Thursday, April 9

Analysis of current Financial Crisis and banking industry

Introduction
The world financial system is now more interrelated than ever. Financial markets are seriously regulated whereas capital markets are expanding in Africa, Asia and Latin America. The banking industry is going in the course of a concentration process with less and fewer players left. Indonesia, Mexico, Nigeria and Turkey are coming into focus after Russia, Brazil, China, India and South Africa have let down. It seems that Europe countries are back in the game, with Germany on the lead for recovery of the continent. On the other hand, the US is still the world's mainly competitive economy, by the IMD World Com­petitiveness Ranking. The procedure of deleveraging the balance sheets of governments and com­panies is under way. Government bond yields and interest rates are at past lows and stock markets have improved to pre-crisis levels.
Therefore what is there to be anxious about? There are eight likely scenarios that might cause the next crisis, not any more significant or likely as compared with the others. For some, prevention is straightforward. For others, some not sure there is a big deal we be able to do.

1.      Stock market

During June 2013 and June 2014, world’s stock markets returned 18 per cent on standard. Certainly, performance was rough, not dissimilar a "normal" year: the market return was about 30 per cent in India, and in China 8 per cent merger. Though, most companies that announced outcomes during 2014 let down markets, and mainly large companies, stock markets have reacted negatively to annual earnings. The cause is that, driven by overload liquidity and a lack of substitute opportunities, a lot of cash has flown in to equity markets. The Yale University economics expert and Nobel Prize winner Robert Shiller has discovered that the gap between stock prices and corporate earnings is now bigger than it was in the previous pre-crisis periods: 2000, 2007. If markets were to go back to their ordinary earning levels, the standard stock market in the world should go down by about 30 per cent

2.      Energy

An energy disaster now might not be caused by the shortage of energy sources - rather the opposite. The expansion of frocking methods and increasing supply of gas in the US has twisted shale gas into an effective geopolitical weapon. If the US Congress were to let energy exports, world’s energy prices would fall considerably. This might be great for companies, but might generate geopolitical problems in Russia and West Asia. These countries depended on energy demand from Western Europe and China, where energy expenses are currently throbbing competitiveness and where a less-expensive alternative might be welcomed with open arms.

3.      New real estate

The circumstances in 2005-07 that led to a real estate bubble have returned: low growing demand, low interest rate and increasing real estate prices in a few markets. With respect to the demand issue, in present market circumstances, the only good-looking investments for institutional investors are equities and real estate. As a consequence, prices are increasing.
Recently, Bank for International Settlements has released information on real estate prices in a number of markets from 2013. During, 2008 to 2013, housing property prices enlarged by more than 60 percent in China, 80 per cent in Brazil, and in Canada 15 per cent.
In addition, there are uncertainties of a bubble in other countries such as UAE and Switzerland. Similar to any other bubble, it would only become one time it bursts. What is dissimilar in 2014 is that at the present central banks have enormous tools to prevent real estate bubbles.

4.      Corporate

The standard for companies is now to be BBB-rated. In the US, there are merely three firms that still are AAA-rated: Johnson & Johnson, Microsoft and Exxon Mobil. 61 were in 1982. As interest rates are low, companies perceive the profit in debt financing. But this means that firms are too more responsive to changes in interest rates. Usually a BBB rating is linked with a likelihood of default of about 4%t in five years. So, we ought to anticipate that in the next 5 years, about sixteen companies in the S&P500 index might go bankrupt. One of them might be the new Enron.

5.      Geopolitical:  

From Ukraine to Nigeria, and from Venezuela vs. Syria, the world danger map shows a lot of hot areas where geopolitical actions might trigger a world crisis. Why should anybody care regarding Syria or Uk­raine? Because fi­nancial markets tend react to political actions. And because, given the financial connection among countries, negative sentiment in China might trigger a market fall down in the US and vice-versa. Let us not fail to remember the outcomes of the Great Wars.

6.      Poverty:

During last few decades the world has turned into wealthier and more flourishing. While the proportion of the population in absolute poverty is at the moment at its lowest height ever, the absolute figure of poor people continues to grow up. In this background income variation is one of the social battles that we require to fight. But the trouble with combating income variation is that the common solutions (usually taxes) hinder the competitiveness of countries. This is one of the long-term crises that will need smart guidance to shun inefficient solutions.

7.      Cash:  

There is great amount cash out there. It is the consequence of quantitative let-up policies that central banks have followed. The surplus liquidity in the system is determined among financial and non-financial organizations. More than four hundred and eighty six billion US dollars in cash has Citigroup; Apple about one hundred and fifty billion US dollars. It is paradoxical that, in a few cases, banks and firms are so wealthy that they could purchase entire countries (total GDP minus government debt). If the corporate segment were to unload such enormous financial resources on to society, they might create hyperinflation and consequently financial crisis. But otherwise we are in circumstances in which central banks print money that they will have to get out of the system later. We know how quantitative let-up works, but we do not recognize how to exit from it.

8.      Banking system:

One of the main components of the banks’ transactions is shadow lending, it is more than hundred per cent of GDP in the US, and about seventy per cent in China. This is more of a crisis in China as compared in the US, due to two reasons. First, in China the banking sector is protected from foreign rivalry - only local banks are permitted to work independently in the country. As a consequence, without any danger in a gigantic market, the leading banks in the world are now Chinese. They are in fact too large to fail.
The second cause is that a big element of Ch­inese shadow lending goes to central government and provincial governments. Banking guideline in China is measured to be very stringent, but we recognize what happens when regulators become self-interested. Without a hesitation, the next banking crisis will be triggered by a Chinese bank.

Conclusion 

We are at the present in a post-crisis stage. Yet, looking behind to between 1945 and 2008, we observe that the frequency of financial crises and recessions is fairly high: at average, there is one crisis every 58 months (US National Bureau of Economic Research). Using other words, statistically words we should be expecting the start of the next crisis in April 2015, it would ending by March 2016. That’s why we are in a post- or a pre-crisis phase? For some, prevention is straightforward. For others, some not sure there is a big deal we be able to do.
I do not desire to be the holder of ill tidings, but I believe we should always speculate what the cause of the subsequent crisis will be. There is no solitary episode of financial crises in the previous 50 years that could not have been prohibited. This time, let us look in front, not react after the crisis has occurred.

References:

1.      Chudik, A., & Fratzscher, M. (2011). Identifying the global transmission of the 2007–2009 financial crisis in a GVAR model. European Economic Review, 55(3), 325-339.

2.      Fidrmuc, J., & Korhonen, I. (2010). The impact of the global financial crisis on business cycles in Asian emerging economies. Journal of Asian Economics, 21(3), 293-303.

3.      Turner, A. (2009). The Turner Review: A regulatory response to the global banking crisis (Vol. 7). London: Financial Services Authority.

4.      Dieckmann, S., & Plank, T. (2012). Default risk of advanced economies: An empirical analysis of credit default swaps during the financial crisis. Review of Finance, 16(4), 903-934.

5.      Riaz, S. (2009). The global financial crisis: an institutional theory analysis. critical perspectives on international business, 5(1-2), 26-35.

6.      Blankenburg, S., & Palma, J. G. (2009). Introduction: the global financial crisis. Cambridge Journal of Economics, 33(4), 531-538.