Banking In Emerging Markets in the Aftermath of Global Financial Crisis (Research Paper Sample)

Banking In Emerging Markets in the Aftermath of Global Financial Crisis
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Paper outline
I.Synopsis
II.Introduction
III.The quality of central bank supervision and support during GFC
IV.How Global financial crisis was managed
V.Bank lending and non-performing assets
VI.Bank Structure – ownership
VII.Bank performance in emerging markets
VIII.Rating of banks in emerging economies
IX.How banks in emerging market fared as compared to western banks during and after GFC
XI.Effects of GFC on risks management
XII.Vulnerability of banks to crisis
XIII.Reference List
 
Synopsis
This essay discusses the Global Financial Crisis (GFC) in emerging markets in the world. The essay utilizes several references that discuss the causes of GFC and the impacts on the economies of the emerging markets. The essay explores the differences in financial sectors between the emerging markets and the developed world with a view of ascertaining the differences in the degree of the impacts of GFC on both economies. The essay studies why emerging markets are more prone to GFC as compared to developed economies. The key issues discussed by the essay are the severity of GFC, how GFC was managed, bank ownership structure, and the regulatory environment in the financial sectors of emerging markets.
Banking in Emerging Markets in the Aftermath of Global Financial Crisis
Introduction
The background of the causes of global financial crisis (GFC) dates bank in mid 2007 in the United States of America. The collapse of subprime assets in the summer of 2007 triggered by liquidity crisis in the banking sector in the United States (Kapsis, 2012) was the origin of the most recent GFC. Lending was restricted due the exposure of the financial sector GFC due to the collapse of the subprime market. Banks that depended on interbank lending were worse hit by the crisis leading to solvency problems. According to Kapsis, the most hit banks, Northern Rock, and Bradford & Bingley were crippled by the insolvency problem in the early stages of the crisis. The daily operations of the banks were slowly shuttered by the financial menace that made the central banks react. The central banks intervened through offering liquidity support to the banks that were worse hit by liquidity problem. Furthermore, the government and other regulators intervened by brokering mergers of insolvent banks with banks which were more stable (Kapsis, 2012).
Though the intervention by the government and the central bank seemed to have had significant success, the impact of the crisis was far from over. The subprime market multi-linkages among the banks spread the crisis further. According to Kapsis, the deeper effects of the crisis manifested further when Lehman Brothers was hit by the crisis in the year 2008. The crisis spread to various regions in the world when investor started to liquidate their positions as more banks in the United States and Europe experience insolvency threats (Kapsis, 2012).
The world economy was in jeopardy due to these financial crises. Banks were reluctant to lend companies and consumer dues the turmoil. This pushed so many countries into economic recession. The United States and the European countries fought hard to contain the crisis that threatened to plunge the whole world into economic depression like the one witnessed after the First World War in early 1930s. Though the crisis was significantly contained its effects were far reaching consequences on the world emerging market economies. Moreover, the crisis still re-occurred in 2010 in Europe and threatens to spread to worldwide (Kapsis, 2012).
The quality of central bank supervision and support during GFC
According to Vies (2006), the structure supervision of the banking sector tends to be weak. Financial supervisors in emerging market lack legal protection exposing them to demands from lobbies. Furthermore, the regulatory authorities lack enough resources hence exposing them to influence from government or foreign bodies that fund them. Banks in emerging markets are less developed exposing them to government inflationary debt because of dependence on government bonds (Vies, 2006). The government regulations in this scenario, weakness the financial sector in emerging markets (Vies, 2006). The structure of banking in emerging markets is further weakened by lack transparency in the regulation and supervision.
The central banks as a financial sector supervisor played a major role in the mitigation of the financial crisis in emerging economies. Though the primary role of central banks is issuing currencies in the economy, management of external and internal currencies, credit regulation, and acting as a fiscal agent, it went beyond its mandate during the financial crisis to manage it effectively. During the GFC, the vulnerability of the banking system in emerging economies rendered the quality of supervision and regulation by the central banks (Vies, 2006). This caused information and system asymmetry in the economy thereby catalyzing the crisis. According to Vies, to enhance quality regulation and supervision of the financial sector in an emergency there is a need to undertake rigorous examination of bank books. This enables central banks to draw up policies to maintain stability in the financial sector (Vies, 2006).
How Global financial crisis was managed
The global financial crisis caused panic across the world, and this made government and financial regulators take a number of measures to manage the situation. Some of the major measures that were taken by governments and regulators included the use of deposit insurance, bailouts, and bankruptcies. Some countries especially in the emerging economies also opted to use foreign reserves to manage the situation since it was believed that the volatility in the foreign could further catalyze the crisis.
Deposit insurance was implemented in many countries to protect bank deposits from losses due to the inability of the banks to pay their debts (Turner, 2006). This acted as a safety net by the central banks to ensure financial stability of several banks that were indebted. The crisis created anxiety among depositors, and this prompted some authorities to increase the coverage of the insurance of the deposits. Deposit insurance adoption helped to prevent the debt of the financial institution from being transmitted to depositors (Turner, 2006).
Bailouts were also used to salvage banks that were greatly affected by solvency and liquidity problems. The United States government passed a bill in the year 2008 that allowed the government to bailout banks that were on the brink of collapse due to the financial crisis (McAfee & Johnson, 2010). In Europe, the European Union committed to guaranteeing bank financing by spending $ 1.8 trillion and purchased banks shares to prevent collapse. The United States government further agreed to purchase equity ownership in major banks and purchased less of the toxic mortgage debts (McAfee & Johnson, 2010).
Bank lending and non-performing assets
The recent financial affected banking sectors across the world. However, the impact of the crisis was unevenly felt across different banking sectors in the world. Financial crisis has an effect on credit growth thereby causing standstill and drop in the growth of loans and assets (Middle East Economic Digest, 2010).
The banking sector usually experience liquidity problems during GFC meaning that banks cannot afford to offer credit to companies during this period because of the probability of loan defaulting. It is generally acknowledged that companies are usually in dire need of credit during GFC.
Non-performing assets, according to Yang, can be defined as accounts are assets or accounts that are held by borrowers that the bank classifies as doubtful. During GFC, many companies become bankrupts due to liquidity and solvency problems. This translates to an increase in bank non-performing assets because of the high levels of defaulting caused by the crunch of companies affected by the GFC (Middle East Economic Digest, 2010).
Bank Structure – ownership
Types of banks in emerging markets are classified as government owned, private domestic, and foreign. According to Mian (2003), these banking structures differ significantly from one another. Majority government banks are characterized by lack poor cash-flows. Private domestic banks on the other hand have high cash-flows incentives, and clear separation from the ownership. Mian points out those foreign banks are only differentiated from private domestic bank by the organizational structure of the top management. These types of banks are equally distributed across the emerging markets across the world.
Many emerging market economies have banks that are either directly owned by the government or indirectly controlled by the government. It is due to this reason that the governments play a major role in the regulation of financial sector in many emerging economies. In his analysis of the political influence on bank ownership in emerging countries, Dinc finds out that government ownership of banks is very common in emerging markets. It is further noted that the government holds large stakes in banks that it controls (Dinc, 2005). Government owned banks tend to bigger and older than the private domestic and foreign banks (Mian, 2003).
Private domestic banks are more aggressive in terms of lending as compared to government and foreign banks. Private domestic banks in developing economies hold less of liquid assets and more in the form of loans as compared to foreign banks. Furthermore, private domestic banks give out loan at a higher rate than the foreign counterparts (Mian, 2003)
Foreign banks have significantly gained way into the emerging market for a couple of decades ...