Santander Is in the Global Banking Industry. Essay

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Santander is in the global banking industry. Based in Spain, Santander has operations in Europe and Latin America primarily. The current conditions for the banking industry in Europe are challenging, on account of a number of different factors. The euro crisis is perhaps the biggest issue facing the banking industry in Europe, and all European banks are exposed. Santander's exposure is thought to be relatively low as the company is well-capitalized, but some of the solutions to the problem that have been proposed would apply to all European banks, reducing the profitability of Santander if it were to face a situation where it had to increase its capitalization (AFP, 2011).

Beyond the euro crisis, the banking industry is facing a number of other challenges as well. Economic growth, particularly in Europe, is sluggish. This has the affect of reducing loan demand, creating an uncertain earnings environment (Putnis, Stimpson & Marais, 2011). Lastly, and of significant concern for Santander, is Basel III. This is a new set of regulations that has been introduced by the Bank of International Settlements in order to enforce greater stability on the banking industry. One of the most important aspects of Basel III is that banks will need to maintain more common equity on their balance sheets. This new regulatory burden is seen by some as decreasing the profitability of banks (The Economist, 2011).

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To deal with the new regulatory burden, European banks have had to retrench. For its part, Santander has sold off subsidiaries in Latin America, but with new capital requirements most banks in Europe have had to find sources of capital in order to strengthen their balance sheets.

An additional characteristic of the current market is a high intensity of competition. This occurs at all three levels -- retail, commercial and investment. Banks compete aggressively for business, and generally need to emphasize both service and price in trying to attract business. As banks earn their money on the spread between the rates at which they acquire capital and the rates they get for lending that money out again, and competition reduces those spreads, the industry can be challenging from a profitability standpoint, and banks forced to utilize a high-volume low-profit business model bolstered by strong service capabilities.

Thus, the current market conditions are challenging on a number of fronts. The regulatory environment is having a negative impact on the industry. The economic environment is also difficult, given low levels of demand for loans and especially given the euro crisis. Even if Santander has a relatively low level of exposure to the euro, the bank is still going to face negative outcomes if the euro slides further or if it is broken up altogether.

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