Professional Documents
Culture Documents
Dr Brinda Sooreea-Bheemul
Introduction Basic raison dtre of financial markets: to mediate between those who have a surplus of funds and wish to lend with those who have a deficit and wish to borrow.
BORROWERS FINANCIAL MARKETS LENDERS
With increased globalisation and deregulation, financial activities have expanded in terms of scope (greater geographical possibilities) and content (wider portfolio of financial instruments).
Capital Flows
Financial Players 1. Commercial banks 2. Investment banks 3. Credit card companies 4. Insurance companies 5. Accountancy firms
Casino Capitalism
Susan Strange
Mad/hot money increases the vulnerability of financial systems and creates uncertainty through increased interconnectedness. Role of technology is fundamental. Dual characteristics of financial services:
Circulation services Financial services as commodities/products in their own rights
The extent of integration of the international financial centres in the global network depends on a number of statistical variables. (Reed 1989, 16 variables)
Volume of international currency clearing Size of the foreign exchange market Volume of foreign financial assets (e.g. Portfolio investment) Number of headquarters of the large international banks
Evolving structure of financial services industry 1. Financial mediation: savings lending/investment; S I 2. Bank deposits used as money to give loans: credit creation multiplier effect; I S 3. Inter-bank lending; less risk of reserve loss; multiplier effect faster 4. Central bank: lender of last resort; no reserve constraint 5. Liability management: market share struggle as non-bank intermediaries enter 6. Securitization: capital adequacy intl competition
4. The surge in MNCs activities reinforced the globalisation process of the financial system in order to enable cross-border investment. 5. Technological revolution, mainly in the forms of information technology and communication systems, has made the global financial markets electronically connected on a 24-hour basis.
Raw material are information about markets, risks, ER, returns on investment and credit worthiness. Products are also information about value-added to informational inputs.
Stage I Banking crisis Domestic financial fragility due to ill-devised financial liberalisation; under-regulated and over-guaranteed banks.
Large capital inflows; bank lending boom, but poor quality of bank loans. Banking sector increasingly vulnerable, possible bank runs. 1) Deterioration of firms and bank balance sheets. 2) Drop in asset prices. 3) Increase in uncertainty. 1) + 2) + 3): Problems of asymmetric information increase.
Stage II Currency crisis Loss of confidence (foreign) investors; pressure on the exchange rate. Currency crisis and reversal of capital flows; 4) Debt-deflation (debt in foreign currency). 5) Interest rate increase. 4) + 5): Further increase in problems of asymmetric information.
THE CAUSES
Globally, companies and individuals have an ever increasing demand for capital for both personal and corporate investments. Irrational demand Traditionally, banks have been very conservative and stringent in their requirements. This makes access to finance difficult for the majority of the people.
THE CAUSES
Banks and other financial institutions, mostly in the USA and the UK, have gone through a long period of inappropriate lending. Relaxation of lending terms for mortgages was as a result of the boom in the housing sector. Millions of Americans and British with poor credit history who might not have bought their homes were granted sub-prime mortgages.
THE CAUSES
Traditionally banks finance lending using deposits from customers. With increasing demand for mortgage loans, banks moved to a new model where mortgages were being issued on the bond market or with zero percent deposit. This led to the growing of the mortgage bond market as mortgage brokers focused on less than ideal clients. This proved to be very profitable as banks earned a fee for each mortgage sold and urged brokers to sell more and more.
THE CAUSES
In the US, the sub-prime mortgages, referred to as Adjustable Rate Mortgages (ARM) had a fixed payment for two years. Then reset to higher (double the interest rate) rates and became more expensive for the people to repay. Millions of Americans are having their homes repossessed due to failure to repay the mortgages. House prices which have been falling at an annual rate of 4.5 percent in the past 3 years and are expected to fall by at least 10 percent in 2008.
Impacts
Bailouts of financial entities The collapse of investment banks (E.g. Lehman Brothers) Weaken growth Recession Reduced demand for imports
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Exchange rate problem Asian nationalistic view: conspiracy theory Private sector borrowing abroad Internal weaknesses Poorly conceived projects Export boom
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