Question

1- “In emerging market banking systems with heavy regulations, banking crises are unlikely to occur as the regulations effectively prevent excessive risk taking behaviour. On rare occasions that crises occur they can be quickly contained due to effective government intervention with little cost to the economy.” Discuss.

2- Briefly list and explain the consequences of a banking crisis. Given the significant costs associated with banking crises, why do they keep re-occurring despite various regulatory efforts in response to the previous ones?

Answer 1

1- MARKET BANKING SYSTEM OR BANKING CRISIS-

1-The crisis has been attributed to a combination of macro - economic turbulence, weak regulation, and bank specific problems.

2-Government intervention included bank takeovers, direct monetary assistance and temporary blanket guarantees to the banks.

-Example-

3-Banks have regulations at the federal, state,and sometimes local levels.

-Examples of bank regulation include capital requirements and limits on interest rates. Member banks of the Federal Reserve are subject to further regulations, such as the requirement to buy stock in the Federal Reserve System.

4-During the global financial crisis, a number of financial entities merged under pressure. In 2008, for example, JP Morgan Chase snapped up Bear Sterns and Washington Mutual in distressed sales and Wells Fargo picked up troubled Wachovia .

5- Three Primary risks that bank face-

-8 types of risk involved-

-Out of thess eight risks , credit risk , market risk and operational risk are the three major risks. The other important risks are liquidity risk ,business risk,and reputational risk.

6-The crises rapidly spread into a global economic shock ,resulting in several bank failures during banking crisis of 2008 .

7- EFFECTS-

-This banking collapse led to a significant fall in the money

-Supply and a decline in normal economic activity leading to a mass unemployment of the 1930s. This banking crisis played a major role in the great depression and negative economic growth of that period.

8-Lehman Brothers went bankrupt. Merrill Lynch AIG, Freddie Mac,Fannie Mae, HBOS, Royal bank of Scotland, Bradford And Bingley, Fortis, hypo and alliance and Leicester all came within a whisker of doing so and had to be rescued.

9-If for any reason your bank were to fail, the government takes it over ( banks do not go into bankruptcy)

It is possible to both over - regulate and under - regulate banks.

10-Investment banks in the United States are continuously reviewed and regulated by the Securities And Exchange Commission or SEC  they are also occasionally regulated and investigated by Congress.

11-Methods are used to regulate Banks-

1-Comptroller of the currency .

2-Federal deposit insurance corporation .

3-Federal reserve system .

4-National credit union administration .

5-Office of thrift supervision .

12- Self regulation can affect the financial industry in positive and negative ways. The SEC is the main regulatory body for the stock market, protecting investors from mismanagement and fraud , which boosts investor confidence and investment.

2- FINANCIAL CRISIS OR REGULATORY EFFORTS-

1- When a bank fails, it may try to borrow money from other solvent banks in order to pay its depositors, a bank panic might ensue in which depositors run on the bank in an attempt to get their money back.

2-Banking crisis are when there are widespread bank runs : an abnormal number depositors try to withdraw their deposits because they don't trust that the bank will have the deposits for withdrawal in the future.

3-The research found out that the key challenges commercial banks faces in Financing SME's were among others that SME's lack proper books of accounts, lack collateral, and their inability to prove their credit worthiness.

4-The financial crisis on the business impact of large bank customers, especially export- oriented enterprises.Declining in exports led to decline in client business performance, repayment pressure , and increased risk of determination in credit quality, Second the lack of effective demand for loans.

5-The CUMU - lative effect is a financial and liquidity crisis thst threatens to become a global macroeconomic upheaval, with significantly negative world GDP growth, perhaps for two or three years, sharply increased unemployment, pressures on public revenues and deflation.