Business — Banking — Management — Marketing & Sales

Centralisation vs Decentralisation

Category: Strategy Implementation

A managerial choice

Each bank has its own culture and organisational choice. Depending on these elements, the head-office gives more or less autonomy to its profit centres, either branches or product lines. In terms of efficiency and dynamism, it is however usually better to give the profit centres the direct responsibility of their activity, and to stimulate them to do so.

Whatever the balance between the head-office’s responsibility of the profit centres’ one, the definition of the role of each of them has to be established, with a precise allocation of responsibility and clear reporting and communication lines.

The framework presented below represents what could be a good organisation between the head-offices and the entities. This is not the only efficient scheme, but a basis to be adapted according to each bank’s own specificity.

Responsibility of the branch in the implementation of a new strategy

A new strategy is discussed and approved at a top management level, with a strong input of the commercial manager. Then, objectives and budgets are determined and delegated. From that moment on, the prime responsibility of the commercial success of the strategy should be at the branch and profit centre level.

The branch manager is in charge of organising his (her) teams, giving them targets and incentive schemes to reach the objectives. He is has to carefully monitor the development of the activity, in order to check if the actual business is in line with the expectations. If not, the first step of any corrective action will be at that branch level too.

Role of the head-office

The head-office should have a few main functions: to ensure the consistency of the overall strategy, to determine the acceptable risk/profitability profile of the bank, to set up standards and to offer tools and expertise to the profit centres. It is also of the head-office’s responsibility to monitor the risk framework (delegation of limits and follow-up of them), and to be in charge of the entire treasury and funding issues.

In terms of support functions, the head-office will ensure that the computer systems are adequately designed for the network, and that they are consistent. The branches generally use the same standard programs, developed for them by the group systems centre. The reporting will also be a standard one, to allow an easy consolidation.

Dialogue between the head-office and the branches

This dialogue occurs on different items, mainly:

The delegation of limits, the use of these limits, special authorisations

First, this regards the credit limits, crucial for the network. The branches have specific delegations, including those related to the lending activity, within which they can work. In case of a branch wishing to go over its limits with one client, it will be discussed with the risk department of the head-office (or sometimes with a regional office responsible of a set of branches in the area) to see how the situation can be dealt with. In some cases, the branch can have a temporary authorisation.

Similarly, the report showing, on a regular basis, the use of limits will be discussed, if necessary between the head-office and the branches. The exercise is especially important once a year, when the authorisations are reviewed. The new limits can then be adjusted to take into account their effective use, and it will be to the branches to argue about their needs.

The results of the strategy

Regular reports allow the head-office to judge of the results of a new strategy, either product by product, or type of clients by type of clients, or branch by branch, or for any combination of these criteria. If the results are not on line with the expectations, discussions could occur between a manager at the head-office level (or at the regional level) and the branch manager to understand the reasons of the discrepancies and to think about possible actions.

The funding issue

This is a crucial point in many emerging countries. Normally, the funding responsibility lies only at the head-office level. It is under the centre’s responsibility to fund the group, and to manage its assets and liabilities exposure. Depending on the risk profile of the group and on the overall cost of the funds, the group will authorise certain operations, with a maximum maturity. In the same time, internal funding costs will be charged to the branches, with an indication of the extra margin to add to these costs. The extra margin is the branches’ contribution to the revenue of the banking group.

This scheme is the most efficient to ensure that the overall exposure is under control, and to assess the cost of its management. However, another pattern sometimes exists, where the branches, or a regional office, are in charge of their own funding, at least for a part of it. In that case, the branch would have to integrate the regional constraints (for instance no possibility of funding for maturities over 12 months) in its own strategy. At least, the branch should be helped by the head-office, in terms of methodology or to determine a risk profile.

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