japan crisis(2)

8/3/2019 Japan Crisis(2)

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JAPAN CRISIS


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Postwar financial system

v Bank- based system with underdevelopedstock and bond market.

v Stable system no threat of new

entry.v Safe but inefficient system.v Postwar system could not last

forever.v Banks grew too large but restricted

by many restrictions.


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4 basic causes of bankdifficulties

v Failure to create prudential regulatorysystem.

v Macroeconomic mismanagement.

v

Effect of globalization.

v High rate of financial innovation.


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Prudential regulatorysystem

v Deregulation of the system took placewithout creating a effective system.

v Generates competition.

v

Profit no longer guranteed.


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5 microeconomic policymistakes

v Interest rates were at postwar lows.

v Not easing monetary and fiscal policies inthe early 90s.

v Relying excessively on easy monetarypolicies in the mid 90s.

v Fiscals stimulus through supplementary

budgets in the mid 90s, too little too late.v Wrong optimistic forecast for 97.


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Effect of globalization

v Economic and financial policies subject toforeign pressure.

v World s largest creditor nation: Japanese

financial institutions engaged in foreignlending and portfolio investment.

v Flourishing of a free global capital market.v Big bang deregulation creates competition

in japan home market from foreignfinancial institutions.


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Financial technologyinnovation

v Wide range of new financial derivatives.

v

Mostly Americans and some Europeansplayers.

v

Japanese bank unable to learn.

v The most capable japanese are hired awayby foreign firms.


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Banking sector problem

v Mergers and failures have left japan with 7major banks.

v Low profitability for more than 10 years.

v

Banks depends too heavily on revenuefrom lending.

v Government sponsored financialinstitutions.


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Comparison to us banks

v Interest margin of japanese banks 1.2%compared to 3.3 to 3.5 of assets.

v other revenue 38% revenue fromlending operations compared to us 73% oflending revenue.


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Bank problem example

v 1.1 trillion yen of public funds injected intoasahi and daiwa banks.

v March 2003: asahi and daiwa banks merge

into resona bank(5th largest).v Resona granted another 1.96 trillion yen.

v September 2003: resona records loss of

1.76 trillion yen for period between Mar-sept 03(90% capital provided, disappears).


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Continued

v Regulators principal aim to avoid largebank failures.

v Regulators did not systematically forceother banks to reassess their risk ratings.

v Gives little incentives for banks to

restructure.


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Analysis

v Cumulative loan losses by banks since1990 is 91.5 trillion yen(18% of current

japanese GDP).

v Tax player burden very likely at least 100trillion yen(20% of GDP).


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SOUTH EAST ASIAN CRISIS


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Effected countries

v Indonesia

v South Korea

v

Thailandv Hong Kong

v Malaysia,

v Laosv Philippines


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leading to and worseningthe crisis

v Financial liberalisation

v Currency depreciation and debt crisis

v Liberalisation and debt: the Malaysian case

v Local Asset Boom and Bust, and Liquidity Squeeze

v The fall in output

v

Easing of fiscal and monetary policy


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Chain of events

v Bank failure at Thailand

v Corporate failure at Korea

v Policy mismanagement at Thailand and Korea to

defend their pegged exchange rated

v International intervention IMF


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Effect on india

The effect of SEA crisis on India intrinsically is mildfor the following reasons:

v Full capital convertibility is not allowed

v Lock in period for foreign investment in real estatev Floating exchange rate with some influence by RBI

during period of crisis

v Strong fundamental growth with services sectorbeing the prime reason

v External debt to GDP has been declining for the past

few years


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IMF handling of crisis

v Financial Assistance

v The austerity Programme

v Fiscal Policy

v

Monetary policy

v Restructuring


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Analysis

v High saving and investment rate.

v Strong emphasis on education.

v Stable macroeconomic environment.

v Free from high inflation or major economic slumps.

v High share of trade in GDP.


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EUROZONE CRISIS


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v It is an economic and monetary union of 16European union members.

v Adopted EURO currency as their sole legaltender.

v The European Central Bank (ECB) is theinstitution of the European Union (EU)tasked with administrating the monetary

policy of the 16 EU member states takingpart in the Euro zone.

v Members-

Euro Zone


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v Before one to could even think of the end of greatrecession of 2008, Greece gave birth to another crisis.

v Greece debt crisis is actually an evolution of the global

crisis.v Greece allowed deficits from Central bank and

government bonds to pile up.

v

Greece debt came to light in 2009.

Europe crisis


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Causes not just a financial crisis

v Sharp rise in commodity prices

v Sharp appreciation of the euro

v Lagged effect of past interest-rate rises

v Imbalances and (housing) booms in some EUcountries

v Then shock from US hit Europe:v US consumer retrenchment

v Fed rate cuts led to more appreciation of euro

v Toxic assets held by EU banks


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Why did the Crisis Spread?

v Subprime Debt Obligations made in USA held around the worldcaused global financial shock.

v Housing bubbles burst in UK , Ireland, Spain as well as US.

v Failure of Lehman Bros in September 2007 caused massive panicover counterparty risk. AIG required $180 billion bailout tocover Credit Default Swaps, insurance against bond defaultsunderwritten without reserves.

v Stress on banks around the world led to shrinking creditavailability. Shadow off-balance-sheet banking sectorcollapsed as short-term funding vanished.

v

C i i


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Current crisis

vThe European debt crisis came into limelight with Greece.

vThis was done by the new government who took charge after

the general elections.

vShocking role of Goldman Sachs in the fraud.

vNew government revealed the facts which actually happened in

which the previous government had overspent and also reported

a debt which ballooned to 12.7% of the GDP.

M P li R b


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Monetary Policy Response byEuropean Central Bank (ECB)

vECB injected liquidity into European banks unable toobtain short-term funds in market.

v

Federal Reserve used Euro-dollar swaps to make dollarsavailable to ECB to lend to banks.

vECB did not lower interest rates until October 2008

because of its focus on inflation.vEuro fell against the dollar due to safe haven flight toUS Treasury securities.

Fi l P li R R i


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Fiscal Policy Responses to Recession

vAutomatic Stabilizers of falling taxes, rising welfare and

unemployment payments kick in as incomes fall andunemployment rises.

vDiscretionary Fiscal Stimulus enacted in most countries,

depending on their fiscal positions.

vEuropean countries limited by Stability and Growth Pact to3% fiscal deficits, except in time of exceptional economic

distress.


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Sub-prime lending

v The term subprime refers to the creditquality of particular borrowers, whohave weakened credit histories and a

greater risk of loan default than primeborrowers.

v

In addition to easy credit conditions,there is evidence that both governmentand competitive pressures contributed toan increase in the amount of subprime

lending during the years preceding the


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Background and causes

v The HOUSING PRICES peaked inearly 2005, started to decline in 2006 and2007.

v An increase in loan packaging,marketing and incentives.

v Refinancing Became Difficult.

v

Major Cause : Banking System.


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Financial crisis of 2007 to the present

v Liquidity shortfall in the United

States banking system

v Subprime lending :

Credit card,

Mortgage, Auto.

f th h i


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Growth of the housingbubble

Between 1963 and 2008

Financial crisis of 2007 t


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Financial crisis of 2007 tthe present

v The immediate cause :

The housing prices

goes down


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Easy credit conditions

v Lower interest

rates

v Easy lending

v Weak Verification

System


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Fannie mae & Freddie mac

v Two U.S. Government sponsoredenterprises.

Behind the smoke n mirrors,

v they transfer wealth from tax payeres

to mortgage borrowers.


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The impact of the crisis

v Citigroup ($55.1 bn)

v Merrill Lynch ($52.2 bn)

v US-based firms( $260 bn)

v European firms ($227

billion)


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Outlook: Uncertainty at an all-time high


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Analysis

v Major Cause : Banking System

Subprime lending :

v Credit card,

v Mortgage, Auto.


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THANKYOU

BHAVIN

binitaankit

akshay

japan crisis(2)

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