New Trend In International Banking

CASE STUDY – NEW TREND IN INTERNATIONAL BANKING

The Zedmo (Asia) Pacific Bank was incorporated in Taiwan on the 7th December 1970.
The lead promoter of the bank, Mr. Philip Zem decided to recruit one of his relatives, Mr.
Sim Lin, who by profession is one of the most respected bankers of his generation. Mr.
Lin graduated from one of the local Universities with a BSc (Hons) in Mathematics &
Physics. After a short work experience with the Best Union Bank (BUB), he went to
USA to complete a Masters’ Degree in Banking & Finance. Mr. Lin is a very ambitious
young man, and constantly told his colleagues that he will not get married at a young age,
because some wife can be very dominant. He does not want to be bossed by the wife. He
wants to maintain a high-profile and lavish life style until he reaches the age of 34. On his
return in Taiwan, he was approached by a number of local and foreign banks to work for
them as their Deputy General Manager of Operations.

After quite a while without a job because he wanted to be choosy, the President and CEO,
Mr. Philip Zem approached him with a very lucrative salary package for him to work for
Zedmo (Asia) Pacific Bank. He was told that as part of the deal, he should work in this
position for a period of 5 years, then he will be promoted to the Vice-President of
Finance, and in the next 5 years again, he will be promoted as the CEO under the
leadership of Mr. Zem.

The bank started its operations with a capital injection of US$10 million, and as at 31st
December 2005, the capital base has reached US$350 million. According to one financial
analyst for the banking sector, the bank should grow at a more rapid pace. The progress is
not as expected by the market because Mr. Zem is a very old-fashioned and conservative
banker, who worked for one of the local banks until 1968. Whenever, there is such a
comment coming from the capital market, Mr. Zem seems to take exception and get
unnecessarily upset. He would normally quote “Slowly but surely” of what one is doing
rather than taking a faster lane, and in the end, gets caught up with various problems.

This is a business philosophy that he used to tell Mr. Lin that he has learnt a lot out of the
University of Life. Mr. Zem never had the opportunity to go the University after his
secondary school. His family could not afford the University fees, and he had no option
but to join Best Union Bank as a messenger and worked his way through the ladder. After

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his normal working hours, Mr. Zem used to teach himself accounts and maths so that he
can progress further in life.

Zedmo (Asia) Pacific Bank employed 150 employees including the management staff.
Every month, they would have their management meeting and Mr. Zem would suggest to
other members of the Board of Directors that the bank is doing very well with their
manual accounting system. Every night at least 25 employees including Mr. Lin would
stay behind to complete the day’s work manually. The bank had to pay huge overtime to
the employees and provide them with transport. Mr. Zem would boast his success that
luckily he has one of his relatives to supervise the “after-office-hours” job. One evening,
there was a power failure at the bank’s premises, and the job could not be completed as
planned.
The next morning, Mr. Zem came to know about this problem. He called in Mr. Lin, who
is practically in-charge of the bank’s operations to get a definitive explanation.
Meanwhile, customers of the bank were coming to the bank to withdraw monies right-
left-and centre. Mr. Lin recognized that the problem was going to aggravate that he told
Mr. Zem to change his old-fashioned business practice. He shouted to Mr. Zem saying
that” I have told you on a number of occasions that this bank will fail unless, we
modernize its operations”. Our competitors are conducting all their transactions
electronically. Why can’t we do the same? We need to invest more in Information
Technology rather than paying more overtime. The bank is going to collapse unless we
change this administrative practice. The staff is getting really tired of this manual system,
which gives a reasonable accuracy of the transactions.

Meanwhile, news started to spread in the City that Zedmo (Asia) Pacific Bank is facing
some serious administrative problems with its accounts. The External Auditors were
called in to help minimize the damage that the accounts should be reconciled to the last
dollar. Mr. Chen, who was the Auditing partner of Lem Chu Associates, came in a rush
and told Mr. Zem that he had noticed that this system cannot carry out to function in this
modern setting. He stated that he was getting really worried, when last year’s audit was
not completed on time as a result of missing information from the customers’ accounts.

Unknown to the Board of Directors, the Regulatory Agency had issued a warning to Mr.
Zem concerning the bank’s liquidity and capital adequacy requirement. Mr. Zem never
disclosed this piece of information to the rest of the directors, and nor to the management

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team. While assisting the management to put the accounts up to date, the Auditors found
out that there is a sum of US$5 million missing from one of the customers’ account. This
matter was brought to the attention of Mr. Zem, who claimed that the bank should keep
quiet and the money will be refunded to the client without much publicity.

Mr. Lin was so upset that he decided to take one day off duty. He told Mr. Zem that he
has lost control over the operations of the bank. It is high time that he consult other
members of the Board of Directors that he should retire. Mr. Zem was very adamant that
he told Mr. Lin to leave his office because he wants to be the boss of the bank. One of the
corporate customers phoned the bank to find out what has happened, he was told by the
front-office staff that it is “none of his business” and Mr. Zem is still in control.

The competitors of Zedmo (Asia) Pacific Bank came to know about the news and one of
them decided to “launch” a hostile bid to takeover the operations of Zedmo (Asia) Pacific
Bank. Mr. Zem decided to make a news announcement on the Taiwanese media that the
bank is still solvent and those new financial services products will be made available as
soon as they have sorted out the accounts.

Mr. Clifford Smith a foreigner working for the Regulatory Agency came to the bank to
meet with the Board of Directors so that a decision can be made to save the
embarrassment and the bank from collapse. Mr. Smith was a very vocal person and told
Mr. Zem that Information Technology in banking is now one of the key drivers. Mr. Zem
replied that you are talking in terms of “machines”, when we survive without computers
for a long time. Mr. Smith further argued that the bank has not been able to meet its
capital adequacy ration under the Basel I Accord for quite sometimes. The authorities are
now very concerned that the New Basel II, will shortly become the norm for all banks to
comply with. Mr. Zem replied that “the bank operated long enough without having to
under the Basel Accord”. He also stated that I do not need this gentleman (meaning Basel
II) to come on my banking premises. I will get the security guards to throw him out of the
banking hall.

The Finance Director of Zedmo (Asia) Pacific Bank pointed out during the meeting that
Mr. Zem was obsessed in turning the bank into a “one-stop financial services boutique”
and when asked what he is going to offer, he said, we will keep the same level of services

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and charge the customers more for the bank’s services. Mr. Zem was quite embarrassed
to hear the Finance Director’s argument and told him to resign immediately because he is
in control whatever happened to the bank.

Mr. Lin has sent an email to Mr. Zem to tender his resignation because he is of the
opinion that the bank will not be able to recover from the operational risk. An inter-bank
borrowing from Sin-Son Bank for the amount of US$65 million is coming close to
maturity. The Chairman of the Sin-Son Bank, Miss. Cheong is a very serious banker and
has given Zedmo (Asia) Pacific Bank a delay of one day, failing, which if the amount is
not paid in full, there will be a court case.

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Question Time

1. What is the main problem with Zedmo (Asia) Pacific Bank?

2. Do you think that Mr. Zem’s behaviour is acceptable in today’s banking era?
3. What are the risks that Zedmo (Asia) Pacific Bank under the Chairmanship of Mr.
Zem?
4. What are the auditors’ roles in this scenario?
5. Is there any thing that the competitors can do to save Zedmo (Asia) Pacific Bank
from collapse?
6. Is Mr. Lin’s action warranted?
7. What about the position of the Regulatory Agency – is acceptable the way they
have dealt with the situation?
8. What do you think the Board of Directors should do?
9. Is there any recourse, which the Board of Directors can take against the external
Auditors?
10. Do you share the view that Mr. Zem can save the bank’s operations through the
establishment of a “one-stop financial services boutique?”
11. Where the Board of Directors collectively responsible for this problem?
12. Are you of the opinion that the bank must switch from a manual accounting
system to a computer-based accounting system?

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Answers

Q 1.

The problem of Zedmo (Asia) Pacific Bank has been due to lack of innovation, and
preparedness to follow new trend and development in a modern banking environment.

Mr. Zem’s belief is that what had worked for the last 36 years of the bank’s existence will
continue even in the 21st Century.

There has been a very poor professional judgment by Mr. Zem.

Q. 2
Mr. Zem’s behaviour is certainly unacceptable because he has been behaving like an
autocratic leader not to allow the bank to change and adapt to new commercial
environment.

Mr. Zem is a resistant to change to new banking practices – which is dangerous for the
bank.

Q. 3
Under the Chairmanship of Mr. Zem the bank face a multitude of risks like:
(a) operational risk (e.g. collapse of the accounting system)
(b) technological risk
(c) financial risk
(d) reputation risk

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Q. 4
The External Auditors does not have much to contribute with the exception that they have
done their duties professionally and to highlight any administrative deficiencies. It is up
to the Board of Directors (responsible for Corporate Governance) should take necessary
actions to remedy any problem.

If the Auditors had known the problem and had kept quiet without alerting the Board of
Directors, they can be considered as an accomplice to such problem. They will be
considered negligence and liable for the professional negligence.

Q .5
The competitors can join forces together to analyze the magnitude of the problem of
Zedmo (Asia) Pacific Bank and take necessary administrative actions to either purchase
the bank in whole or in part or restructure the whole operations.

This strategy can be done with the help of the Regulatory Agency so as to avoid a
systemic risk in the banking system.

Q. 6

In real life, Mr. Lin has no choice, but to resign in order to save his reputation, otherwise,
his reputation is also tarnished with the Zedmo (Asia) Pacific Bank.

The financial market will have no confidence in his professional reputation. He may not
get another job within the banking sector.

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Q. 7

Regrettably, the Regulatory Agency did not perform its function in accordance with the
local and international standards to follow and monitor the progress of each and every
bank operating in Taiwan.

They have been acting very passively in their role to protect and ensure a safe and sound
banking system at all time prevails.

They are equally guilty with Mr. Zem to create a moral and financial hazard in the
banking system. The Supervisor responsible to deal with Zedmo (Asia) Pacific Bank
should resign from his job with immediate effect.

Q. 8

The Board of Directors should appoint an independent consultant to sort out the problem
and then resign from their position respectively.

Otherwise, the bank will have great difficulty to continue to operate with the same
directors.

Confidence is already lost.

Q. 9

The Board of Directors does not have any right of recourse to the External Auditors
because this is an internal matter between Mr. Zem and the bank.

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Q.10

Mr. Zem is a confused man and does not have any idea what he wants to do. Without
additional services being provided by the bank, he has already mis-managed the
operations. To enlarge the products/services portfolio would mean more problem for the
bank to handle under his leadership.

Q 11.

The stewardship of the bank rests the entire responsibility of the Board of Directors
jointly. They should be made to answer to all the stakeholders as to why they bank had
reached such a position.

Q. 12
In this day and age, all banks have a computerized accounting system. It is considered as
one of the key drivers in a bank’s resources. Any bank that uses manual accounting
system runs the risk of a system collapse and it is nor appropriate to do so.

Customers are now more sophisticated and demand up to date information about their
accounts and services that will help them be more business like.

Mr. Zem has allowed the bank’s operations to outgrown its operating systems – hence
such a disaster.