Banking and Finance

(Part 2)


The financial meltdown in US was attributed to Federal Reserve’s repealing of the Glass-Steagall Act of 1933 and enactment of Financial Modernization Act of 1999. This had had set the stage for a sweeping deregulation of the US banking system. The result was too much of creativity in designing the financial instruments which were not based on real value. The only Indian bank which had some exposure to such a market was ICICI Bank. But as it was negligible in its portfolio the interest of the bank was not harmed.
Here the capital adequacy and other such requirements of the Indian system also played a major role. This ensured that the system doesn?t get unstable.


The future ahead


Regulators and legislators all over the world have contemplated taking action with respect to lending practices, bankruptcy protection, tax policies, affordable housing, credit counselling, education, and the licensing and qualifications of lenders. Regulations or guidelines can influence the transparency and reporting required of lenders and the types of loans they choose to issue.

When something goes wrong the regulator and the government has to bail out the financial institutions. So now there is pressure on these institutions to agree to a more stringent regulatory environment where will be accountability and discipline. So the coming days will see a more conservative stance on the part of the regulators world over. This will be truer for the banking institutions which are systematically important for the economy.




Banking system affects everybody in the society. So to protect the interest of this sector and to ensure the well being of every stakeholder of the economy is the top priority of every regulator. In every financial crisis the banking system plays its own role. But in the revival of the financial system too the banking system plays a definitive role. The future of economy worldwide will, to a great extent, depend on how the banking system responds to the challenges of the hour.




Impact of Financial Meltdown on the Banks of Different Countries




Ranked tops in the world by the World Economic Forum for soundness of banks. Canada’s big five lenders all reported healthy profits in their most recent quarter, generally beating analysts’ expectations. Tightly regulated, with cash-spewing retail banks that can offset losses in other areas of the business.


United States


There are 252 problem banks being tracked by the government’s bank insurance program. In 2008, 25 banks failed, including household names like Washington Mutual. The government has rolled out numerous programs and spent at least $1-trillion (U.S.) in a bid to prop up the financial system, but there are no sure signs that the bailouts are working. The Federal Deposit Insurance Co. is now on track to seize 100 failed banks in 2009.




The big economies in South America have had little trouble with bank failures resulting from stumbles on risky assets such as subprime mortgages. Still, they won’t be immune to rising defaults from slowing economies, which will be a test of how far financial regulation and bank management have come in recent years.




The banking system of this tiny island nation – which boasts a population half the size of Winnipeg – represents probably the most spectacular rise and fall of the global financial meltdown. In 2003, Iceland’s three main banks had just a few billion dollars of assets, but by 2006 this hit $140-billion (U.S.). Today, all three have failed and been nationalized in a bailout that’s cost about $330,000 per citizen, leading to the collapse of the country’s currency and economy.




Sweden faced a banking crisis in the 1990s, and was forced to remake its financial sector. This time around, while one bank has failed because of toxic assets, the country has mostly dodged the problems and Sweden’s banking sector was ranked second only to Canada’s for stability by the World Economic Forum. Exposure at some big banks to Eastern Europe could lead to loan losses.




The British government has been forced to bail out big lenders such as Lloyds Banking Group, Northern Rock Plc and Royal Bank of Scotland, which have been crippled by forays into risky mortgage products before the property market in the UK and in the U.S. fell apart.




The country’s reputation as the home of the quiet, prudent banker is in shambles after gambles by Swiss giants UBS AG and Credit Suisse led to massive losses totalling more than $65-billion (U.S.). The government is now looking to write new rules to keep the financial sector out of trouble.




Austria has historically been the bridge between Western Europe and Eastern Europe. In recent years some of its largest lenders focused on expansion in such countries as Czech Republic, Romania and the Ukraine. Lending to the Central and Eastern European region amounts to almost 70 per cent of Austria’s gross domestic product, according to Moody’s. That was great when those countries were booming, but Eastern Europe is hurting badly and now many loans are likely to go bad.




Spain’s banking system has held up better than most with banks reporting gains in profit in large part because of strict regulatation when it comes to high risk assets, a legacy of a banking crisis in the 1970s. As a result, big Spanish banks like Banco Santander focus mostly on low-risk retail banking. Still, there are signs it may not last. The country’s swooning property market could lead to loan defaults, and the government and some bank executives warn that the domestic banking sector may have to be restructured should the global financial crisis deepen.




Namibia has the highest-ranked banking system in Africa for stability, well ahead of Spain, the U.S. and Britain. According to the International Monetary Fund, the country’s banks entered the financial crisis very profitable and well capitalized. And while the country is being buffeted by the global troubles, the resource-based economy is still expected to grow 1 per cent this year, according to Namibia’s central bank.




The Russian government has already invested about $11-billion to try to aid banks, and is looking at another $55-billion stimulus package to restart the economy and support the country’s ailing banking system. Lenders are suffering from a fast downturn in the oil-powered economy of Russia.




China’s big banks have avoided troubles with subprime and other toxic assets, and may benefit as the government unveils a big stimulus package designed to keep the country’s economy growing quickly. If that doesn’t work, though, expect the banks to face bigger loan losses.




Japan’s response to the banking bust of the 1990s was a `What not to do’ lesson. The country put off dealing with bad loans and propped up bad banks for too long. Just as the country finally started to take big steps to fix the problem, this financial crisis cropped up. So far, Japanese banks have avoided the worst of it, signalling perhaps they’ve learned from experience.




Ranked fourth by the World Economic Forum for soundness of banks, Australia’s system shares many attributes with Canada’s. It’s centralized, with a few big players that are making money. The big problem for Australia is an economic one: its banks may not be big enough to take up the slack as global lenders cut back on lending, leaving the country’s borrowers in the lurch.



Banking and Finance