Surviving a Global Financial Crisis

Conquering The Coming Collapse

Conquering The Coming Collapse: is a Powerful, Real and Proven Survival Strategies When Money Turns Into Dust is a simple to take after survival reference that was made by Bill White, a creator of Survivopedia.com. In basic words, this aide gives numerous imperative survival methods that could help you and the ones you want to survive and flourish in the case of a characteristic disaster or breakdown of the financial framework. Taking after is an outline of a portion of the significant points secured inside this course and the primary things that you can hope to discover inside a fundamental rundown of things you and your friends and family will require so as to survive the turbulent beginning periods of a financial breakdown and supportive pointers on putting away adequate nourishment supplies that your kids will discover nutritious and charming. Regardless of the possibility that you choose you would prefer not to purchase it, I'm not stressed, I simply think this is something everybody needs to know. After you get the book you can even send it out to loved ones, what sort of individual helps themselves get arranged however ignores their own particular loved ones. Read more here...

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The Bank of England and Financial Stability

A central bank will always be involved in the preservation of financial stability because it will act as the lender of last resort, and or play a key role in any lifeboat rescue, injecting any liquidity needed to stabilise markets. Financial stability is also a statutory obligation of the FSA, hence a Memorandum of Understanding was deemed essential. The MOU (Appendix 5 of the 1998 Bank of England Act) is between the Treasury, the FSA and the Bank of England. These organisations are jointly responsible for financial stability, including the reduction of systemic risk and undertaking official operations to prevent contagion. A tripartite standing committee was established, consisting of the respective heads of the three organisations, and chaired by the Chancellor. Though their deputies meet on a monthly basis, additional meetings take place in the event of any problem (e.g. a threatened bank failure) which could exacerbate systemic risk.

Measuring Banking Stability

Stability is traditionally assumed if bank failures are absent. However, since bank failures are frequently resolved through assisted mergers, capital injections, and other means of support, empiricists have heavily relied upon proxies for the measurement of bank stability since data on actual failures are not readily available for countries other than the US.7 Commonly used proxies to assess bank soundness are as follows capital ratios and variations thereof (e.g., Nier and Baumann 2006, Schaeck and Cihak 2007), the interest cost on large CDs (Keeley 1990), indices constructed as weighted averages of risky assets (Shrieves and Dahl 1992), Z-scores (e.g., Mercieca et al. 2007), large swings in bank stock prices (Nier 2005), distance-to-default (e.g., Chan-Lau and Sy 2006), and the market-value capital to asset ratio (Keeley 1990).8 As in many other situations, the choice of the measurement variable involves trade-offs. Whereas the former four measures are all based upon accounting...

Assessing Financial Stability

Financial system stability in a broad sense means both the avoidance of financial institutions failing in large numbers and the avoidance of serious disruptions to the intermediation functions of the financial system payments, savings facilities, credit allocation, efforts to monitor users of funds, and risk mitigation and liquidity services. Within this broad definition, financial stability can be seen in terms of a continuum on which financial systems can be operating inside a stable corridor, near the boundary with instability, or outside the stable corridor (instability).1 Financial stability analysis is intended to help identify threats to financial system stability and to design appropriate policy responses.2 It focuses on exposures, buffers, and linkages to assess the soundness and vulnerabilities of the financial system, as well as the economic, regulatory, and institutional determinants of financial soundness and stability. It considers whether the financial sector exhibits...

The Asian Financial Crisis and the International Monetary Fund IMF

The IMF and the principal governments lent a total of 119 billion to Indonesia, Korea, and Thailand so that they could pay the interest on the existing bank loans or repay the principal. Extending new credit helped the Asian banks to avoid default, but money went to the foreign banks. International bank loans were in dollars, yen, and other hard currencies. Instead of taking large losses like the holders of currency, stocks, and bonds, the international banks collected their loans with relatively small losses. And in exchange for extending repayment, the banks collected fees for renegotiating the loans. They demanded government guarantees of the loans they made to banks, financial institutions, and private companies. Allen Metzer believes that this policy is the fourth mistake, because it may invite a larger financial crisis in the future. Asian economic growth and hurt corporate profits. These slow economic growth and low corporate profits turned ill-conceived and overleveraged...

Bank Failure Definitions

Normally, the failure of a profit-maximising firm is defined as the point of insolvency, where the company's liabilities exceed its assets, and its net worth turns negative. Unlike certain countries that default of their debt, some banks do fail and are liquidated. Recall from the discussion in Chapter 5 that the USA, with its prompt corrective action and least-cost approach, has a well-prescribed procedure in law for closing and liquidating failed banks. In other countries, notably Japan (though it is attempting to move towards a US-type approach) and some European states, relatively few insolvent banks have been closed in the post-war period, because of real or imagined concerns about the systemic aspects of bank failure. Thus, for reasons which will become apparent, most practitioners and policy makers adopt a broader definition of bank failure a bank is deemed to have ''failed'' if it is liquidated, merged with a healthy bank (or purchased and The debate among academics is...

Case Studies on Bank Failure

Bank failures, broadly defined, have occurred in virtually every country throughout history. In the 14th century the Bardi family of Florentine bankers was ruined by the failure of Edward III to meet outstanding loan obligations - the only time in history, to date, that an English government failed to honour its debts. Some failures seriously undermine the stability of the financial system (as happened, for example, in the UK in 1866 and the USA in 1933). Others do not. In some cases, state support of problem banks proves costly. For example, the taxpayers' bill for the US thrift bailout is put at around 250- 300 billion, while recent problems with the Japanese banking system has cost the taxpayer about 560 billion to date. In this section, bank failures are examined on a case by case basis, the objective being to identify the qualitative causes of bank failure. After a brief historical review, the main focus is on modern bank failures, commencing with the failure of Bankhaus Herstatt...

The Determinants of Bank Failure A Qualitative Review

The previous section reviewed the details of a large number of bank failures from around the world. These cases make it possible to make a qualitative assessment of the causes of bank failure. The list of causes as they appear below is for ease of exposition - it is rare to find a single cause for bank failure rather, there are a number of contributing factors. For example, poor management can be the source of a weak loan portfolio or sloppy supervision, and regulatory forbearance can make conditions ripe for rogue traders and fraud.

The Secondary Banking Crisis 1973

The events of the early 1990s share some features with the UK's secondary banking crisis. In the early 1970s, several small banks were rescued by the Bank of England. A number of so-called ''secondary'' banks were established in the UK in the 1960s. Unlike the mainstream banks, which relied on relatively cheap, stable retail deposits, most of the funding for the new banks came from the growing wholesale money markets, which they

The South East Asian Financial Crisis 199799 831 An Overview of General Contributing Factors

What became known as the Asian financial crisis originated in Thailand, then spread quickly to South Korea, Indonesia, Malaysia, Thailand, other Asian economies and beyond.15 The onset, speed and seriousness of the crises took experts by surprise - there were no official forecasts of a sudden downturn, let alone crisis. Spreads on Asian bonds had substantially narrowed during 1996 and for most of 1997 likewise, credit ratings remained largely unchanged. Until the onset of problems, fiscal and monetary indicators were relatively stable. While it was acknowledged in some quarters that the growth of the ''tiger'' economies could not be sustained,16 there was little reason to think a slowdown would turn into a meltdown.

Bank Failure Quantitative Models

Qualitative reviews of bank failure provide some insight into what causes a bank to fail, but these ideas need to be subjected to more rigorous testing. Any econometric model of bank failure must incorporate the basic point that insolvency is a discrete outcome at a certain point in time. The outcome is binary either the bank fails or it does not. The discussion in the previous section shows that banks (or, in Japan, almost the entire banking sector) are often bailed out by the state before they are allowed to fail. For this reason, the standard definition of failure, insolvency (negative net worth), is still extended to include all unhealthy banks which are bailed out as a result of state intervention, using any of the methods outlined in earlier sections, such as the creation of a ''bad bank'' which assumes all the troubled bank's unhealthy assets and becomes the responsibility of the state, and a merger of the remaining parts with a healthy bank. Much of the methodology employed...

Credit In Ancient Times

Twelve hundred years later, around 600 b.c., the legal history of classical Greece began with the laws of Solon. At that time, drastic reforms were necessitated by an economic crisis in Athens, stemming in part from excessive debt and widespread personal slavery for debt. In contrast to the Code of Hammurabi, the laws of Solon did away with all limits on the rate of interest. They reduced or canceled many debts. They permitted hypothecation, but they forbade personal slavery for debt. These laws endured for centuries.

Expanding global money capital

Securitization is a relatively new concept in finance, having gained acceptance only over the last 20 years. Securitized debt has grown in the issuance of new loans and covers such diverse sectors as residential mortgages, commercial real estate, corporate loans, auto loans, student loans, and so on. In 1990, just 10 of mortgages in the United States were securitized, compared to 70 in 2007. It is estimated that by the middle of 2008 there were asset-backed securities worth US 10.2 trillion in the US and US 2.3 trillion in Europe. In 2007, new issues of asset-backed securities amounted to US 3.5 trillion in the US and US 650 billion in Europe. Securitization has had a major setback due to the 2008 US economic crisis, with the issuance of new mortgage-backed securities dropping by almost 85 in the first half of 2008 compared to the same period in 2007. The 2008 subprime

Commercial and Investment banks

Securities with the exception of municipal bonds, US government bonds and private placements. Investment banks were prohibited from offering commercial banking services. The objectives of the Act were twofold, to discourage collusion among firms in the banking sector, and to prevent another financial crisis of the sort witnessed between 1930 and 1933.

The End Of The Gold Standard And Price Stability

The chronic inflation that the United States and other developed economies have experienced since World War II does not mean that the gold standard was superior to the current paper money standard. The gold standard was abandoned because of its inflexibility in the face of economic crises, particularly during the banking collapse of the 1930s. The paper money standard, if properly administered, can prevent the

Overall Framework for Stability Analysis and Assessment

The analytic framework to monitor financial stability is centered around macropruden-tial surveillance and is complemented by surveillance of financial markets, analysis of macrofinancial linkages, and surveillance of macroeconomic conditions. These four key elements play distinct roles in financial stability analysis. Assessing financial stability is a complex process. In practice, the assessment requires several iterations. For example, the effects of the financial system on macroeconomic conditions may produce feedback effects on the financial system. The profile of risks and vulnerabilities (ascertained through macroprudential surveillance) could feed into qualitative assessments of effectiveness of supervision, and those effects, in turn, might influence the analysis of vulnerabilities and overall assessment of financial stability.

The financial account group C

Up to 1995, the USA ran a huge deficit in its FDI flows, which means that Americans invested more abroad than did foreigners in the USA. The US deficit in FDI flows, however, has declined rapidly in recent years in 1997, foreigners invested more in the USA than did US residents in foreign countries. Some of this change in directions was caused by the strong economic performance of the USA during the late 1990s prospects for the US economy had been sufficiently bright for Americans and foreigners to make investment in the USA more attractive than investment elsewhere. FDI inflows into the USA have dropped since 2000, as the boom in the US economy and its stock market ended in March 2000.

Agreeing on goals as a household

If you share financial responsibilities in a household, talk about your goals together. Real financial stability grows out of a household's common efforts to reach shared goals. Have each member of the household think about his or her own financial goals, then compare and discuss them. Find out where you agree and disagree. Talk about the choices you're making now about health insurance, housing costs, spending on entertainment, the amount you're saving every month and whether you all agree that those choices are helping you reach your most important goals. Through these conversations, you'll begin to come to some agreement about priorities and spending. This may take time, but it's time well spent. No shared budget can be successful unless it is built on shared goals.

Analysis of Macrofinancial Linkages

Macrofinancial linkages focus on macroeconomic and sectoral implications of financial instability, and they derive from the many ways in which different nonfinancial sectors rely on intermediation by the financial sector to conduct their activities. Those linkages differ significantly across countries, but they are likely to include (a) the dependence of nonfinancial sectors (e.g., corporate, household, and government sector) on financing by domestic and foreign banks (b) the deposits and wealth of those sectors placed with the financial sector that would be at risk in a financial crisis (c) the role of the banking system on monetary policy transmission and (d) the financial sector's holdings of securities issued by, and loans to, the government so that problems in the financial sector could adversely affect debt sustainability. Thus, the monitoring of financial sector vulnerabilities using FSIs should be combined with an analysis of other data on macrofinancial linkages to assess the...

Effect of Financial Soundness on Macroeconomic Developments

Macrofinancial linkages also derive from residents' deposits and wealth placed with domestically owned and foreign-controlled financial institutions, which would be at risk in crises at home or abroad. The importance of this linkage depends on institutional features such as the extent to which the deposits are covered by domestic and foreign deposit insurance schemes. The linkage can be assessed using data on residents' deposit holdings, which, in principle, need to cover both (a) deposits held within the country with domestically owned banks or the local branches and subsidiaries of foreign banks and (b) deposits held abroad, either with domestic banks' branches and subsidiaries abroad or with foreign banks (in both domestic and foreign currency). Data from monetary statistics typically capture the first but miss the second (which can be substantial, especially in dollarized economies). Some information on the latter can be obtained from international investment position data and...

Is there Another Wave of American Decline

The collapse of the Soviet Union in 1991, along with the unusually strong performance of both the US economy and its stock market during the 1990s, elevated the USA to unsurpassed economic, militarily, and cultural power. However, in the early 2000s, the USA faced another wave of decline since the 1950s, a phenomenon largely triggered by its economic problems. Every single empire and great nation of history has been destroyed or has greatly diminished in world influence. Why should we assume that the USA, today's great nation, could prevail over the pattern of history If we assume for the moment American decline, the European Union or China seems likely to emerge as a great power, which might end the dominance of the USA in the game of influence on world affairs. We can base the current wave of decline on three bodies of evidence (1) mounting US budget and trade deficits (2) continuing declines in the US economy and its stock market and (3) a growing European Union's resistance to...

Effect of Financial Soundness on Growth and Financial Development

In the short run, country authorities may be faced with a tradeoff between economic growth and financial sector soundness. Fast growth can make financial markets vulnerable to shocks, constraining potential output.26 In particular, rapid credit expansion may, at times, exceed banks' capacity to assess risks, thereby leading to reduced asset quality. At the same time, credit expansions can be only a symptom of rapid financial deepening.27 In a country experiencing rapid credit growth and rapid output growth, the key is to determine whether the credit growth can be interpreted as a structural and positive development (e.g., if it follows a period of financial liberalization and bank restructuring). Even if credit growth is determined to be the result of structural developments., as has arguably been the case in some transition countries in the late 1990s and early 2000s,28 policy makers have to evaluate carefully its implications for financial stability and macroeconomic developments....

Capital Account Liberalization

Capital account controls can have a significant effect on the way that external shocks are transmitted to the domestic financial system and on how domestic financial developments affect the macro-economy. When one considers the effect of the capital account on domestic financial stability, it is important to be aware of existing capital controls, including the nature and scope of recent liberalizations and any plans to relax them.33 Experience has demonstrated that liberalizing the capital account before the home-country financial system has been adequately strengthened can contribute to serious economic problems.34 For example, studies have shown that a significant number of countries that suffered from a financial crisis have liberalized their financial systems, including their capital accounts, within the past 5 years before the crisis.35 These experiences have highlighted the importance of (a) appropriate sequencing and coordination when opening capital accounts and (b) domestic...

Dollarization Implications for Stability

Dollarization can have important implications for financial stability. A dollarized economy can be defined as one where (a) households and firms hold a fraction of their portfolio (inclusive of money balances) in foreign currency assets, (b) the private and public sector have debts denominated in foreign currency, or (c) both. Dollarization can be official when the U.S. dollar is adopted as the legal tender or partial when the local currency remains the legal tender, but transactions are allowed to be denominated in dollars, thus effectively allowing a bicurrency system to take hold. It is useful to distin guish among three generic types of dollarization that broadly match the three functions of money (a) payments dollarization (currency substitution) is the resident's use of foreign currency for transaction purposes in cash, demand deposits, or central bank reserves (b) financial dollarization (asset substitution) consists of the resident's holdings of financial assets or liabilities...

Options and option theory

Financial derivatives - and options in particular - form an important component of financial instruments. Considerable negative criticism has been directed at options and derivatives in light of the 2008 economic crisis, some of it being justified and some being off the mark. As long as there are assets and liabilities, there will be a need to protect the future value of assets, as well as of finding ways for maximizing returns on assets. Derivatives play a central role in achieving these twin objectives.

Possibilities For Reform

In the last decade, the reform of corporate governance has attracted interest in Western and Eastern Europe, Latin America, and Asia. The discussions have intensified since the Asian financial crisis, and took on the flavor of reforming the global financial architecture . To discuss any reform, it is important to start with its goals. Our analysis suggests that one objective of corporate governance reform is to protect the rights of outside investors, including both shareholders and creditors. As the evidence described in Section 3 shows, the benefits of such reform would be to expand financial markets, to facilitate external financing of new firms, to move away from concentrated ownership, to improve the efficiency of investment allocation, and to facilitate private restructuring of financial claims in a crisis.

Background The Republic

Soon after this interval of monetary ease, the civil wars of 49-31 b.c. again bankrupted Rome and led to ruinous confiscations and a return of high interest rates. Caesar removed the knights from tax collecting and from moneylending in Asia and ended their abuses. He attempted to restore credit by permitting bankruptcies at prewar prices. He introduced an issue of gold coin. Caesar personally was a daring borrower and financed an important part of his political rise on credit. Financial stability, however, was not restored until the battle of Actium, 31 b.c., and the beginning of the reign of Augustus.

Institutionalising Money

Ultimately banks ceded control of short-term interest rates (the charge made by the central bank) in return for the central bank acting as lender of last resort in emergencies (Kynaston 1994 332). Similarly the Banque de France and Banca d'ltalia developed regulations against aggressive lending by commercial banks (Braithwaite & Drahos 2000 91). The USA, in the last quarter of the 19th century, was equally marked by panics among thousands of decentralised banks. After more serious bank runs and a financial panic in 1907, when the established New York bankers were unable to bail themselves out, the US Federal Reserve System (the Fed) was founded in 1913, directed by US Congress to provide desperately needed financial stability. Even so, the new Fed could do little about 'the hundreds, then thousands' of local banks collapsing each year up to 1933 (Braithwaite & Drahos 2000 92 see also Macfarlane 1999).

An Extraordinary Time

Events came together in the 1980s and 1990s in ways that provided an unusually fertile environment for the global financial marketplace to develop.2 These consecutive decades were the only time in the twentieth century in which the United States was not at war, or in economic crisis, or just recovering from one or the other. And some special conditions did materialize during these two decades that significantly accelerated financial market developments (1) changes in economic policy initiated by governments (2) the release of market forces resulting from these changes and (3) technology developments that not only occurred simultaneously and greatly extended the effects of the other two developments but also created myriad institutional changes.

The story behind the crisis

When the financial crisis began in 2007, it came after a long, long period of borrowing in the Western world. In 1987, for example, US household debt as a percentage of gross domestic product stood at just below 60 in the UK it was just above 60 . By 2007, these figures had risen to just above and just below 100 respectively. Why did consumers in the world's developed economies take on so much debt According to economists like Martin Wolf of the Financial Times and Adair Turner, chairman of the British Financial Services Authority, it was mostly down to two things macroeconomic factors and financial innovation. In his book, Fixing Global Finance, Wolf says some (if not a lot) of the blame for all that indebtedness lies with countries in Asia and the Middle East. The risky, high-yielding investments that sparked the financial crisis were subprime mortgages. These were mortgages that were often extended to so-called 'ninjas' - people with no income, no job, and no assets. Why would...

Fourteenth Century Background

Trade, if not expanding as heretofore, was evolving its modern forms. Great commercial companies now grew rapidly. Princes cooperated with merchants to their mutual advantage. The coinage of gold spread. Modern bookkeeping methods began to develop. In spite of frequent wars between Venice and Genoa, the closing of the trade routes to the East, and bank failures, Italy retained its trade supremacy. Greater and greater concentrations of Italian capital were accumulated.

Financial Soundness Indicators

Financial soundness indicators (FSIs) are indicators of the current financial health and soundness of the financial institutions in a country, as well as of their corporate and household counterparts, and FSIs play a crucial role in financial stability assessments. FSIs include both aggregated individual institution data and indicators that are representative of the markets in which the financial institutions operate. FSIs are calculated and disseminated for use in macroprudential surveillance, which is the assessment and monitoring of the strengths and vulnerabilities of financial systems. The list of FSIs discussed herein consists mainly of aggregate balance sheet measures. This type of aggregation of individual institution-level indicators (microprudential indicators) into financial soundness indicators (macroprudential indicators) necessarily involves a loss of information because the distribution of prudential indicators of individual institutions is also a crucial dimension of...

The Case for an Asian Monetary Fund

Haque, The Asian Financial Crisis of 1997 Causes and Consequences, Multinational Business Review, Spring 2002, pp. 37 44 Youn Suk Kim, Rationale for An Asian Monetary Fund, The Journal of Korean Economy, Fall 2001, pp. 229-48 and Allen H. Metzer, Asian Problems and the IMF, The Cato Journal, Winter 1998, pp. 267-8.

Autonomy stewardship and stakeholders

This was the highest of the high ground of the new technologies, which was being occupied by the shock troops of the US economy, in the face of relatively feeble European and Asian opposition Whatever damage was being done to other areas of the US economy by the abandonment of 'retain and reinvest', something valuable was being done here by capital that was presumably available because it was not being retained and reinvested. In the next section we consider whether there has been more of a need for such mobile capital recently than in the heyday of financial commitment in the US.

Credit risk and counterparty risk

Good credit risk management has always been a key component to the success of the bank, even as banks move into other areas. However, as will become apparent in Chapter 6, the cause of the majority of bank failures can be traced back to weak loan books. For example, Franklin National Bank announced large losses on foreign exchange dealings but it also had many unsound loans. Likewise many of the ''thrift'' and commercial bank failures in the USA during the 1980s were partly caused by a mismatch in terms between assets and liabilities, and problem loans. In Japan, it was the failure of mortgage banks in 1995 that signalled major problems with the balance sheets of virtually all banks.

Ambiguous Trust In The Impersonal Market

In the wake of economic crisis and collapse, the losers are so quickly forgotten. To the financial world view, the catastrophic effects on whole countries ofspeculation on future claims are merely passing tragedies. From a democratic viewpoint, relations of money are in principle important and could be fine in moderation so long as they are restrained by democratic regulation and oversight. Caution is the key emotional term. But the 'money power' has never faced democratic control beyond the flimsy post-1945 controls on capital movements and 'fixed' exchange rates in contrast to today's uninhibited selling and buying of currencies that float on forex markets and serious prudential regulations. Yet wild as the numerous financial markets may seem, the Anglo-American financial world is not 'evil personified'. Such talk is extremely dangerous. The racist personifications and scapegoating that were so characteristic of our modern world's murky past were opportunistically resurrected by...

Whos winning in the crisis

Bonds are a kind of IOU that pay a fixed rate of interest. 2009 is proving a good year for them because in an uncertain market there have been big differences between what buyers and sellers are willing to pay (the bid offer spread). Brad Hintz, banking analyst at Sanford Bernstein, argues that banks have also benefited from the disappearance of Lehman and Bear Stearns now that there are fewer competitors, there are fewer people to give prices, and with fewer points of price comparison bid offer spreads vary more widely. Equally, foreign exchange trading has proven big business in 2009. Historically, FX was seen as a bit of a backwater in the trading world - currencies are simple products and banks didn't make much money out of trading them. However, people still wanted to buy and sell FX even in the depths of the financial crisis, and with currencies fluctuating considerably and uncertainty about the health of some large countries, exchange rates have proven a good way of betting on...

Government Debt Placement

Consider a country experiencing a number of bank failures, which, in turn, threaten the viability of the financial system. If the central bank is responsible for the maintenance of financial stability in the economy, it may decide to inject liquidity to try and stem the tide of bank failures. It does this by increasing the money supply and or reducing interest rates, so stimulating demand. The policy should reduce the number of bankruptcies (personal and corporate), thereby relieving the pressure on the banking system. However, if the central bank's efforts to shore up the banking system are prolonged, this may undermine the objective of achieving price stability. Continuous expansionary monetary policy may cause inflation if the rate of growth in the money supply exceeds the rate of growth of national output. The central bank may be faced with a conflict of interest does it concentrate on the threat to the financial system or is priority given to control of inflation The dilemma may...

Increasing and then decreasing risk tolerance

Until 1997, there were trends of lengthening maturities, thinning prices (which was reflected in spreads over benchmark funding indices), loosening covenants, extending project finance to new industries and geographical regions, and a willingness on the part of lenders and investors to assume new risks. This was partly a result of more institutional investors becoming interested, and developing expertise, in project finance. These trends reversed as a result of the worldwide ripples caused by the Asian financial crisis starting in 1997, the Russian default in 1998 and the Brazilian devaluation in 1999. Banks became less willing to commit themselves to emerging-market credits, and spreads on emerging-market bonds widened. To be financed, projects required increasing support from sponsors, multilateral agencies, export credit agencies (ECAs) and insurance companies. Since the Enron debacle, investors and lenders have reduced their tolerance for risk related to power companies with...

Assessment Methodology and Assessment Experience

Each principle is assigned criteria that are relevant for compliance with it. Two categories of criteria are used essential criteria and additional criteria. The essential criteria are those elements that should be generally present in individual countries for supervision to be considered effective. Typically, essential criteria specify certain policies and procedures that supervisors are expected to follow to comply with a core principle. The additional criteria are elements that further strengthen supervision and that all countries should strive to implement to improve financial stability and effective supervision. Additional criteria may be particularly relevant to the supervision of more sophisticated banking organizations or may be needed in instances where international business is significant or where local markets tends to be highly volatile.

The economic environment for enterprises in a new economy

Schwartz and Leyden start to compare the post-Second World War period with the situation today and with the possible future. In this 40 years, from 1940 to 1980, the US economy was flooded with an array of new technologies the development of which had been interrupted by the war effort mainframe computers, atomic energy, rockets, commercial aircraft, automobiles, and television. In addition a new integrated market was devised for half the world - the so-called free world - in part through the creation of institutions like the World Bank and the International Monetary Fund (IMF). With the technology and the enhanced system of international trade in place by the end of the 1940s, the US economy boomed through the 1950s, and the world economy joined in through the 1960s. From 1950 to 1973, the world economy grew at an average 4.9 - a rate not matched since.

Bank Insolvency Procedures Emerging Bank Fund Guidelines

A special bank insolvency regime, or suitable modifications of a general corporate insolvency regime, is needed to reflect the potential systemic effects of bank failures that call for prompt actions, effective protection of bank assets, and the key role of the banking authorities in bank insolvency proceedings. A typical immediate first step is to have an official authority assume direct managerial control of an insolvent bank (insolvent either in a regulatory sense or in a balance-sheet sense) with the goal of protecting its assets, assessing the true condition, and arranging or conducting either restructuring or liquidation. Official administration continues until the institution has been restored or placed in liquidation. The key principles governing official administration, bank restructuring, and bank liquidation are further discussed in appendix G. One of the key principles is that the authorities should choose the bank resolution option that costs the least. In particular, the...

The Rise of Government Power over Corporations

Berle and Means seem to have correctly predicted the future intervention by government in corporate matters in the 70 years that followed their seminal book. Following the market crash and the numerous bank failures in the early 1930s, the Roosevelt administration pushed through Congress an entirely new legal and regulatory regime to control corporations. The emphasis was placed on creating a federal system for protecting ordinary citizens from abuses or misconduct of powerful business and financial interests. The Banking Act of 1933 instituted deposit insurance, strengthened the regulatory powers of the Federal Reserve System, and, in its Glass-Steagall provisions, separated investment and commercial banking to prevent abuses of corporate lending being tied to mandates to issue new securities (they were reconnected by the Gramm-Leach-Bliley Act in 1999). The Securities Act of 1933 and the Securities Exchange Act of 1934 required truthful, complete disclosure of corporate information...

Relevance to Stability and Development

Sound regulation and supervision can also guard against the consequences of insurer failure for policyholders. The traditional focus of supervision on policyholder protection is increasingly giving way to broader financial stability concern as activities of insurers in financial markets expand. Failure can have catastrophic consequences for the individual policyholder, particularly because the choice of insurer may not be subject to market forces in all cases (e.g., third-party claimants) and may not be easily diversified. Some insurance contracts are not suitable for the insured party to take out contracts with several providers in the same way that many hold deposits with several institutions. The ICPs seek to protect policyholders, both as a group (by focusing on the institutional integrity of the insurance companies) and individually (by promoting good marketing practices, adequately disclosing information about contracts to customers and potential customers, and handling consumer...

The Statement Of Cash Flows

While the accrual basis accounting we use has many advantages, its major disadvantage is that it obscures vital information about what is happening with the company on a cash basis. (In this chapter, and most of the time in discussions of financial statements, the word cash refers to not just cash but short-term marketable securities as well because they can be quickly and easily converted into cash at or close to their values on the books.) Cash is the lifeblood of a business. If we do not pay attention to how much cash a company is generating and what it is doing with it, a company may seem to be doing very well on an accrual basis while it slides towards a financial crisis or even bankruptcy.

Assessment of Securities Market Regulation

Securities markets are a critical component of many economies, and the regulation of securities markets can be fundamental to a country's financial development and integration into the global market. Consequently, securities market regulation is an important element of financial stability. This section looks at the objectives and principles of securities regulation (core principles), which were developed by the International Organization of Securities Commissions (IOSCO)33 as the key global standard for securities regulation. The section briefly reviews the development of the core principles and examines the ways in which they reflect the broad responsibilities of securities regulators and the nature of IOSCO as a whole. The section then looks at the preconditions for effective securities regulation, which, though fundamental, can be both difficult to achieve and challenging to assess. The section next turns to the IOSCO methodology, which is the principal tool used to assess...

Transfer of corporate control

Gilson (1989), for the US, and Franks et al. (2001), for the UK, find that turnover is higher in firms at the onset of a financial crisis, when the firm's creditors increase their pressure on the management and seize control. Transfer of the control to creditors should then be associated with an increase in top executive turnover in the Italian sample.

How to Select a Swiss Bank

One important factor in banking in Switzerland versus the United States and many other places is that the banks are financially sound. The number-one factor in selecting a Swiss bank may be the liquidity of the bank itself, especially if you are concerned about the possibility of bank failures or a catastrophic international banking crisis, which may be possible if the derivative market blows sky high or other world events come to pass. As there is no government agency that guarantees deposits and the Swiss federal government itself guarantees only some deposits and even this could change the strength of your bank may be of greatest importance to you, especially if you're keeping your entire fortune in it. But the fear of losing your money in a Swiss bank should be minimal, because, unlike in the United States, where American depositors have witnessed the failure of hundreds and hundreds of banks in the not-so-distant past, and many more in the 1920s and 1930s during the Great...

Basel and Related Problems with the VaR Approach

The numerous problems arising from the use of VaR, many of which derive from the assumptions underlying the model, were discussed in Chapter 3. One, perhaps unjust, criticism is that VaR does not give a probability of bank failure. However, it was never meant to because it is designed to establish a capital requirement for market risk, one of many types of risk the bank faces. Due to the amount of attention it has received, there is a tendency to forget that it deals with just one aspect of a bank's risk. Nonetheless, there are other problems related to the use of the Basel VaR.

Tracking the US Dollar

If the dollar's recent decline can be attributed to the slowdown in the US economy, along with corporate governance and geopolitical uncertainties, then recent weakness in the dollar is not a matter for serious concern. As the economy rebounds, we would expect foreign investment to make a comeback, and the dollar with it. So, remember the dollar goes up, the dollar goes down. These are normal fluctuations in a well-functioning and vigorously competitive market.

Abiad.abdul.2003 Early Warning

Structural Aspects of Market Liquidity from a Financial Stability Perspective. A discussion note for a meeting of the Financial Stability Forum, Bank for International Settlements, Basel, Switzerland. Available at http www.bis.org publ cgfs_note01.pdf. -. 2005. Real Estate Indicators and Financial Stability. BIS Paper 21, Bank for Bell, J., and D. Pain. 2000. Leading Indicator Models of Banking Crises A Critical Review. Financial Stability Review (Bank of England) 9 (December) 13-29. Craig, R. Sean, and Venkataraman Sundararajan. 2004. Using Financial Soundness Indicators to Assess Risks to Financial Stability. In Challenges to Central Banking from Globalized Financial Systems, ed. Piero C. Ugolini, Andrea Schaechter, and Mark R. Stone, chapter 14. Washington, DC International Monetary Fund. Financial Stability Forum. 2000. Report of the Working Group on Offshore Centres. Basel, Switzerland Financial Stability Forum. Available at Gulde, Anne-Marie, David Hoelscher, Alain Ize,...

Financial services is a great career even now

Following the financial crisis, you could be forgiven for thinking that jobs in the sector are best avoided. Two major investment banks (Lehman and Bear Stearns) have gone under another one (Merrill Lynch) has been forced to merge. The European Central Bank is predicting a total of 649bn in writedowns across European financial institutions from the start of the crisis to its eventual end some time in 2010. Predictably, there have been big job losses. According to the Centre for Economic and Business Research (CEBR), a UK-based think tank, job cuts in the City of London alone will total 47,000 between 2006 (when employment peaked) and 2009 (its lowest point). Why, therefore, is the financial services industry still an appealing place to work

Relationship Between Disciplining And Alternative Governance Mechanisms

Few of the tasks which good corporate governance consists of, like strategy development or control, are visible to non-insiders to the corporation. Minutes of board or committee meetings or the outcome of shareholder-management meetings are not disclosed. Hence, one of the few occasions to study corporate control actions (or the lack of them) is poor corporate performance or a financial crisis. The paper studies several substitute forms of discipline and, where there is redundancy, whether some forms dominate others consistently.2 This section provides an overview of the hypotheses after which each of these are further expanded.

Inequalities Of Money Trustworthy To The Weakest Publics

Graham Ingham related the role of financial regulators to issues of newspaper context 'Every time there's a bank failure or an investment scandal, the media in particular tends to whip up an hysteria implying that regulators are there to eliminate risk, and they're not.' As he said, often the victims of investment banks' incompetence are the banks themselves, but Maxwell, for example, 'was breaking the law and that's what regulators are there to prevent' (18 March 2002).

Extreme events are not the key

We routinely run six scenarios a week the 1987 crash, the Gulf war, the 1990 junk bond crisis, the 1994 bond market shock, the Tequila Crisis Mexico's financial crisis in 1995 and last October's downturn 1997 . Or our chief economist throws in future scenarios of his own the integration of Hong Kong with China, the break-up of European monetary union, Korean unification.

IOSCO Core Principles Relevance to Stability Considerations and Structural Development

The Objectives and Principles of Securities Regulation (the IOSCO core principles) of the International Organization of Securities Commissions is the key global standard for securities market regulation. The IOSCO bylaws state that the organization's members (a) will exchange information about their experiences so they can foster the development of domestic markets, (b) will work together to establish standards and improve market surveillance of international transactions, and (c) will provide mutual assistance to promote market integrity. IOSCO adopted the core principles in September 1998, and they have been identified by the Financial Stability Forum as one of the 12 key international standards. The IOSCO core principles provide evidence of IOSCO's commitment to the establishment and maintenance of high regulatory standards for the securities industry (IOSCO 2003b, 2). Over the years, IOSCO has produced many resolutions and numerous technical reports relating to different aspects...

10 More About Futures

Margin has been much neglected in the academic literature. But a poor understanding of the subject has led to a number of famous financial disasters, most notably Metallge-sellschaft and Long-Term Capital Management. We'll discuss the details of these cases in Chapter 24, and we'll also be seeing how to model margin and how to margin hedge.

Investing Idle Cash The Money Market

Limiting maturity has two advantages for the cash manager. First, short-term securities entail little interest-rate risk. Recall that price risk due to interest-rate fluctuations increases with maturity. Very-short-term securities, therefore, have almost no interest-rate risk. Second, it is far easier to gauge financial stability over very short horizons. One need not worry as much about deterioration in financial strength over a 90-day horizon as over the 30-year life of a bond. These considerations imply that high-quality money-market securities are a safe parking spot to keep idle balances until they are converted back to cash.

Selected Issues on the Regulation and Supervision of Pension Funds

National pension systems are typically characterized as multipillar structures that are defined in many ways, depending on the purpose of analysis.6 From the perspective of analyzing financial stability and development, it is useful to distinguish between (a) state-provided pension schemes, which are a combination of a universal entitlement and an earnings related component (b) occupational pension funds, which are funded by and organized in the workplace as Defined Benefit (DB), Defined Contribution (DC), or a hybrid and (c) private savings plans, which are often tax advantaged. As a result of increasing longevity and rising dependency ratios, the funding of promised retirement benefits (in DB plans) has become a challenge in many countries. This funding challenge has led to pension reforms that reduce benefits, increase contributions (i.e., taxes to pay state pensions), redefine risk sharing between sponsors and beneficiaries, and raise retirement age. Increased funding of pension...

Managing Transaction Exposure and Economic Exposure

Avon Products, Inc. is a global manufacturer and marketer of beauty and related products. In 1996, the Asian market accounted for 16 percent of Avon's total revenues ( 4.8 billion). This case recounts how Avon minimized its currency exposure to the Asian financial crisis of 1997 8 through the use of three hedging techniques the balance-sheet hedge, leads and lags, and forward contracts.

Participation and cooperation by developing countriesemerging markets

All of the key international bodies concerned with prudential supervision have their memberships dominated by the industrialised countries, while the developing nations are normally the recipients of aid and loan packages by the IMF, World Bank, etc. However, greater participation of the emerging market countries is vital if international financial stability is to be achieved, and this is beginning to happen. For example, 13 emerging market central banks are members of the Bank for International Settlements, in contrast to its predominantly western focus at the time of its establishment. The Basel Core Principles Liaison Committee has members drawn from developing nations.

Supertraders or tradebusters

Risk managers as prime contributors to shareholder value and society at large may be a difficult concept to swallow. But it may become more credible, depending on what role these big financial institutions play in future. Will they exist mainly to cushion players in the so-called real economy from financial risk, or will their main role be to lay off such risks on investors and insurers If it is the former, then regulators are bound to be more concerned with their long-term survival if the latter, then the regulators might be content with big bank failures, as long as any wind-down or sell-off is done in orderly fashion. Either way, the risk manager will be an important point of contact for regulators, auditors and the chief executive - assuming, that is, that the risk manager is not the chief executive, which some observers believe is only a matter time.

Application The Basel Rules

Presumably, the 10-day period corresponds to the time required for corrective action by bank regulators should an institution start to run into trouble. Presumably as well, the 99 percent confidence level corresponds to a low probability of bank failure due to market risk. Even so, one occurrence every 100 periods implies a high frequency of failure. There are 52 2 26 two-week periods in one year. Thus, one failure should be expected to happen every 100 26 3.8 years, which is still much too frequent. This explains why the Basel Committee has applied a multiplier factor, k 3 to guarantee further safety.

Federal Reserve System

To promote the development of a sound economy and a reliable banking system, Congress passed, and President Woodrow Wilson signed, the Federal Reserve Act on December 23, 1913. The act was a response to the recurring bank failures and financial panics that had plagued the nation.

UK Financial Reforms in the late 20th Century

In 1986, the ''City''8 of London underwent ''Big Bang'', or a series of financial reforms to change the structure of the financial sector and encourage greater competition. The reforms gave UK banks and other financial firms opportunities to expand into new areas. At the same time, London wanted to maintain its reputation for quality, and new financial regulations were introduced, designed to ensure continued financial stability within a more competitive environment. Just over a decade later, banks and other financial sectors were subject to major changes in regulation again. One objective of this section is to explore how and why regulation changed in such a dramatic fashion.

What type of risk management framework

The finance industry, for example, has pushed the boundaries of risk management in recent years because of changes in the nature of the risks it faces and the desire for greater real time information on them. Regulators have also become more intrusive because a disruption in payment systems or a bank failure could have severe implications for the economy as a whole. The result has been heavy investment in risk

Single National Regulator

Australia employs a ''twin peaks'' model, where the Australian Prudential Regulation Authority is separate from the central bank but conduct of business is the responsibility of the Australian Securities and Investment Commission. In Italy, the Banca d'ltalia is responsible for prudential regulation and financial stability for banks and securities houses, while another body (CONSOB) deals with conduct of business issues. The Netherlands adopted a similar approach in 2002, but cross-sector activities are jointly regulated by the central bank and the insurance supervisor. In Japan, after recent reforms, the central bank shares bank supervision with the new regulator (since 2001), the Financial Services Authority the system is reviewed in section 5.5.

Thoughts for Future Research

The third theme concerns the massive expansion of the safety net as a consequence of governments bailing out large insolvent non-bank financial intermediaries, such as Bear Sterns, Fannie Mae, Freddie Mac, and AIG. While the bailouts were deemed necessary by governments in dampening the effects of the financial crisis, the enlargement of the safety net will exacerbate moral hazard behavior. Credit risk has been shifted onto governments, which may have to pay in the future a higher risk premium on their debts. Furthermore, as the financial industry consolidates into fewer and bigger institutions, future bailouts will become more costly and in some cases even beyond the means of governments' deep pockets. Institutions that are now considered too big to fail will be tomorrow too big to save.

Concentration and Competition

The empirical literature on the direct relationship between competitive conduct of financial institutions and its bearing on concentration is comparatively short. This is surprising, given that issues of competition and concentration in the banking industry are heavily debated by policy makers. Bikker (2004) underscores that concentration may impact on competition and that the increasing size of financial firms has substantial bearing on financial stability. Following an approach pursued in the industrial organization literature, he proposes that competition can be measured by the Panzar and Rosse (1987) H-Statistic. This indicator measures the sum of revenue elasticities with respect to factor input prices. In order to test the effect of concentration on competition, Bikker and Haaf (2002) regress the H-Statistic on a variety of concentration indices and the number of banks in a sample of 23 industrialized countries and find that increasing concentration significantly decreases...

Japans Big Bang 199647

Following the crash of Japan's stock market in late 1989, Japan's financial sector went into severe decline, so that by the beginning of the 21st century most Japanese banks were insolvent. In an attempt to revive the financial sector, ''Big Bang'' was announced in 1996. The programme of reforms was designed to fulfil two objectives. First, the financial sector was to be restructured, putting an end to functional segmentation. Second, to restore financial stability, the Financial Supervisory Agency and Financial Reconstruction Commission were established. The Bank of Japan was granted independence.

Concentration and Stability

Earnings and the pre-merger covariance between target and acquiring bank earnings show a negative association with bid prices, thereby underlining the hypothesis that increases in market power contribute to financial stability. Similar results for mergers of US banks are obtained by Craig and Santos (1997), who analyze post-merger profitability and post-merger risk. Focusing on thrift institutions in Texas in the 1980s, Gan (2004) presents evidence for increasing franchise values in more concentrated banking markets and a corresponding decrease in bank risk, proxied by investments in real estate and brokered deposits, both as a percentage of assets. Recent work by Beck et al. (2006) using a cross-country data set on 69 jurisdictions provides strong empirical evidence that is consistent with the 'concentration-stability' view. They report that increases in national bank concentration, measured by the 3-bank concentration ratio and by the Herfindahl-Hirschman index, do not feed into...

Not by Compensation Alone

Compensation experts we consulted all emphasized that much of what motivates people to remain with a company during the disruptive period following a merger has little to do with compensation. Roger Brossy cites studies of groups of executives. When asked to rank a dozen issues related to considering an outside job offer, pay ranked below the top ten considerations. Many other issues factored more importantly into the decision, including the quality of one's boss, job security, financial stability of the company, challenging assignments, and decision-making responsibility and authority.

Competition and Stability

Matutes and Vives (1996) argue that instabilities can arise in any kind of market structure as depositors' propensity to run is determined exogenously by their expectations in the spirit of the Diamond and Dybvig (1983) model. In contrast, Smith (1984) puts forward a theoretical exposition of how increasing competition for bank deposits gives rise to vulnerabilities in the system. Besanko and Thakor (1993) illustrate that banks decide on risky portfolio strategies when competition stiffens. Taking the design of deposit insurance schemes into consideration, Cordella and Yeyati (2002) show that risk-based deposit insurance restrains risk-taking behavior of financial institutions even in the presence of increased competition whereas fierce competition in an environment with flat-fee deposit insurance translates into higher risk in the system. Similarly, Matutes and Vives (2000) also investigate bank risk-taking behavior and deposit insurance. They additionally consider social costs...

What Are the Underlying Concepts

As highlighted in the preceding section, structural (e.g., concentration ratios) and nonstructural (e.g., Lerner, H-Statistics) measures of competition have often been used interchangeably in the literature on competition in banking. However, those studies that aim to test the effect of competition on banking stability almost exclusively rely upon structural measures of competition such as the k-bank4 concentration ratio and the Herfindahl-Hirschman index and relate proxies for banking stability to these measures (Beck et al. 2006, 2007, De Nicolo et al. 2004).

The United States more direct control than meets the eye

At the beginning of the 20th century, the US economy was dominated by family capitalism. In the large-scale capital-intensive sectors of the day, as Alfred Chandler (1990) has shown, a few US firms were taking advantage of outside, non-family capital to grow fast to optimum scale - the outside capital being supplied either directly by big banks, or through Stock Exchange issues under their sponsorship. (Others, such as Ford, managed the trick without any such dependence.) This continued into the 1920s. Meanwhile, more large firms were being formed by mergers that diluted the original family capital - as with General Motors. That was not, however, a certain route to indirect or management control. Very early in GM's history, for example, a controlling stake was acquired - and exercised -by the DuPont company, itself controlled by the du Pont family (Monks and Minow 2001). Employee shareholdings thus seem capable of working in one of two directions. Either actively or passively, they...

Measuring Stability Competition and Concentration

In this section, I discuss the variables of key interest. First, I start by defining what is meant by banking stability, also pointing out the key differences in the empirical literature between measuring stability on the bank level and on the systemic level. Second, this section also discusses and evaluates a number of alternative ways of measuring competition and concentration in banking systems. Third, I elaborate upon traditional measures of concentration, such as the k-bank concentration ratio and the Herfindahl-Hirschman index and discuss them in light of advances in the new empirical industrial organization (NEIO) literature.

International Financial Markets

Investors purchased Asia-focused funds as they switched out of fixed-income securities back into stocks, reasoning that shares in Asia will rise faster and further in front of a US recovery, as they have in the past. Another reason for a current Asian markets boom is the return of investor interest in so-called cyclical stocks, whose prices rise and fall with overall economic performance. In Asia, entire markets tend to be cyclical as they follow the ups and downs of the US economy.

Achieving a Single Market in Financial Services

68 The Sarbanes-Oxley Act was passed by Congress in July 2002, in the wake of the Enron and Worldcom financial disasters. External auditors are no longer allowed to offer consulting services (e.g. investment advice, broker dealing, information systems, etc.) to their clients. Internal auditing committees are responsible for hiring external auditors and ensuring the integrity of both internal and external audits. There are strict new corporate governance rules which apply to all employees and directors. CEOs and CFOs are required to certify the health of all quarterly and annual reports filed with the Securities and Exchange Commission. Fines and prison sentences are used to enforce the Act. For example, a CEO convicted of certifying false financial reports faces fines in the range of 1 million to 5 million and or prison terms of 10-20 years. The accounting profession is to be overseen by an independent board.

The European Central Bank

Nonetheless, these articles84 are sufficiently ambiguous to allow for the possibility that the ECB may one day undertake the joint functions of ensuring price and financial stability through some form of prudential regulation. There is an ongoing debate about whether the EMU should have a single regulator and if so, whether it would be part of or independent of the central bank. The pros and cons of a multi-function central bank were reviewed in Chapter 1 and will not be repeated here. Davis (1999) and others have identified several existing bodies which could be used to facilitate coordination and cooperation among EU supervisors, with the objective of ensuring financial stability throughout the Union. These groups are organised by function. Three organisations deal with issues related to bank regulation The Banking Supervision Committee (ECB, 1998), consists of EU central bank governors and national banking supervisors. It is concerned with matters which affect financial stability...

Avenues for Future Research and Policy Implications

The review of the literature provides numerous appealing avenues for future research. First, M&A activities in the banking industry around the world trigger the question as to what are the effects for the likelihood of observing a systemic banking crisis. While this is an issue that has received widespread attention in studies that use national measures of competition and concentration (e.g., Beck et al. 2006), the increasing number of cross-border mergers in Europe requires a pan-European perspective which could shed new light into the build up of banking system vulnerabilities across national boundaries. In that respect, it is not sufficient to only develop measures of concentration and competition that account for cross-border activities. Rather, it is pertinent to also propose measures of bank soundness that extend beyond the domestic banking system. Second, given the many different measures of concentration, competition, and stability, each one having its strengths and...

Conclusions Structure and Regulation of Banks

In the UK, self-regulation by function was replaced with a single financial supervisor. While the Bank of England gained its independence over the conduct of monetary policy, it lost its established role as prudential regulator of UK banks. Unlike Japan, no single event prompted these quite radical changes, just a view that self-regulation was not working as well as it might, and a recognition that the changing nature of financial institutions required a new approach. It is too early to judge whether these changes will improve the regulatory regime. For example, the Memorandum of Understanding between the Bank of England, the Financial Services Authority and the Treasury in the event of a financial crisis has yet to be tested. The FSA must prove that the enormous power it wields is justified and show that it can control its costs while meeting four demanding statutory objectives. However, as this book goes to press, the status quo is to depend on coordination among multiple regulators...

The Fall Of The Gold Standard

To prevent a steep loss of gold, Great Britain took the first step and abandoned the gold standard on September 20, 1931, suspending the payment of gold for sterling. Eighteen months later, on April 19, 1933, the United States also suspended the gold standard as the Depression and financial crisis worsened.

Ase P roblem 10 Dell Mercosur

At the end of 2002, Todd Pickett, CFO of Dell Mercosur, was faced with conflicting predictions of the value of the Brazilian currency, the real, and what to do to hedge Dell's operation in Brazil. Although Pickett was concerned about Dell's exposure in the other Mercosur countries, especially Argentina, Brazil was clearly the largest concern. The year 2002 began with the shocks resulting from the Argentine financial crisis that started at the end of 2001, and it ended with the election in October of Luiz Ina'cio Lula da Silva, known simply as Lula, as the president of Brazil. Lula, the leader of the Worker's Party and long-time leftist politician, had held the lead throughout the year. The markets were skeptical of Lula's potential leadership, a factor that caused the real to fall from 2.312 reals per US dollar at the end of 2001 to a record 4 reals to one US dollar at one point just prior to the election. After the election, the real began to strengthen somewhat, but Pickett had to...

O 116 Long Term Capital Flows to Developing Countries

Figure 11.5(a) shows that long-term capital flows to developing countries have declined since 1998, mainly due to the Asian financial crisis of 1997-8 and the recent slowdown of the global economy. New long-term flows totaled 261 billion in 2002, 83 billion below the peak in 1997. Sharp declines in private capital market flows in recent years - bank loans, bonds, and portfolio equity flows account for nearly all of this decline. As a result, the share of emerging markets in global capital market financing fell to 3 percent in 2002, compared to 6.4 percent in 1998 and 11 percent in 1997. Figure 11.5(b) shows that even foreign direct investment (FDI), which tends to be more resilient than capital market flows, has slowly but steadily declined since 1999.

Foreign Direct Investment

Foreign direct investment (FDI), in factories and purchase of companies overseas, rose rapidly over the last three decades, especially in the second half of the 1990s. Corporations in the rich countries were both investing overseas (outward investment) and meeting competition from overseas companies investing in their domestic markets (inward). The quantitative importance of FDI may be assessed by comparing the annual flow with the total amount of domestic investment going on in the recipient country in that year. If the inflow of FDI were to continue at a particular percentage of investment, eventually it would constitute that percentage of the accumulated capital stock. Table 4.5 suggests that should recent trends continue, around 13 of the capital stock in both the developed and developing countries would be owned abroad. This would bring the share of FDI above its previous historical peak before 1914, though not by a large margin.27 Within the developed economies FDI is...

International Banking Issues and Country Risk Analysis

This chapter has three major sections. The first section discusses international banking operations. This section describes the types of foreign banking offices and interbank clearinghouse systems. The second section describes developing-country loans and their problems. This section focuses on causes and policy responses for the two international lending crises the Latin American debt crisis of the 1980s and the Asian financial crisis of 1997-8. The third section looks at how banks and other investors assess unique risks of their foreign operations and how these risks can be incorporated into routine operations.

Heavy reliance on ratings

Cdos and credit derivatives, which now total over 1 trillion in outstanding amounts, are just an example of how the traditional barriers between banking and insurance, and indeed other big investment institutions, have broken down. It is becoming more difficult to identify where the ultimate risks in the financial system lie, and where the hot spots will be in the next global financial crisis.

The worlds largest financial companies

China appears to be on its way to becoming the new center of global economic power. In dollar terms, China's economy is about 10 percent of the US economy and 20 percent of Japan's. However, after adjusting for differences in the cost of living (purchasing power parity), China's economy is more than half as large as the US economy and surpasses Japan to become the world's second-largest economy in 2002, the gross domestic product was 10.1 trillion for the USA, 6

Independence From The Governors Eyebrows To The Feds Briefcase

Central banks gained novel prominence after this dual unravelling. More than twenty major monetary, securities and banking crises have occurred since the 1970s international monetary and national banking crises and numerous individual bank failures (Braithwaite & Drahos 2000 135). Stability from the hegemonic dollar ended with Nixon's float of 1971 - the Bretton Woods breakdown - and in 1975 when competitive regulations replaced control-type restrictive practices on the NYSE. Overnight, every other stock exchange became globally uncompetitive and foreign investment flowed into Wall Street (Ingham 2002 153). In what became an anti-state era, central banks expanded responsibilities economy-wide -not necessarily effectively - while under enormous pressure to rescue private network banking breakdowns. Whether central banks formed a symbiotic relation to the finance sector's demands for 'certainty' and stable money, governments were standing aside. Also banking evasion of Bretton Woods...

The international debt crisis of the 1980s

Solutions Observers feared that the debt crisis would provoke an international banking crisis and a global depression. Thus, lenders, borrowers, the International Monetary Fund (IMF), and the World Bank worked together to overcome this crisis through rescheduling, refinancing, addi

Asian Companies Turn to Capital Markets for Funds

Traditionally, capital markets have been the main source of funds for US and British companies, while banks have been the main source of funds for Asian companies. However, Asia appears to be growing less dependent on bank loans for funding as companies have increasingly turned to the stock and bond markets to raise money. Primary figures for 1999, for example, suggest a decided shift in the way Asian companies and governments obtain financing in the wake of the Asian financial crisis. Of course, this shift away from bank lending has been born partly of necessity. For years, companies in Asia borrowed heavily from local and international banks. But a wave of Asian currency depreciations in 1997 and 1998 left many companies in the region unable to service their debts. Banks in the region were saddled with a mountain of nonperforming loans. Foreign lenders have been reluctant to lend money to Asian companies since the Asian financial crisis of 1997-8. With bankers still working out how...

How to Deal with Failed Banks The Controversies

Asking all banks to set aside capital as a percentage of their assets (capital assets ratio) or risk weighted assets (the ratio of capital to weighted risk assets) is now the preferred method for ensuring banks have a cushion against shocks to credit, market and operational risks which could threaten the viability of the bank. The Basel 1 and 2 agreements are examples of an application of this approach. They were discussed at length in Chapter 4 and are noted here to illustrate the role they play in averting bank failures and crises. Contagion results in larger losses for depositors, but the evidence suggests the losses are smaller than losses to creditors in other sectors. For example, during the 1980s when there were a large number of thrift and bank failures in the USA, the solution of the problem was more efficient when compared to the closure of insolvent non-bank firms through bankruptcy procedures. Another way of dealing with bank runs is for the central bank to supply...

Making a drama out of a crisis

Mulhouse Brand was a game played in August 1997 by approximately 50 financial professionals, academics and consultants. Originally, the plot was devised because the author, who was then working for Euromoney magazine, wanted to write about the anatomy of a financial crash. At the time, in the absence of any live financial crashes, it seemed possible to create a virtual one. Andrew Hilton and David Lascelles at the Centre for the Study of Financial Innovation (csfi) immediately cottoned on and organised a round table for 20 people, at which a draft scenario was torn apart and rebuilt. Over the next few months a plot was devised that it was believed was robust enough to set the preconditions for a world financial crisis. At the centre of the storm was Mulhouse Brand, a British merchant bank uncannily like the Baring Brothers of Nick Leeson fame. The extra twist was that, to bring in European actors, Mulhouse Brand had just been bought by a big German bank, and to bring in American...

Financing Foreign Trade

In an unusual move, the agency put 1,500 pages of its own financial and institutional information on a website to make it easier for potential investors to perform due-diligence research. Hoping for quick action, the Ex-Im Bank held a pre-proposal conference on March 7, 2000. Ex-Im Bank officials first conceived of the idea in 1997. Private institutions showed interest, but pulled back soon after the Asian financial crisis sent US banks and investors fleeing the developing markets. Ex-Im Bank revived the concept after the crisis subsided.

Franklin National Bank

10 Friedman and Schwartz (1963), pp. 354-355 distinguish between the ex ante and ex post quality of bank assets. Ex ante, banks' loan and other investment decisions were similar in the early 1920s and the late 1920s. The key difference was that the loans investments of the late 1920s had to be repaid matured in the Great Depression. Thus, they argue, with the exception of foreign lending, the number of bank failures caused by poor investment decisions is debatable.

Role of the Accounting and Auditing Framework Relevance to Development and Stability

Accounting and auditing standards of high quality provide the basis for reliable and transparent disclosure of information to relevant stakeholders. Disclosure is crucial for informed financial decisions, efficient resource allocation, and effective functioning of markets. Chapter 4 discusses the fact that they form the core of the information infrastructure needed for financial development. Accounting, auditing, and disclosure requirements of high quality for financial institutions are regarded as one of the key basic areas of financial reform necessary to prevent a financial crisis.5 By contributing to good corporate governance, high-quality accounting and auditing influence perceptions of risk, cost, and availability of capital, as well as foster financial stability through strengthened market discipline.

Stranger than fiction

Two financial institutions, Goldman Sachs and ubs, have been to Connecticut to look at ltcm's books. They have more information than the others. ubs is in a unique position as a shareholder in ltcm as well as a lender to it. Most of the banks have to weigh up the cost of putting more money into ltcm against cutting their losses and risking a prolonged world financial crisis.

The US Bank and Thrift Crises 198094

Between 1980 and 1994 there were 1295 thrift failures in the USA, with 621 billion in assets. Over the same period, 1617 banks, with 302.6 billion in assets, ''failed'' in the sense that they were either closed, or received FDIC assistance. These institutions accounted for a fifth of the assets in the banking system. The failures peaked between 1988 and 1992, when a bank or thrift was, on average, failing once a day.15 This section will begin with a review of the thrift failures, followed by the commercial bank failures.16

Effects of Internationalization for Countries Hosting Foreign Banks

Summarizing the empirical findings discussed above and in the previous sections, it is clear that banks expanding abroad are typically more efficient, come from countries with more developed banking systems, and typically expand in countries with an overall less efficient banking system. In other words, better banks tend to expand to countries with worse banks. As to the effects of foreign banks for the host country, one would expect that the efficiency of the host country's financial system and its overall performance should improve as a result of the entry of foreign banks. Indeed, the position that foreign banks are beneficial for the host economy, recently advocated also by Focarelli and Pozzolo (2005) and Goldberg (2007), is at odds with the traditional view (blatantly against the access of foreign banks).14 Historically, policy makers have been patently hostile toward foreign banks, fearing that they might worsen the allocation of credit with respect to the autarchy equilibrium...

Results and Comments

Our data set covers the period ranging from January 1, 1999 to December 7, 2001. Data consist of 150 weekly observations on European-style options written on the S&P 500 Index and quoted Over-The-Counter (OTC) by a market maker.2 We recall that the S&P 500 Index represents about the 80 percent of the entire US economy capitalization.

Bigleague roleplayers

The game involved not just the financial sector but also trade, defence and foreign policy. The scenario was set six months ahead in July 2000. Various crises loomed around the globe. For example, Ukraine repudiated its foreign debt Brazil's was still unpaid there was a Turkish banking crisis, a squeeze by oil producers, mass litigation against American mutual funds with huge implications for the equity market, the default of a British insurance company and reports that Libya had a nuclear weapon. All these turned the world into a highly unstable theatre and American policymakers had to sort out the mess. When the game was conceived and played - before the September 2001 terrorist attacks in America and the Enron and subsequent banking and mutual fund scandals - the scenarios seemed a little far-fetched. They look tame now.

Financial End Game

Financial End Game

How to profit from the global crisis and make big bucks big time! The current global financial crisis has its roots embedded in the collapse of the subprime markets in the United States. As at October 2007 there was an estimated loss on the subprime market of approximately 250 billion. If you want to come out on top, you have come to the right place.

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