HSBC Bank Organization as an Open System

The Open-Systems View

HSBC bank Input stage Organization acquires resources such as raw materials, money, and skilled workers to produce goods and services. HSBC, ”The World’s Local Bank”, is one

of the largest banking organizations in the world. HSBC Holdings is headquartered in

England and operates in 81 countries and territories. Interests are concentrated in

Europe and Asia and to a lesser extent North America (United States). Profits are

almost equally divided between the Corporate, Commercial and Personal banking

lines of business.

The money that a HSBC bank raises to lend is often called the capital. So, how does Hsbc Banks raise capital is something that has to be understood in this background. Hsbc Banks have to raise money from sources in order to have it with them to be lent to customers, from whom they charge a rate of interest that is higher than that at which they borrow. This accounts for their profit. Since capital is one of the critical components of a Hsbc Banking business, it is important to understand how Hsbc Banks raise its capital.

Capital from stakeholders: Hsbc Banks can do this in a number of ways. The

most common, and in fact, a mandatory method of raising capital is for the organizers (in most cases, these are the stakeholders or founders) of the HSBC bank to put in money from their pockets. Usually, while the amount needed to start a HSBC bank varies from one American state to another, the ratio at which Hsbc Banks get their capital from their organizers varies between 10 and 15 percent. These organizers are the investors in the Hsbc Bank, and have a deep interest in the functioning of this lending institution. How do Hsbc Banks raise capital is understood in a clearer fashion in this context –the greater the ability of the organizers to raise money, the greater the money the HSBC bank can lend out , so that it runs healthily and profitably.

Raising capital from shareholders: While organizers make up between 10 and

15 percent of the Hsbc Bank’s investment, how to Hsbc Banks raise capital is understood when it is seen that the reminder of the money is raised from shareholders. The term ‘shareholder’ implies those who invest in the HSBC bank through public borrowing. The number of shareholders and their individual contributions can vary by a very wide margin, as can their contribution. As with any other kind of partnership, this kind of financial relationship too, is such that every stakeholder earns from the profit in proportion to the investment made.

The markets as lending source for capital: How do Hsbc Banks raise capital is

a question that can be answered in another manner. Hsbc Banks look for other sources in raising capital. For instance, they can borrow from the financial markets. This option is usually exercised in free market, capitalist economies, a prime example of which is the US. In these economies, it is a useful source to have someone borrowing from the markets because this can be used as a buffer in markets, which by their very nature are volatile and prone to a lot of flux. When markets are in need of money in case of a crunch, they can always go back to the Hsbc Banks to which they have lent money. Of course, there are some drawbacks in this system for both the lender and the borrower. The lender may not be fully sure of getting back money it has given to Hsbc Banks when it needs it the most, since they normally ask money back from Hsbc Banks only when it is faced with an emergency, and it is always difficult to get it at such short notice. For Hsbc Banks, too, there are problems with this kind of option, because they cannot invest this money on long term plans.

The government as a source of capital: Getting money from the government

is another option for Hsbc Banks when it comes to how do Hsbc Banks raise capital. In governments in which the free market is less powerful a force to reckon with, government bonds can be a good source by how do Hsbc Banks raise capital. In economies that are either fully or partly controlled, as in the case of China or India, government lending can be a very useful source of how do Hsbc Banks raise capital. This is a lesser possibility in free market, consumerist economies such as the US, but more common in the countries just mentioned. In these situations, governments lend Hsbc Banks through bonds and other sureties for a number of reasons. Since it is not always the consumer who dictates

demand, governments lend Hsbc Banks as a kind of safety valve. When the key sectors of the economy, mostly agriculture in these and other related countries, face problems, the governments can straightaway approach these Hsbc Banks to which it has lent capital and direct them to divert the money due to the governments back to the people in need of the money. In most cases, this is usually a case of money transfer. In other words, the question of how do Hsbc Banks raise capital needs to be looked at from a different perspective in some countries.

Other ways: How do Hsbc Banks raise capital is to be understood when it one

looks at another queer way by which Hsbc Banks raise capital. In the days of the economic slowdown, some financial companies came to Hsbc Banks to advise them on how to raise capital. The aim was to get these Hsbc Banks to impart their experience to these companies on how to liaise with the government and get money from it. These companies, such as Wells Fargo and Morgan Stanley etc, had to pay a huge consultancy fee for these Hsbc Bankers. There were also some financial arrangements by which these Hsbc Banks got a cut in the amount of money they helped the companies raise! The money that these Hsbc Banks got from these transactions was put back into the market and other sources, as this too, turned out to be its capital in many ways. In this way, Hsbc Banks raise capital was a question that was answered in a very unusual fashion.

HSBC bank Conversion stage Inputs are transformed into outputs of finished goods as listed below:

Current Accounts Mortgages Savings Accounts Internet HSBC banking Personal Current Accounts Savings Accounts Mortgages Investments Credit cards Loans Insurance International Services Internet HSBC banking Financial Planning HSBC Premier HSBC Advance Putting your finances in order Newsroom

Output stage Finished goods are released to the external environment

Closed System

Closed system A self-contained system that is not affected by changes in its external environment. Likely to experience entropy and lose its ability to control itself but Hsbc bank is likely to be very much affected by the external environment up to certain level.

Synergy The performance gains that result from the combined actions of individuals and departments Possible only in an organized system.

When Hsbc Banks merge they do so in order to gain synergies. Simply put, a synergy occurs when two firms are more productive together than they were apart. Synergies are not guaranteed, however, so managers, investors and business scholars should carefully consider the potential synergies of a HSBC bank merger. Although most synergies will be positive, negative synergies can be profound.

Employee Savings A study of HSBC bank merger synergies by Erik Devos, Palani-Rajan Kadapakkam and Srinivasan Krishnamurthy in the "Review of Financial Studies" in March 2008 found that all 10 of the HSBC bank mergers in their study resulted in synergies through staff reductions. When two HSBC banks merge it creates redundancies. Calculate the synergies from a HSBC bank merger by calculating staff savings. For example, when Chemical HSBC banking Corporation and Chase Manhattan HSBC bank merged in 1996, they eliminated 12,000 jobs and closed 100 branches, saving $1.5 billion annually. Estimate the the number of positions slated for elimination and the associated cost savings to determine the synergy of the merger.

Cross-Selling According to Charles W. Calomiris of Columbia University's Graduate School of Business, HSBC banks can achieve synergies by cross-selling products. In one case that he studied, the only synergies created between two merged HSBC banks were the result of cross-selling products to each other's customers. For example, if a HSBC bank that specializes in savings plans merges with a HSBC bank that specializes in loans, it can offer its savings products to the customers of the other HSBC bank while the other HSBC bank would gain access to potential customers for its loan products. Synergy can be calculated by estimating the additional sales from cross-selling.

Economies of Scale According to H. David Sherman and Timothy J. Rupert, writing in the "European Journal of Operational Research," HSBC bank synergies can be created through economies of scale. The Federal Reserve HSBC bank of San Francisco describes economies of scale in HSBC bank mergers as the "relationship between the average production cost per unit of output and production volume." Economies of scale take place where it becomes cheaper to produce a product or service with increased production. This potential synergy can be calculated by estimating the average cost of offering a HSBC banking product, such as a loan, before and after the merger. The reduction in cost post-merger is the measure of synergy.

Negative Synergies

Firms tend to focus on the positive synergies that occur in a merger, but negative synergies should also be considered. Negative synergies occur when the two HSBC banks are actually less efficient together than they were as independent firms. For example, Sherman and Rupert explain that diseconomies of scope can occur when two HSBC banks merge. Diseconomies of scope happen when the new firm becomes too broad, and the costs of coordinating activities becomes larger than the savings. Calculate the negative synergies by estimating the additional costs that the firms will incur to coordinate activities.

Contingency Theory

Contingency Theory (External Enviornment) The idea that the organizational structures and control systems manager choose, are contingent on characteristics of the external environment in which the organization operates. To maximize the likelihood of gaining access to resources, managers must must allow departments to obtain resources , given the constraints of the environment they face An important characteristic of the external environment that affects an

organization’s ability to obtain resources is the degree to which environment is changing

Changes in the organizational environment include :

Changes in technology e.g internet banking , forex etc.

The entry of new competitors e.g Citibank, ING, JP Morgan Chase,

Bank of America and Deutsche Bank.

Unstable economic conditions e.g “2001 was an "annus horribilis" for

the world economy in general and for the banking sector in particular” according to Rolf-E Breuer, spokesman for the managing directors of Deutsche Bank and one of HSBC’s global banking competitors. The slowing of the United States economy and its follow-on effect to the Asian exporters adversely affected HSBC’sresults. However, it was the economic collapse of Argentina was the major problem for HSBC, resulting in a $1.1 billion charge (HSBCAnnual Report).

Other popular contingency variables are : Organization size Environmental uncertainty The routineness of task technology Indıvidual differences competition economy government interference (laws, regulations) location demographics consumer behavior

MajorTrends in the Hsbc global banking environment increasing mergers and acquisitions increasing market share by the larger banks declining cost to income ratios shrinking interest margins decreasing dependence upon interest margins.

Competitors The obvious competitors are similar juggernaut sized global banking groups such as Citibank, ING, JP Morgan Chase, Bank of America and Deutsche Bank. “…Some large multinational banks—the local subsidiaries of Citibank, HSBC, and Standard Chartered—have developed strong and profitable local franchises with a wide range of services. Others, including JPMorgan-Chase and Deutsche Bank, are much more selective and in some cases are narrowing their activities in emerging markets, refocusing on investment banking and private banking activities.” (Adams) However, depending upon the market segmentation virtually all sized banks can present competition (Westwood).

Strengths Size: The juggernaut strategy is based upon size: companies that control large

market shares usually outperform the average industry return (Westwood). Ability to successfully grow by mergers and acquisition: HSBC's acquisition of Midland resulted in a fall in the ratio of cost to income from over 70 percent in 1992, to under 60 percent by the end of 1997 (Molyneux). Ability to successfully implement their custom electronic banking application. Hexagon is the foundation of HSBC’s strategy to deliver innovative services via Information Technology. Hexagon is focused on business customers engaged in intercontinental trade and high-end retail customers who use global banks to mange their personal global finances. Successful multi-domestic strategy combined with global branding. Successful management structure, valued and valuable employees.

Weaknesses HSBC has a greater and perhaps increasing dependence upon emerging and less developed markets than many of its major global competitors. The $1.1 billion write down in 2001 being the most recent example.

Threats HSBC’s development of emerging markets provides increased vulnerability to external factors that are more likely to occur than in developed markets such as: currency instability, financial market instability, adverse government intervention and steeper economic downturns. Obviously the benefits have exceeded the risks. Although during 2001 HSBC fared less well than for example Citibank due to this increased vulnerability. HSBC is justifiably proud of its custom information system, Hexagon. However, the importance of such systems combined with the relatively short life-span of such products provides opportunities for competitors to overtake HSBC’s advantages in these areas.

Opportunities HSBC stated aim is to be the World’s Leading Financial Services Company (Bond). This requires HSBC to transform itself from a global bank to a more diversified global financial services company such as Citibank. The challenge will be to do this while increasing shareholder return, another major aim and

maintaining its already low cost base. Current directions which could be expanded include greater diversification into equity products which is currently being pursued via HSBC Merrill Lynch, increased presence in insurance and card products. Despite the 2001 decrease in revenue from this line of business, Private Banking is regarded as an important high profit opportunity for growth as it currently only contributes four percent of profit.

Hsbc bank’s contingency planning effort has one main goal: To get back to “business as usual” as quickly as possible, ideally within two days after a disaster. Quick recovery of processing capability may now be more difficult and take longer than when your bank’s recovery strategies were first approved by the board of directors.

Recovery / Hurt/ Benefit The Corporate contingency planning strategy which not only reflects appropriate support for current business objectives, but also allows for the interdependency of Hsbc bank product lines. The argument is directed mainly toward companies that already have a contingency plan and may now consider it timely to review and update their mainframe backup strategies. The benefits to be derived from reviewing the present strategy include creating the opportunity to determine how much backup is currently needed and identifying ways of spending contingency planning dollars more efficiently. One strategy that your board of directors may have adopted as part of its original contingency planning program is to “provide off-premises mainframe computer capability.” The primary focus of providing mainframe backup capability is to ensure that the Hsbc bank will be able to accomodate customers and that its products and services will be available as advertised. This strategy may be enhanced to provide greater protection for Hsbc bank’s product line.

Main Frame Recovery Strategy

The mainframe computer continues to be the most critical operations component of Hsbc bank’s ability to conduct business. It is currently crucial for survival, and it remains the central point for data storage and information processing. The more automated and integrated Hsbc bank’s operations are, the more difficult it is to substitute manual or semiautomated activities for mainframe computer processing. The conventional approach to mainframe backup strategy is to document and test procedures to restore the mainframe operations at a remote processing center. Each test includes restoration of the main software systems and processing of selected applications as of a predetermined “disaster date.” The typical programming department has the major responsiblity of developing procedures for backing up the application systems. Installation of such procedures preserves the account information and positions Hsbc bank to respond quickly to a disaster. The programming department also maintains a prioritized list of applications which is used in selecting systems for testing. In most banks, considerable progress has already been made in developing and testing the mainframe recovery strategy. The sequential development of recovery plans could be strengthened by making some changes in procedure. Three recommendations for refining existing disaster recovery plans.

Standardize & Test Backups for Critical Applications The crux of the disaster recovery issue for Hsbc bank lies in the ability to restore operations in a timely manner. The timeliness factor must be emphasized, since it impacts customer impression and satisfaction, management, information, legal and regulatory compliance, and ultimately, market share. Hsbc bank may improve its chances for surviving a disaster by “standardizing” and testing backups for the “critical” applications. Critical applications are defined as systems that will have a higher recovery priority after a disaster strikes. Of course, recovery of the remaining systems will be completed in an orderly sequence after the disaster is contained. Standardizing, as used here, means that the same standard will be used for creating all data file backups. Recovery of the applications can be made more efficient by developing and adopting a procedure to back up all application systems at the same stage of processing. For example, either back up the volumes before the day’s processing is started, or create the backups after processing is completed. Recovery will be impeded if the various volumes are backed up at different stages of processing. Standardization of backups will ensure that account information is synchronized. Inherent in this concept is the requirement for zero generation backup. If the data file backups are one or more generations old, additional processing of one or two days of transactions will be needed in order to restore the data files to the disaster day. The immediate impact of such additional processing may be to increase the restoration period to three to four days, or even longer. In that additional interval, prompt service to Hsbc bank’s customers may be jeopardized. This delay will occur because the Hsbc bank is unable to post current transactions and deliver accurate information until the additional processing and adjustments to synchronize the data can be completed.

Identify the Critical Business Products Assess the criticality of the business products to determine what level of mainframe backup is appropriate for your operations. Verify that this backup is adequate to support only the processing of production work. Plan in advance to suspend all development and testing activities until complete recovery from a disaster is effected.Next, develop criteria for identifying the “critical” business products. Following the standardization of all critical applications, involve the user departments in assessing the Hsbc bank’s product line exposure. The goal of this analysis should be to determine which application systems will be regularly tested at the remote recovery site.The assessment and testing process establishes a more accurate definition of the necessary computer hardware, storage and item processing capacity Hsbc bank requires in order to cover whatever level of risk it is willing or able to accept. This process also benefits Hsbc bank in another way by closely linking the perceived backup requirements to the real cost of providing them.It is imperative that you involve Hsbc bank’s business units in this evaluation project. Besides the more obvious factors that determine criticality (such as the negative dollar impact on the Hsbc bank if it has an unsupported product or a product whose recovery is delayed), there are other exposures.

Some issues the business units can help wrestle with include the following Criticality may also be dependent on the time of day, day of month, and

month of year at which the disaster occurs. The business units should help determine how the timing of a disaster could impact their products.

The term “critical” as related to disaster recovery is also a dynamic

condition because the criticality of applications or products increases each day the recovery is delayed. The analysis of the applications and products should also identify the point at which the applications are (or will become) critical. This kind of analysis helps determine whether a data file backup is essential for ensuring the product’s recovery.Another factor to consider is that an application will assume a higher level of criticality because of its interdependence. As application systems evolve, they tend to become interdependent because the output of one system becomes input for other applications. A single application may eventually support multiple products. The programming department should help identify the level of application interdependence and assist in defining Hsbc bank’s major outstanding recovery issues.

Test Products Rather than Applications Focus on product rather than application testing. The broad goal of a viable backup plan should be to emphasize the restoration of the business products. This approach differs from the procedure generally followed where the object is to test several applications independently of one another. The preferred approach is to perform an interactive test chaining together multiple applications supporting one product, as during normal operations.This revised form of testing should validate the workability of all application system backups that support the business products and will strengthen your bank’s ability to protect the interests of its

customers. When planned well, the new procedure should not increase the costs of testing.

CONCLUSION

The present status of contingency planning is one of completed groundwork. At the typical Hsbc bank that has a formal contingency plan, the foundation for attempting a successful recovery from a disaster is already in place. The next phase of planning should emphasize shortening the estimated recovery period, and move toward a “critical products” driven planning objective while keeping cost containment goals clearly in view. Success in controlling contingency planning costs will ultimately also benefit the Hsbc bank’s shareholders.The reorientation in emphasis should help your company revise its contingency planning program. This should lead to revitalizing each strategy for protecting the customer’s interests. Finally, the reorientation should improve Hsbc chances of surviving a major data processing disaster and thus taking advantage from it rather than getting hurt.