ppt on banking crisis-kritika

8/22/2019 PPT on Banking Crisis-Kritika

1/35

Banking Crisis International

Banking

Submitted By:

Ankit Arora (212)

Ashish Agarwal (217)

Dolly Kotak (227)

Kritika Jain (239)


2/35

Agenda

Introduction

Japanese asset price bubble

Cyprus Crisis

Spanish Financial Crisis

How to Avoid Banking Crisis


3/35

Agenda

Introduction


Cyprus Crisis




4/35

Introduction

Banking crisis includeBank runs

Banking panics and

Systemic banking crisis.

Marked by bank runs that lead to the demise of

financial institutions, or

by the demise of a financial institution

that starts a string of similar demises.


5/35

Agenda

Introduction


Cyprus Crisis




6/35


What?

Why?

Effects ?


7/35

Economic bubble from 1986 to 1991.

Indicated that both financial andmacroeconomic instability are closely relatedto large fluctuations in asset prices.

Japanese Asset Price Bubble


8/35

Japanese Asset Price Bubble


9/35

What?

Substantial increase in asset prices

Overheating of economic activity

Increase in money supply and credit

Intensified Bullish Expectations

Financial deregulation in progress

Inadequate risk management on the part

of financial institutions Taxation and regulations biased toward

accelerating the rise in land prices

Aggressive bank behavior

Why?


10/35

Effects?

The subsequent collapse of the bubble lasted for

more than a decade and contributed to the so-called Lost Decade(1991 to 2000).

Slowdown in growth

Diminishing global role

Recession and natural disaster (low IndustrialProduction)

Quality of life remained high

Discouraging employment trends

Chronic fiscal deficits since the mid-1990s


11/35

Agenda

Introduction


Cyprus Crisis




12/35

Cyprus is a self-professed offshore banking haven.

Cyprus has a political and cultural affinity with

Greece, the two countries and their economies areclosely related. Therefore, when Greece entered amajor economic slump, Cyprus also suffered.

When Greece partially defaulted on its sovereign

debts last year. Cypruss two biggest banks, theBank of Cyprus and Laiki Bank, held large amountsof Greek government debt and took a major hit inthe partial default

Cyprus Crisis


13/35

Cyprus is a popular place for cash-rich Russian investors tohold offshore deposits.

25 and 40 per cent of all cash in Cypruss banks is held by aRussian account holders.

When the Cypriot economy began to slide, it first went toRussia for financial assistance. It received a loan of 2.5billion in early 2012.

Cyprus asked for a bailout from the EU and IMF in summer2012.

Eurozone finalised a bailout deal where Cyprus wouldreceive 10 billion in Troika loans, as long as it came up with7.2 billion itself.

Cyprus Crisis


14/35

INTRODUCTION OF HAIRCUTS


15/35

It was proposed to raise this amount by taking moneyfrom depositors. The idea was that accounts withbalances over 100,000 would be hit with a levy of9.9 per cent. The account holder would be givenshares in the bank in exchange.

Accounts under 100,000 would also be hit with a levyof 6.75 per cent.

It Initiated BANK RUN. Bank remain closed for 10 days.

Cyprus Crisis


16/35

With no deal from Russia, and an ultimatumfrom the ECB, the Cypriot parties plans tocreate a National Solidarity Fund, which willinclude public and Church assets, as well as oiland gas rights, which could be offered as

security for any foreign loan

Cyprus plans to split Laiki into two banks essentially good and bad banks hoping to

lower the price of saving the good bank.

Cyprus Crisis


17/35

Theres was lot of

Russian capital in Cyprus,estimated before thiscrisis at $15bln. Russian

depositors in Cyprushave been using thesector for tax evasion

and secrecy basedactivity.

Cyprus spentinvestments poorly

instead of creating realassets in country.

Offshore assets in Cyprusjust move elsewhere,

such as Latvia or theCayman Islands.

This leads to bust thereal estate and tourismbusiness in Cyprus as

foreign investors rushesto sell property held in

Cyprus.

Reasons behind Crisis


18/35

The Crisis of Cyprus shows the lack of financialstrengthening and mutual trust in EU ,more specifically inwestern banking system. Some experts thinks that if ithas happened in Cyprus, It can happen again in EU.

Tax havens have been criticized because they often resultin the accumulation of idle cash which is expensive andinefficient for companies to repatriate. Many tax havensare thought to have connections to "fraud, money

laundering and terrorism supporting activities.IMF shouldlook into the TAX HEAVEN status of such countries toavoid repetition of CYPRUS Crisis.

Learnings for the World


19/35

So who is next.. Any Guess


20/35

Agenda

Introduction


Cyprus Crisis




21/35


SPANISHFINANCIAL CRISIS

2007

2008

2009


22/35

European Sovereign Debt AGlimpse

Referred to as the Euro zone crisis 1992 signing of the Maastricht treaty, under which

the members of EU pledged to limit their deficitspending and debt levels.

In 2000s members failed to stay within the

confinement of Maastricht criteria and startedsecuritising future government revenues to reducetheir debt levels/ deficit.

Sovereigns started selling rights to receive futurecash flows, allowing govt to raise funds without

violating debt and deficit targets.


23/35

International agreed standards were

completely ignored Masking of deficit and debt levels through

a combination of techniques likeinconsistent accounting, off balance

sheet transactions, use of complexcurrency and credit derivatives structures.

With the increase in private and govt debtlevels fears of sovereign debt increasedfrom the late 2009.



24/35

The Bank bailouts and economic downturn increased

leading to downgrading of credit rating Concerns increased in early 2010 which resulted into

implementation of financial support measures such asEuropean Financial Stability Facility (EFSF) and EuropeanStability Mechanism (ESM)

EFSF an SPV created to deal with the European sovereigndebt crisis

ESM An international organisation located in Luxembourgcreated to safeguard and provide instant access tofinancial assistance programs, max lending capacity Euro600 million



25/35


Spain had a comparatively low debt

levels as compared with advancedeconomies prior to crisis

Spains trade deficit reached to 10% ofthe countrys GDP

Debt was avoided by ballooning taxrevenues generated from the housing,which helped in managing the increasedgovt spending without debt

accumulation.


26/35

When the housing bubble burst, Spain

spent large amounts on bank bailouts. In May 2012, Bankia received 19 bn euro

bailout

In Sep 2012 Spanish Banks required Euro

59 bn in additional capital to offsetlosses from real estate investments



27/35

Effects

Spain Debt Levels

Property Bubble

Spanish Banking System

Unemployment Crisis


28/35



29/35

Property Bubble

House ownership in Spain is above 80%

Desire to own house was encouraged bygovernment in 60s and 70s

Tax regulations too encourage houseownership: 15% of mortgage amount to be

deducted from personal income tax Banks offered 40 years mortgage and most

recently also started offering 50 yearsmortgages

Euro 651,168,000,000 was the mortgagedebt at the end of 2nd quarter of 2005.


30/35

Spanish Banking System

The Spanish banking system had been

accredited with one of the most solid andequipped among all western economies

Unusual accounting standards were observedwhich have smoothened earnings for thebusiness but have misled the regulators

Accounting standard such as DynamicProvisioning which violated the standards setby IASB

In May 2012, credit ratings of Spanish Banking

system has been downgraded, some have evengot junk status.


31/35

Employment Crisis

The unemployment rose to 17.4% at the end of FY 2009

4,000,000 people were unemployed in a single month ofMarch 2009

Spains unit labor cost also increased 40% relative toGerman unit labor cost changes

2 tiered workforce: Privilege labor which got the wageincrease and the unprivileged labour which were offeredpink slips

Spains unemployment rate reached 29.16%, twice thatof the Euro-zone average in April 2013


32/35

Lessons learnt from the Crisis

Sustainability of the external deficit in a

monetary union A Need to Increase Financial

Transparency and Regulations

A Need to Increase Spanish Banks

Efficiency An Urgent Need to Incentivize a Culture

of Entrepreneurship, Innovation andCompetitiveness


33/35

Agenda

Introduction


Cyprus Crisis




34/35

Steps to be taken to avoidBanking Crisis

Better mortgage products Avoid high volatility in monetary policy

Appropriate response of monetary policyto asset prices

Manage capital flow volatility Look for signs of over leveraging

Active dynamic financial regulation


35/35

Thank you

ppt on banking crisis-kritika

Documents