Banking Crisis International Banking

Submitted By: Ankit Arora (212) Ashish Agarwal (217) Dolly Kotak (227) Kritika Jain (239)

Agenda
Introduction Japanese asset price bubble Cyprus Crisis Spanish Financial Crisis How to Avoid Banking Crisis

Agenda
Introduction Japanese asset price bubble Cyprus Crisis Spanish Financial Crisis How to Avoid Banking Crisis

Introduction

Banking crisis include

Bank

runs Banking panics and Systemic banking crisis.

Marked by
bank

runs that lead to the demise of financial institutions, or by the demise of a financial institution that starts a string of similar demises.

Agenda
Introduction Japanese asset price bubble Cyprus Crisis Spanish Financial Crisis How to Avoid Banking Crisis

Japanese asset price bubble

What? Why? Effects ?

Japanese Asset Price Bubble

Economic bubblefrom 1986 to 1991. Indicated that both financial and macroeconomic instability are closely related to large fluctuations in asset prices.

Japanese Asset Price Bubble

What?

Substantial increase in asset prices Overheating of economic activity Increase in money supply and credit

Why?

Intensified Bullish Expectations Financial deregulation in progress Inadequate risk management on the part of financial institutions Taxation and regulations biased toward accelerating the rise in land prices Aggressive bank behavior

Effects?

The subsequent collapse of the bubble lasted for more than a decade and contributed to the socalled Lost Decade(1991 to 2000). Slowdown in growth Diminishing global role Recession and natural disaster (low Industrial Production) Quality of life remained high Discouraging employment trends Chronic fiscal deficits since the mid-1990s

Agenda
Introduction Japanese asset price bubble Cyprus Crisis Spanish Financial Crisis How to Avoid Banking Crisis

Cyprus Crisis
Cyprus is a self-professed offshore banking haven.

Cyprus has a political and cultural affinity with Greece, the two countries and their economies are closely related. Therefore, when Greece entered a major economic slump, Cyprus also suffered. When Greece partially defaulted on its sovereign debts last year. Cypruss two biggest banks, the Bank of Cyprus and Laiki Bank, held large amounts of Greek government debt and took a major hit in the partial default

Cyprus Crisis
Cyprus is a popular place for cash-rich Russian investors to hold offshore deposits. 25 and 40 per cent of all cash in Cypruss banks is held by a Russian account holders. When the Cypriot economy began to slide, it first went to Russia for financial assistance. It received a loan of 2.5 billion in early 2012. Cyprusasked for a bailout from the EU and IMF in summer 2012. Eurozone finalised a bailout deal where Cyprus would receive 10 billion in Troika loans, as long as it came up with 7.2 billion itself.

INTRODUCTION OF HAIRCUTS

Cyprus Crisis
It was proposed to raise this amount by taking money from depositors. The idea was that accounts with balances over 100,000 would be hit with a levy of 9.9 per cent. The account holder would be given shares in the bank in exchange. Accounts under 100,000 would also be hit with a levy of 6.75 per cent.

It Initiated BANK RUN. Bank remain closed for 10 days.

Cyprus Crisis
With no deal from Russia, and an ultimatum from the ECB, the Cypriot parties plans to create a National Solidarity Fund, which will include public and Church assets, as well as oil and gas rights, which could be offered as security for any foreign loan Cyprus plans to split Laiki into two banks essentially good and bad banks hoping to lower the price of saving the good bank

Reasons behind Crisis

Theres was lot of Russian capital in Cyprus, estimated before this crisis at $15bln. Russian depositors in Cyprus have been using the sector for tax evasion and secrecy based activity. Offshore assets in Cyprus just move elsewhere, such asLatvia or the Cayman Islands. Cyprus spent investments poorly instead of creating real assets in country.

This leads to bust the real estate and tourism business in Cyprus as foreign investors rushes to sell property held in Cyprus.

Learnings for the World

The Crisis of Cyprus shows the lack of financial strengthening and mutual trust in EU ,more specifically in western banking system. Some experts thinks that if it has happened in Cyprus, It can happen again in EU. Tax havens have been criticized because they often result in the accumulation of idle cashwhich is expensive and inefficient for companies torepatriate.Many tax havens are thought to have connections to "fraud, money laundering and terrorism supporting activities.IMF should look into the TAX HEAVEN status of such countries to avoid repetition of CYPRUS Crisis.

So who is next.. Any Guess

Agenda
Introduction Japanese asset price bubble Cyprus Crisis Spanish Financial Crisis How to Avoid Banking Crisis

Spanish Financial Crisis

2007 SPANISH FINANCIAL CRISIS

2008 2009

European Sovereign Debt A Glimpse

Referred to as the Euro zone crisis 1992 signing of the Maastricht treaty, under which the members of EU pledged to limit their deficit spending and debt levels. In 2000s members failed to stay within the confinement of Maastricht criteria and started securitising future government revenues to reduce their debt levels/ deficit. Sovereigns started selling rights to receive future cash flows, allowing govt to raise funds without violating debt and deficit targets.

European Sovereign Debt A Glimpse

International agreed standards were completely ignored Masking of deficit and debt levels through a combination of techniques like inconsistent accounting, off balance sheet transactions, use of complex currency and credit derivatives structures. With the increase in private and govt debt levels fears of sovereign debt increased from the late 2009.

European Sovereign Debt A Glimpse

The Bank bailouts and economic downturn increased leading to downgrading of credit rating Concerns increased in early 2010 which resulted into implementation of financial support measures such as European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) EFSF an SPV created to deal with the European sovereign debt crisis ESM An international organisation located in Luxembourg created to safeguard and provide instant access to financial assistance programs, max lending capacity Euro 600 million

Spanish Financial Crisis

Spain had a comparatively low debt levels as compared with advanced economies prior to crisis Spains trade deficit reached to 10% of the countrys GDP Debt was avoided by ballooning tax revenues generated from the housing, which helped in managing the increased govt spending without debt accumulation.

Spanish Financial Crisis

When the housing bubble burst, Spain spent large amounts on bank bailouts. In May 2012, Bankia received 19 bn euro bailout In Sep 2012 Spanish Banks required Euro 59 bn in additional capital to offset losses from real estate investments

Effects

Spain Debt Levels Property Bubble Spanish Banking System Unemployment Crisis

Spanish Financial Crisis

Property Bubble

House ownership in Spain is above 80% Desire to own house was encouraged by government in 60s and 70s Tax regulations too encourage house ownership: 15% of mortgage amount to be deducted from personal income tax Banks offered 40 years mortgage and most recently also started offering 50 years mortgages Euro 651,168,000,000 was the mortgage debt at the end of 2nd quarter of 2005.

Spanish Banking System

The Spanish banking system had been accredited with one of the most solid and equipped among all western economies Unusual accounting standards were observed which have smoothened earnings for the business but have misled the regulators Accounting standard such as Dynamic Provisioning which violated the standards set by IASB In May 2012, credit ratings of Spanish Banking system has been downgraded, some have even got junk status.

Employment Crisis

The unemployment rose to 17.4% at the end of FY 2009 4,000,000 people were unemployed in a single month of March 2009 Spains unit labor cost also increased 40% relative to German unit labor cost changes 2 tiered workforce: Privilege labor which got the wage increase and the unprivileged labour which were offered pink slips Spains unemployment rate reached 29.16%, twice that of the Euro-zone average in April 2013

Lessons learnt from the Crisis

Sustainability of the external deficit in a monetary union A Need to Increase Financial Transparency and Regulations A Need to Increase Spanish Banks Efficiency An Urgent Need to Incentivize a Culture of Entrepreneurship, Innovation and Competitiveness

Agenda
Introduction Japanese asset price bubble Cyprus Crisis Spanish Financial Crisis How to Avoid Banking Crisis

Steps to be taken to avoid Banking Crisis

Better mortgage products Avoid high volatility in monetary policy Appropriate response of monetary policy to asset prices Manage capital flow volatility Look for signs of over leveraging Active dynamic financial regulation

Thank you