Verified Tuitor
FIN 6644
GLOBAL BANKING CRISIS
DR. KRISHNAN DANDAPANI
06 – 07 – 2011

GLOBAL BANKING CRISIS
Identify the lessons learned from the prior global banking crisis?

There were different reasons responsible for the Financial Banking Crisis pertaining to different countries. In Argentina for example, it was due to the fact that financial institutions were forced to rely heavily on Central Bank financial assistance when they encountered deposit withdrawals; In Asia, it began as a result of Thailand devaluating its currency which caused other Asian export-oriented growth nations (Malaysia, South Korea, Indonesia etc.) to devaluate their currencies by letting them float and ending the peg to the U.S dollar: In the United States, Subprime loans induced the Financial Banking Crisis of 2007 – 2008. Notwithstanding, valuable lessons were learned from the prior Global Banking Crisis. ✓ The primary lesson learned was for Banks and financial institutions learned to be very vigilant. In doing so, they will have to set up some independent monitoring and regulatory system to oversee its activities. ✓ One lesson is that Bankers seem not to scrutinize credit risk as closely when they serve only as mortgage originators and then pass it on to Mortgage-Backed Securities investors rather than hold the paper themselves. ✓ The Central Bank will have to set in place some sort of infrastructure or framework to support to monitor, control, and prevent asset bubbles. In addition, the banks should not operate with higher levels of non-preforming assets as it provides a negative signal to the investor, thereby increases the volatility of the banks. ✓ Another lesson is that credit rating agencies need to refine their models for evaluating esoteric credit risks in securities such as Mortgage-Backed Securities and Collateralized Debt Obligations. This could be done by establishing an adequate bureaucracy which entails certain policies handling credit risks alongside risk tolerant levels. ✓ Borrowers must be aware and wary of placing their faith in its entirety on credit ratings and must question any discrepancy ahead of time. ✓ Banks must strengthen around credit analysis. They must be willing and ready to withstand a severe market and their liquidity position, credit reserves, and capital bases must be verified. They should be more cautious while lending by investigating the credit worthiness of the borrower before lending, and do so accordingly. ✓ One a more weaker side, strengthening and implementing early system warning models in order to avoid financial crisis by identifying potential triggers which in turn prevents investor panic, a recession, and strengthen a country’s economy. This lesson was particularly gathered after the Asian Banking Crisis.

What should be done to prevent such a crisis from happening again?
If not impossible, it is almost impossible to completely prevent a country from global banking crisis. It is more like a mandatory cycle in every country’s decennial economic viability. However, a few measures can be considered in order to prevent a more severe crisis from happening again. ✓ The very first step would be for the government to determine what caused the crisis in the first place, and why? After all, a problem cannot be solved without first of all identifying the problem. ✓ The government could decide to enact new laws to strengthen its financial system. ✓ Pass some sort of legislation to prevent repetition and future failures. ✓ Banks should be more transparent in their working and should not hesitate in disclosing their financial position and its volatility in order to prevent any sudden reaction by investors in case of any crisis. ✓ They should try and minimize their non-performing assets the best way they can.
These are simply measures that can be taken, and possibly a few others, but does they do not guarantee the complete elimination of any forthcoming crisis. It only help prevent or minimize the occurrence of any unexpected global banking crisis if exercised adequately.