JAPAN CRISIS

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Postwar financial system

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Bank- based system with underdeveloped stock and bond market.

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Stable system no threat of new entry. Safe but inefficient system. Postwar system could not last forever. Banks grew too large but restricted by many restrictions.

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4 basic causes of bank difficulties

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Failure to create prudential regulatory system. Macroeconomic mismanagement. Effect of globalization. High rate of financial innovation.

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Prudential regulatory system

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Deregulation of the system took place without creating a effective system. Generates competition. Profit no longer guranteed.

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5 microeconomic policy mistakes

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Interest rates were at postwar lows. Not easing monetary and fiscal policies in the early 90s. Relying excessively on easy monetary policies in the mid 90s. Fiscals stimulus through supplementary budgets in the mid 90s, too little too late. Wrong optimistic forecast for 97.

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Effect of globalization
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Economic and financial policies subject to foreign pressure. World s largest creditor nation: Japanese financial institutions engaged in foreign lending and portfolio investment. Flourishing of a free global capital market. Big bang deregulation creates competition in japan home market from foreign

financial institutions.
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Financial technology innovation

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Wide range of new financial derivatives. Mostly Americans and some Europeans players. Japanese bank unable to learn. The most capable japanese are hired away by foreign firms.

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Banking sector problem

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Mergers and failures have left japan with 7 major banks. Low profitability for more than 10 years. Banks depends too heavily on revenue from lending.

Government sponsored financial 4/29/12 institutions.

Comparison to us banks
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Interest margin of japanese banks 1.2% compared to 3.3 to 3.5 of assets. other revenue 38% revenue from lending operations compared to us 73% of lending revenue.

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Bank problem example

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1.1 trillion yen of public funds injected into asahi and daiwa banks. March 2003: asahi and daiwa banks merge into resona bank(5th largest). Resona granted another 1.96 trillion yen. September 2003: resona records loss of 1.76 trillion yen for period between Marsept 03(90% capital provided, disappears).

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Continued
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Regulators principal aim to avoid large bank failures. Regulators did not systematically force other banks to reassess their risk ratings. Gives little incentives for banks to restructure.

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Analysis
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Cumulative loan losses by banks since 1990 is 91.5 trillion yen(18% of current japanese GDP). Tax player burden very likely at least 100 trillion yen(20% of GDP).

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SOUTH EAST ASIAN CRISIS

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Effected countries
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Indonesia South Korea Thailand Hong Kong Malaysia, Laos

Philippines

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The sequence of events leading to and worsening the crisis

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Financial liberalisation Currency depreciation and debt crisis Liberalisation and debt: the Malaysian case Local Asset Boom and Bust, and Liquidity Squeeze The fall in output Easing of fiscal and monetary policy

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Chain of events
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Bank failure at Thailand Corporate failure at Korea Policy mismanagement at Thailand and Korea to defend their pegged exchange rated

International intervention IMF

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Effect on india
The effect of SEA crisis on India intrinsically is mild for the following reasons:
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Full capital convertibility is not allowed Lock in period for foreign investment in real estate Floating exchange rate with some influence by RBI during period of crisis Strong fundamental growth with services sector being the prime reason External debt to GDP has been declining for the past few years 4/29/12

IMF handling of crisis

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Financial Assistance The austerity Programme

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Fiscal Policy Monetary policy Restructuring

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Analysis
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High saving and investment rate. Strong emphasis on education. Stable macroeconomic environment. Free from high inflation or major economic slumps. share of trade in GDP.

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EUROZONE CRISIS

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Euro Zone
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It is an economic and monetary union of 16 European union members. Adopted EURO currency as their sole legal tender. The European Central Bank (ECB) is the institution of the European Union (EU) tasked with administrating the monetary policy of the 16 EU member states taking part in the Euro zone. Members-

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Europe crisis
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Before one to could even think of the end of great recession of 2008, Greece gave birth to another crisis. Greece debt crisis is actually an evolution of the global crisis. Greece allowed deficits from Central bank and government bonds to pile up. Greece debt came to light in 2009.

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Causes not just a financial crisis

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Sharp rise in commodity prices Sharp appreciation of the euro Lagged effect of past interest-rate rises Imbalances and (housing) booms in some EU countries Then shock from US hit Europe: US consumer retrenchment Fed rate cuts led to more appreciation of euro held Economicbanksby EU crisis
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Toxic Andrew assets 4/29/12 Watt

Why did the Crisis Spread?

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Subprime Debt Obligations made in USA held around the world caused global financial shock. Housing bubbles burst in UK , Ireland, Spain as well as US. Failure of Lehman Bros in September 2007 caused massive panic over counterparty risk. AIG required $180 billion bailout to cover Credit Default Swaps, insurance against bond defaults underwritten without reserves. Stress on banks around the world led to shrinking credit availability. Shadow off-balance-sheet banking sector collapsed as short-term funding vanished.
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Current crisis
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The European debt crisis came into limelight with Greece. This was done by the new government who took charge after Shocking role of Goldman Sachs in the fraud. New government revealed the facts which actually happened in

the general elections.

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which the previous government had overspent and also reported a debt which ballooned to 12.7% of the GDP.

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Monetary Policy Response by European Central Bank (ECB)

ECB injected liquidity into European banks unable to obtain short-term funds in market.
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Federal Reserve used Euro-dollar swaps to make dollars available to ECB to lend to banks.
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ECB did not lower interest rates until October 2008 because of its focus on inflation.
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Euro fell against the dollar due to safe haven flight to US Treasury securities.
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Fiscal Policy Responses to Recession

Automatic Stabilizers of falling taxes, rising welfare and unemployment payments kick in as incomes fall and unemployment rises.
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Discretionary Fiscal Stimulus enacted in most countries, depending on their fiscal positions.
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European countries limited by Stability and Growth Pact to 3% fiscal deficits, except in time of exceptional economic distress.
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Sub-prime lending
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The term subprime refers to the credit quality of particular borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers. In addition to easy credit conditions, there is evidence that both government and competitive pressures contributed to an increase in the amount of subprime lending during the years preceding the

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Background and causes

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The HOUSING PRICES peaked in early 2005, started to decline in 2006 and 2007. An increase in loan packaging, marketing and incentives. Refinancing Became Difficult. Major Cause : Banking System.

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Financial crisis of 2007 to the present

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Liquidity shortfall in the United States banking system

Subprime lending : Credit card, Mortgage, Auto.

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Growth of the housing bubble

Between 1963 and 2008

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Financial crisis of 2007 to the present

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The immediate cause : The housing prices goes down

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Easy credit conditions

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Lower interest rates

Easy lending Weak Verification System

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Fannie mae & Freddie mac

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Two U.S. Government sponsored enterprises. Behind the smoke n mirrors,

they transfer wealth from tax payeres to mortgage borrowers.

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The impact of the crisis

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Citigroup ($55.1 bn) Merrill Lynch ($52.2 bn) US-based firms( $260 bn) European firms ($227 billion)

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Outlook: Uncertainty at an all-time high

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Analysis
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Major Cause : Banking System Subprime lending : Credit card, Mortgage, Auto.

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BHAVI N ankit

THANK YOU

akshay binita

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