State-owned banks in China vs. private-sector dominance in the
US.
2. Regulatory/Supervisory Approach:
o Focuses on how countries regulate their banking systems.
o Key elements: central bank role, existence of independent regulators, scope
of supervision.
3. Functional Approach:
o Compares the roles banks play in the financial system: payment systems,
credit allocation, and financial intermediation.
4. Performance-Based Approach:
o Uses indicators such as ROA (Return on Assets), CAR (Capital Adequacy
Ratio), NPLs (Non-Performing Loans).
5. Case-Based and Crisis-Based Analysis:
o Looks at institutional and regulatory responses to crises (e.g., Japanese
banking crisis, Eurozone debt crisis).
Comparative Overview
Feature Anglo-Saxon Model Continental (Rhineland) Model
Countries UK, USA, Canada, Germany, France, Italy, Japan
Australia
Ownership Dispersed shareholders Concentrated ownership
Structure (public ownership) (family/state/banks)
Capital Markets Market-based (stock Bank-based (banks play central role)
markets dominate)
 Corporate Shareholder-centric Stakeholder-centric (includes
Control employees, creditors)
Governance Agency theory: protect Coordination theory: balance
Philosophy shareholders multiple interests
Financing Equity financing from Long-term debt from relationship
public markets banks
Accounting Rule-based (e.g. US Principle-based (e.g. German/IFRS
System GAAP) style)
Regulation Lighter, more disclosure- Heavier, more rules and institutional
oriented involvement
Bank Role Arms-length; mainly Banks often have board
lenders representation, equity ownership

IV. Global Banking Landscape: Typologies and Philosophies

A. Key Concepts in Global Banking Landscape
Concept Description
Universal A model where a single banking institution offers a wide range of
Banking financial services under one roof—commercial banking, retail
banking, investment banking, insurance, asset management, etc.
📌 Example: Deutsche Bank
✅ Pros: Economies of scale, cross-selling opportunities, customer
convenience.
Cons: Increased systemic risk, conflict of interest.
Specialized Financial institutions focus on a specific sector or service, such as
Banking mortgage lending, savings & loans, or microfinance.
📌 Example: Fannie Mae (mortgage finance), Grameen Bank
(microfinance).
✅ Pros: Deep expertise, risk specialization.
Cons: Less diversification, vulnerable to sectoral downturns.
Key Concept: Universal Banking was historically dominant in Germany, allowing a
bank like Deutsche Bank to offer retail, corporate, and investment services. In contrast,
the Glass-Steagall Act of 1933 in the United States enforced strict separation of
commercial and investment banking until its repeal in 1999 (by the Gramm-Leach-
Bliley Act).
Shadow Refers to non-bank financial intermediaries that perform traditional
Banking banking functions (like lending and credit intermediation) but operate
outside regular banking regulation. Includes hedge funds, money
market funds, finance companies, peer-to-peer lenders.
📌 Example: Lehman Brothers (pre-2008), investment funds.
 ✅ Pros: Innovation, credit expansion.
Cons: Opaque, risky, prone to liquidity crunch.
Ring-fencing A regulatory strategy to legally separate core retail banking
(deposits, payments, loans) from riskier investment banking
activities within a financial institution.
📌 Example: UK’s Vickers Report (post-2008); led to reforms under
the Financial Services (Banking Reform) Act 2013.
✅ Purpose: Protect consumer deposits, avoid taxpayer bailouts.
Challenges: Compliance complexity, reduced internal synergy.

B. Regulatory Philosophies
1. USA:
o Philosophy: Market-driven regulation, high reliance on disclosure and
competition.
o Regulatory Structure: Fragmented (Federal Reserve, FDIC, OCC, SEC).
o Key Acts:
▪ Glass-Steagall Act (1933): Separated commercial and investment
banking.
▪ Dodd-Frank Act (2010): Introduced systemic risk oversight and
stress testing post-GFC.
2. UK:
o Philosophy: Twin Peaks Model.
o Regulatory Bodies:
▪ PRA (Prudential Regulation Authority): Oversees safety and
soundness.
▪ FCA (Financial Conduct Authority): Conduct and consumer
protection.
o Central Bank: Bank of England (BoE) handles systemic risk.
3. Japan:
o Philosophy: State-led banking with relationship-based finance.
o Regulator: Financial Services Agency (FSA).
 o Post-1990s reforms focused on resolving zombie banks (A zombie bank is a
bank that cannot generate enough profit to cover its debt obligations but is
kept alive by external support—often regulatory leniency, bailouts, or low
interest rates) and encouraging consolidation.
4. EU (European Union):
o Philosophy: Supranational regulatory integration (multiple countries
agree to follow shared financial regulations, and often delegate supervisory
powers to a central authority).
o Key Institutions:
▪ European Central Bank (ECB): Supervises major Eurozone banks
via the Single Supervisory Mechanism (SSM).
▪ European Banking Authority (EBA): Harmonizes rules across EU.
V. Key Acronyms & Definitions
• GFC – Global Financial Crisis
• CAR – Capital Adequacy Ratio
• FDIC – Federal Deposit Insurance Corporation (USA)
• OCC – Office of the Comptroller of the Currency (USA)
• SEC – Securities and Exchange Commission (USA)
• BoE – Bank of England
• ECB – European Central Bank
• FCA – Financial Conduct Authority (UK)
• PRA – Prudential Regulation Authority (UK)
• SSM – Single Supervisory Mechanism (EU)
• GLB Act – Gramm-Leach-Bliley Act (1999, USA)
VI. Discussion Questions
1. Why do countries adopt different banking models and regulatory philosophies?
2. Why might a country prefer specialized banking over universal banking?
3. How did the repeal of the Glass-Steagall Act influence global banking practices?
 4. How do supranational institutions like the ECB affect national sovereignty in
banking regulation?
VII. Suggested Readings and Resources
• Heffernan, M. (2005). Modern Banking, Ch. 1
• Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
• Reports from BIS, IMF, and World Bank on comparative banking systems
• Bangladesh Bank official website (for local banking structure overview)