Over the last two decades many developing countries have liberalized their financial system with the aim of improvement in the financial development and economic growth. While many countries enjoyed economic growth, some of them experienced rapid credit growth and some experienced financial (banking) crises. As a result, some attribute banking crises mainly to financial liberalization ( Kaminsky & Reinhart, 1999), while others include other macroeconomic variables such as exchange rate regimes. A greater part of the empirical literature focused on the impact of financial liberalization and exchange rate regimes on the likelihood of banking crises, however the literature, to the best of my knowledge, has ignored the impact of exchange rate regime on financial liberalization. The next section of the paper presents a critical analysis of one theoretical paper and two empirical studies of the causes of banking crises. The prospect topic for dissertation is discussed in Section III. II. Critical Analysis 1. Amri,P.D., Prabha,A. and Wihlborg, C. 2014. What Makes High Credit Growth Harmful? Leverage, financial regulation and supervision, and banking crises. The literature has identified credit expansions to the private sector as an important predictor of banking crises. Amri et al (2014) in their paper investigate the role of the private sector in triggering financial instability. Most financial crises were preceded by credit booms (eg. the Asian crisis in 1997-98 experienced rapid credit growth). However, the authors point out that only the minority of all credit booms are followed by a subsequent banking crises. They argue that high credit growth is more crises prone if the financial system is characterized by fragility and distorti... ... middle of paper ... ...s Angkinand & Willet (2011) attempt to investigate the impact of the exchange rate polices on the likelihood of banking crises. However, there is no empirical study attempts to investigate the two linkages together (financial liberalization and exchange rate policies) on banking crises. My main focus is to combine and extend the work of Angkinand et al. (2010) and Angkinand & Willet (2011) studying the impact of the different exchange rate policies on financial liberalization on the likelihood of banking crises in developing countries. I would conduct the study only on developing countries because they experience more banking problems than developed countries. For example, banks own larger share of the total financial assets in developing countries than advanced countries and regulatory and supervisory systems are less sophisticated in developing countries.
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
A report compiled by the U.S Financial Crises Inquiry Commission shows that the infamous global crises could have been avoided. It pointed out that failure in different financial institutions including the Federal Reserve accelerated the crises. Lehman brothers; one of the three largest investments banks in the United States has been cited in the financial crises in 2007. The bank went bankrupt and it had to be sold in September 2008 (Currie, 2010). The other two banks Morgan Stanley and Goldman Sachs had to become commercial banks where more regulation was done. The collapse of large and significant financial institutions like the Lehman Brothers propagated the economic crises. Investors withdrew over $150 billion from the money funds in the USA in two days after the collapse of the Lehman Brothers. This caused the money markets to get unstable thereby nee...
This was the first global financial crisis since the Great Depression of the 1930s; it spread at an un-parallel rate across the world (Claessens et al, 2013). In the aftermath of the Great Depression it was universally believed by economists that the unregulated financial markets were to blame as they were fundamentally unstable, subject to manipulation by bankers, and capable of triggering deep economic crises and political and social unrest (Crotty, 2009). These are the same issues that occurred following the aftermath of the financial crisis 2007. It can be argued that the current crisis is the latest stage in a series of financial boom and bust cycles, in which there is a shift from light to tight financial market regulations. The global financial crisis (GFC) is seen as the deepest post-World War II recession (Blankenburg & Palma, 2009) with the United States being the epicenter of the crisis due to the housing bubble burst and sub-prime mortgages (McKibbin & Stoeckel, 2010). This essay will be focusing on the housing bubble, sub-prime mortgages, and the interconnectedness of the global banking system, the lack of transparency and regulation within the finance industry as the main causes for the GFC.
Under global background, capital flows are frequent and capital cost always is relatively low in developed countries, so lots of banks in undeveloped countries seek capital support from developed countries. For example, in 2016, China’s Postal Savings Bank raised $7bn from global market and the majority capitals come from developed market, because the bank has taken large capital for promoting international expansion and has been accepted by foreign investors. With international expansion, China’s Postal Savings Bank can make a great success of foreign financing, so the bank can obtain cheap capital for supporting business development. One main motivation for international expansion is regulatory avoidance and banks hope to avoid the strict domestic regulation for developing in foreign countries. Houston et al (2012) argue that the regulatory difference, especially the requirement of capital reserve, largely promotes the international development of commercial banks, to avoid the high capital adequacy
The recent Global Financial Crisis (GFC) initially began with the collapse of credits and financial markets, which caused by the sub-prime mortgage crisis in the US in 2007. The sub-prime mortgages were given to high-risk lenders (with bad credit history) who were in danger of defaulting, which eventually caused a global credit crunch, where the banks were unwilling to lend to each other. In October 2008, the collapse of the major financial institutions and the crash of stock markets marked the peak of this global economic slowdown (Euromonitor International, 2008).
A financial crisis can be described as a specific situation in which a company, business or production firm loses the value of its assets rapidly and enormously leading to low cost of the assets. In addition, during a financial crisis the value of financial institutions also becomes relatively low in such a way that they cannot efficiently carry out their financial roles within an economy. As a result, financial crisis is usually concomitant to a panic or a run on the available banks so as to salvage the few assets that might not be affected by the financial crisis. Moreover, in an event of a financial crisis, the supply of money often overwhelms the demand thus creating a huge deficit in the money market.
Banking is a heavily regulated industry that is very protected to prevent crises that can cause huge economic harm. One topic that has been greatly debated in the history of financial systems is whether competition is good or bad for financial stability. It is complex and hard to know which side is right. Pretty much everyone with an opinion at least concedes that there are good points for both sides. All the arguments run both ways, and the evidence is mixed. History can show evidence that both sides of the argument are true. It is easy to see an example where a country had X banks and Y crises and assume causation but it is rarely that simple. Other countries’ experiences can show exact opposite results. The key is to find the right balance. There is a very wide range of possibilities concerning the relationship between competition and financial stability. For a long time it was common thinking that, competition made the financial system less stable. Therefore, regulators have restrained competition in many countries. The Great Depression caused the end of most standard competition policies in banking in order to promote fiscal stability. It was successful but smothered development and forced a burden on the customers. This caused a correction towards deregulation, which added more competition but low stability and many crises (Beck, 2010) The recent financial crises reopened the debate. There are many other factors that can affect the financial stability, such as funding structure, institutional and regulatory environments, regulatory framework in which banks operate and which sets their risk taking incentives, and probably others not even realized yet. A big factor many people look at is the willingness of risk taken by owners...
Shleifer, A., & Vishny, R. W. (2009). Unstable banking. Journal of Financial Economics, 97, 306-318.
Prasad, Eswar S., et al. “Effects of Financial Globalization on Developing Countries: Some Empirical Evidence.” The National Bureau of Economic Research. National Bureau of Economic Research, 2003. Web. 10 Dec. 2013. .
Velde,D.K (2008). The global financial crisis and developing countries. Available at: http://www.odi.org.uk/resources/download/2462.pdf (Accessed: 5th August 2010).
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
International banking is now a days becoming backbone of any economy. It plays a vital role in the development of financial system of country. International banking activities has been grown-up speedily due to increased international trade flows and foreign direct investment activities, the globalization of capital markets, and the liberalization of domestic financial markets since 1960s. International banking activities may involve cross-border activities and activities of banks outside their home country (i.e. foreign banks). Banking has gradually become more globalized, which leads towards advances in communications and technology, economic integration. Especially, foreign bank entry has increased sharply in the last few decades, which helped different nations in the development of their financial system. Foreign banks also helped the economies in financial crisis to deal with it and also helped in the establishment and restructuring of their financial system after that crisis.
Furthermore, the ‘openness’ and ‘interconnectedness’ of markets due to globalization increases the vulnerability of countries to externalities, particularly international economic conditions like financial crises. Before the dominant presence of globalization, financial crises in any one particular country posed little risk to those of others, according to Forbes. Unfortunately, due to international markets that lend and trade resulting from globalization, this is no longer the case. The health of a country’s financial system is now very much dependent on the health of another countries’ banking systems and vice versa.
Warwick J. McKibbin, and Andrew Stoeckel. “The Global Financial Crisis: Causes and Consequences.” Lowy Institute for International Policy 2.09 (2009): 1. PDF file.
The banking system worldwide has faced many transformations in last few decades. There is a range of changes from banking regulation, advancement in banking information technology, development of economies, opening and collaboration of global financial institutions and financial markets. Though, all these changes and advancements in the global banking system created opportunities, the challenges are also enhanced and competitiveness exerting pressure on the global banking system. In this report we’ll determine the different aspects of banking globalization and its effects on local as well as global economy.