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


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