...Shadow Banking in China: Boon to Bane The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks. Shadow banking, in other words, is a system that is governed by a coterie of financial intermediaries that carry out traditional banking functions like borrowing and lending but in a way that is loosely connected with the traditional functions of depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper (ABCP) conduits, money market mutual funds, markets for repurchase agreements (repos), investment banks, and mortgage companies." Shadow banking has grown in importance to rival traditional depository banking and was a primary factor in the subprime mortgage crisis of 2007-2008 and global recession that followed. Shadow banking is sometimes said to include entities such as hedge funds, money market funds, structured investment vehicles (SIV), "credit investment funds, exchange-traded funds, but the meaning and scope of shadow banking is a matter of much debate. It is said that commercial as well as investment banks conduct much of their business in the shadow banking system, but most are generally classified as shadow banking institutions themselves. RISK OR VULNERABILITY: Shadow banks, since they are not covered by the same prudential regulations as depository banks, can afford to have a relatively...
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...Term paper of Ef4461 Topic : Shadow Banking in China Created by Pan Date: 24/4/2015 Abstract: In this paper , I will examine the China’s shadow banking for its potential risks. China, an expansion of risky and complicated financial practices in the world’s second-largest economy , what is the potential risk behind? Introduction: From Bloomberg, the definition of“shadow banking” encompasses risky investment products, lending between individuals, pawnshop and loan-shark operations in emerging markets, as well as more respectable activities like derivatives, money-market funds, securities lending and repurchase agreements at financial institutions These activities are beyond the control regular banking system and regulators. Therefore are exempt from the limited regulations and oversight placed on the traditional banking sector. So it is hard to restrict risky lending for the regulators. In china, savings deposit rates of 3 percent which is lower than the target for inflation, combined with at least 90% of small businesses could not get bank loans which propelled the shadow-banking sector to an estimated $6 trillion. Overview of shadow banking in the world and China There are $75 trillion global shadow banking assets worldwide in 2013 according to Financial Stability Board Report,(Appendix 2). After 2008 crisis, The U.S. and the euro area each accounted for a global shadow banking assets, followed by Britain with a 12 percent share and Japan’s 5 percent share(Appendix3)...
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...CHINA’S PERCEIVED ONGOING BANKING CRISIS By Group B Giang Nguyen 1385858 Kiet Nguyen 1402739 Tu Nguyen 1390178 Ngoc Lo 1329692 Dung Dao 1390184 Hiep Ngo 1385862 Thanh Nguyen 1385991 Anh Nguyen 1390169 Khoi Pham1385967 An assignment for ECO 3353 - Spring term, Dr. Dominic Minadeo Troy University April 30, 2014 Abstract In 2013, China, the second largest economy in the world, has experienced a banking crisis that had severely consequences on China itself and several other countries. This resulted from a rapidly rise of short-term lending from the shadow banking system, which has been considered an unofficial lending market that operates outside the scope of regulations and has recently been plunged into crisis. This paper synthesizes the overall indexes and information about the ongoing banking crisis in China, which includes: recent China economic analysis, how the crisis impacts on domestic and global economy, comparing China’s banking system to several countries in the world and the forecast for China in the near future. How the crisis took off In today’s globalized world, no country is immune from the financial crisis, even the second largest economy of the world. An increase in risky and complicated financial practices in China can possibly drive the economy to a terrible crisis. The financial crisis resulted from a rapidly rise...
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...Evolution of Basel Norms and their contribution to the Subprime Crisis The article highlights the emergence of the Basel Accord in 1998 and how it has evolved over the course of the last 23 years. Contrary to the popular belief capital regulations have been considered the biggest underlying factor of the subprime crisis owing to securitization, the shadow banking system and the flexibility given to banks in risk assessment. The recent Basel III norms though aim to mitigate the already caused damage, the results are still left to be witnessed. Evolution of Basel Norms and their contribution to the Subprime Crisis The article highlights the emergence of the Basel Accord in 1998 and how it has evolved over the course of the last 23 years. Contrary to the popular belief capital regulations have been considered the biggest underlying factor of the subprime crisis owing to securitization, the shadow banking system and the flexibility given to banks in risk assessment. The recent Basel III norms though aim to mitigate the already caused damage, the results are still left to be witnessed. The Financial Crisis of 2008 shook the financial world and is still in tatters even after 3 years of its outbreak. From the New York investment bank Bear Stearns collapse in June 2007, Northern Rock liquidity support (Sep’ 07), Bank of America purchases of Countrywide Financial (Jan’ 08), Nationalization of Fannie Mae and Freddie Mac by the federal government (July 08), Lehman Brothers...
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...Real Estate and Financial Upheaval before/during and after the crash of 2008 Melvin Ramos Contents 1.0 Background 2 2.0 Real Estate Bubble 3 3.0 Contributors to the bubble 4 4.0 Monetary Policies before/during the crash 5 5.0 Shadow Banking Systems and Financial risks 6 6.0 Mortgage brokers and real estate brokers 7 7.0 During and after the crisis 8 8.0 Conclusion 9 References: 10 1.0 Background Real estate is industry is one of important industry that fuels economic growth in the US. It is accounted for 10% of US economic output. This 10% comprises not only owning homes but also employment numbers, and overall consumer consumption. We spend a lot of money maintaining our home and also consuming for daily living. This 10% is also a big number and can cause recession if the industry themselves gone to a downward spiral. It will add to unemployment, will reduce consumption causing tight credit, will decrease the values of homes, and causing a huge economic problems unless, Federal Reserve intervenes. Real estate market themselves are composed of the following players * Buyers and sellers * Financial brokers (usually mortgage brokers) * Financial institutions (Banks) * Construction industry * Real Estate brokers * Government (construction permits, fees and all other things related to compliance) * Lawyers and accountants * Land assessors and appraiser * And other players. 2.0 Real Estate Bubble ...
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...• Banks also help facilitate the flow of funds between the surplus and deficit units. • The banking system works on confidence as when there is no trust between the parties they will start withdraw the deposits, consequently causing the bank to collapse. People must hold no doubt and believe that the bank is safe for it to function. • Shadow Banks: financial institutions that perform what banks do but are not banks as they are not regulated like the banks. • Investment banks cannot take retail deposits, as such they created information-insensitive money market instruments such as repos and commercial papers. These liabilities are intended to be as good as bank deposits. • Hence, if you are performing what a bank does, it means that you are in joint venture with the public sector regardless of being a Shadow Bank. Conventional Banking and Shadow Banking should not be treated as separate matters as they are both ultimately banking. Consequently, all banks should require regulatory supervision. • Organisational forms of Banks in foreign markets 1. Correspondent banking 2. Foreign representative office 3. Foreign agency 4. Foreign branch 5. Foreign subsidiary • Internet banking in Japan is lagging despite that they are leading in the worlds technology due to factors such as rigid corporate hierarchies, risk-adverse bankers and the result of not recovering from the banking crisis two decades ago due to its timid nature. • Banks are looking for retail deposits as they...
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...global financial crises displayed various weaknesses in the financial system. Ever since the crises, there have been sincere efforts in trying to eliminate or reduce the chances and impact of a future crisis. Four main areas of reform were identified by the international policy makers and sufficient work has been done to implement them (The Regulatory Response to the Global Financial Crises, 2014). Although Australia has not been affected as much as the north Atlantic countries, it still operates in the global environment. A part of regulatory reforms includes managing and monitoring systemic risk. Australia has been trying to do that through various entities such as the RBA, APRA and ASIC. Australia has also implemented reforms related to derivative trading, which are being traded more and more despite their high level of risk. Even though the reforms and regulations that were and going to be implemented, improved the safety of the financial system, there will never be a one hundred percent guarantee that there will be no future crisis. The G20 summit in 2008 was different from the prior summits in that it constituted of the leaders of the countries instead of Finance Ministers and Bank Governors (RBA, 2012). The leaders agreed on four areas of reforms which are: Strengthening Prudential Regulatory Standards (Basel III), addressing too big to fail institutions, reforms to OTC derivatives market and shadow banking. The entities that are mainly in charge of implementing those reforms...
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...The Growth of Modern Finance* Robin Greenwood Harvard Business School and NBER David Scharfstein Harvard Business School and NBER July 2012 Abstract The U.S. financial services industry grew from 4.9% of GDP in 1980 to 7.9% of GDP in 2007. A sizeable portion of the growth can be explained by rising asset management fees, which in turn were driven by increases in the valuation of tradable assets, particularly equity. Another important factor was growth in fees associated with an expansion in household credit, particularly fees associated with residential mortgages. This expansion was itself fueled by the development of non-bank credit intermediation (or “shadow banking”). We offer a preliminary assessment of whether the growth of active asset management, household credit, and shadow banking – the main areas of growth in the financial sector – has been socially beneficial. * We thank Toomas Laarits for excellent research assistance. We are grateful to Lewis Alexander, John Campbell, Darrell Duffie, Sam Hanson, Anil Kashyap, Morgan Ricks, Andrei Shleifer, Jeremy Stein, Adi Sunderam, Paul Tucker, Bob Turley, Luigi Zingales, and especially David Autor and Tim Taylor for very helpful suggestions. We also thank Erin Ludlow, James Green, Rodger Smith, Karen Lanzetta, Justyna Podziemka, Covie Edwards-Pitt for their help and advice on financial services data, and the Securities Industry and Financial Markets Association (SIFMA) and Greenwich Associates for providing...
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...Global Lessons from the Recent Financial Crisis: Need for Reforms Jason Khan – 212857264 Yiwen Shen – 212828810 Alexander Grynszpan – 212811618 Xueyan wu - 212828380 INTRODUCTION Mortgage Backed Securities Lack of Regulations in the Banking System Lack of Regulations in the Credit Rating Agencies Subprime Mortgages Financial Crisis of 2007-2009 Lack of Regulations of over-thecounter derivatives Introduction to the Financial Crisis Causes of the Financial Crisis Reforms introduced International response Conclusion Cause: Subprime Mortgage - Housing prices were on the rise à More difficult for consumers to purchase - Investment banks purchased the mortgages from individual lenders, re-packaged them, and sold them to an even larger quantity of small and large investors - Borrowed money to magnify the outcome à Created collateral debt obligations (CDO) - Mortgages were sometimes given without down payments, or assurance of repayments - When the housing bubble “popped”, investment banks held massive debts without means of paying them à led to declaration of bankruptcy Introduction to the Financial Crisis Causes of the Financial Crisis Reforms introduced International response Conclusion Cause: Mortgage backed securities - Important players in the Crisis: Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC), or as known as Fanny Mae ad Freddy Mac - Through mortgage backed...
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...The analysis on the development of Chinese Mainland banking industry internationalization Table of Content Introduction 3 1.0 Analysis on capital management based on Basel III 3 1.1 Potential risk determinants 3 1.1.1 CRAR based on Basel III 3 1.1.2 NPL perspective 4 1.1.3 Internal risk control system 4 1.1.4 The fund sourcing exploration through finance innovation 5 1.2 The risk identification 5 1.2.1 Risk of local government financial platform 5 1.2.2 NPL and Due Diligence Investigation 5 1.2.3 Risk of lending to SMEs and Derivative Deposit problems 5 1.2.4 Risk of collateral assets auctions 6 2.0 Analysis on internationalization of operation overseas 6 2.1 Key factors identification and comparison 6 2.1.1 Operation efficiency on ROA and ROE perspective 6 2.1.2 Operation scale and scope 7 2.2 Government potential influence on policies and regulation 8 2.3 Challenge and Risk based on the analysis 8 2.3.1 Strategic partnership with developed bank 8 2.3.2 Human Resource management 8 3.0 Analysis on internationalization of interest rate liberalization 8 3.1 Government potential influence on policies and regulation 9 3.2 Comparison between Chinese Mainland banks and HSBC 9 Conclusion 9 Appendices 11 Reference 13 Introduction From 2013, the trend of catching up with international standard and increasing Chinese banking competitiveness is under the agenda of PBOC through the frequent policies transformation...
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...second "Great Recession", is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s.[1] It resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in numerous evictions, foreclosures and prolonged unemployment. It contributed to the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a significant decline in economic activity, leading to a severeglobal economic recession in 2008.[2] The financial crisis was triggered by a complex interplay of valuation and liquidity problems in the United States banking system in 2008.[3][4] The bursting of the U.S. housing bubble, which peaked in 2007, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally.[5][6] Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined.[7] Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. Although there have been aftershocks, the financial crisis itself ended sometime between late-2008 and...
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...The Global Financial Crisis Introduction The global financial crisis which started in early 2007 has proven to be perhaps the great financial catastrophe in history. Although it traces its roots back to the starting of the millennia, the subsequent meltdown was most gruesome over the past 3 years. What began as a crisis of the sub-prime mortgage market in the United States quickly transcended national borders and developed into a upheaval of epic proportions. What ensued was a systematic debacle of stock exchanges, investment banking, derivatives etc. all financial markets ranging from equity, currency, real estate, futures etc. In order to fully understand the devastation caused by this dilemma, we have to take focus on the core issues and identify the stream of events as they occurred and how they subsequently collapsed global financial markets. Housing Bubble Burst The global financial crisis began through the US sub-prime mortgage market. The past two decades leading up to the year 2005 had experienced phenomenal growth in terms of increases in housing prices. There was an abundance of capital flowing into the country and this translated into excess liquidity available for banks to lend out. The Sub-Prime Mortgage Market refers to a market where people with bad credit history can obtain house loans at relatively better rates. It doesn’t imply that the interest rates are low, but rather they don’t have to go through the rigors they would face due to their poor credit...
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...Dangerous derivatives at the heart of the financial crisis Financiers have engineered a “shadow banking system” that has subverted regulation and dumped risk. Complex derivative trades have fuelled a decade or more of cheap credit and destabilised the financial system. The financial and human costs are now being revealed as the massive borrowing spree unwinds, leaving the public purse to pay for failed corporate structures and the threat of a major economic recession. Fund managers, insurers and bankers have transformed investment practices by creating financial instruments known as derivatives, whose value is derived from the price of another underlying asset. The original idea of derivatives was to help actors in the real economy, such as farmers and manufacturers, insure against risk. A company may want, for example, to guard against increases in the prices of steel, wheat or other commodities. Price stabilisation and risk mitigation are worthwhile objectives, but many derivatives trades have crossed the line into speculation rather than risk management. Companies have been encouraged in this by derivative traders, who make money each time they create or sell a new product. Most derivatives are sold “over the counter” through private trades rather than on public stock or commodity exchanges. This gives investment banks flexibility to propose to their customers whatever deal they want, rather than being bound by the trades sanctioned by exchange supervisors. As the deals are...
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...through this information, we should be able to clear any doubts and discontent one has on this matter. TABLE OF CONTENTS ABSTRACT ………………………………………………………..………..…………………...ii ACKNOWLEDGEMENT……………………………………………….……………….………iii TABLE OF CONTENTS ………………………………………………………………………..iv CHAPTER 1: INTRODUCTION………………………………………………………………1 CHAPTER 2: RESEARCH ANALYSIS………………………………………………………2 2.1 THE GLOBAL FINANCIAL CRISIS OF 2007-2010……………………………………….2 2.2 CAUSES……………………………………………………………………………………....3 2.2.1 US HOUSING BUBBLE AND FORECLOSURES………………………………. 3 2.2.2 SUBPRIME LENDING……………………………………………………………..4 2.2.3 INACCURATE CREDIT RATINGS……………………………………………….5 2.2.4 MORTGAGE UNDERWRITING…………………………………………………..6 2.2.5 SHADOW BANKING SYSTEM…………………………………………………...7 2.2.6 INCREASED DEBT BURDEN AND OVERLEVERAGING……………………..9 2.3 IMPACT……………………………………………………………………………………10 2.4 FUTURE OUTLOOK………………………………………………………………………..12 CHAPTER 3: CONCLUSION 3.1 RECOMMENDATIONS AND SOLUTION……………………………………………….14 3.2 CONCLUSION…………………………………………………………………………..…..16 INTRODUCTION Many questions were raised...
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...Sub prime mortgages The origins of the current crisis lie within the ashes of the equity bubble and subsequent collapse of the equity markets at the end of the 1990s With the collapse of the dot.com bubble, capital began to flow increasingly toward the real estate sectors in the United States The U.S. banking sector found mortgage lending highly profitable and saw it as a rapidly expanding market As a result, investment and speculation in the real estate sector increased rapidly As prices rose and speculation continued, a growing number of the borrowers were of lower and lower credit quality These borrowers, and their associated mortgage agreements (sub-prime debt), now carried higher debt service obligations with lower and lower income and cash flow capabilities New market openness and competitiveness allowed many borrowers to qualify for mortgages that they would not have qualified for previously Structurally, some mortgages re-set a high interest rates after a few years or had substantial step-ups in payments after an initial period of interest-only payments Housing bubble The bursting of the U.S. (United States) housing bubble, which peaked in 2006, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. The financial crisis was triggered by a complex interplay of policies that encouraged home ownership, providing easier access to loans for (lending) borrowers, overvaluation of bundled sub-prime mortgages...
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