Banks in Emerging Markets Weathered the Recent Financial Crisis - Essay Example

? Banks in emerging economies better weathered the economic crisis Contents Introduction 2 Reliance on old fashioned mores of banking 2 Role of Governments of emerging countries 3 Conclusion 4 References 6 Introduction Way back in 2005-2006 when Chinese banks decided to go public, the entire underwriting operation was overseen by financial giants of the western hemisphere and the prospectus issued by these erstwhile government owned Chinese banks were full of terms that are used in free market and industrially well developed western economies. The whole effort reeked of a big brother helping his younger sibling to learn how to walk by holding his finger. The scenario has, however, undergone a radical transformation with all those big brothers either forced to close their shops or helped to survive through humongous government bail-outs while Chinese banks are going from strength to strength and have become the largest in the world. Critics would surely credit their phenomenal growth due to the global economic shift that has taken place during this period where China has become the world’s manufacturing center and back office. While these two happenings have indeed helped in the growth of Chinese banks, one should not lose sight of the equally important fact that while banks in developed western economies crumbled during the global meltdown during 2007-2009, Chinese banks weathered this economic turmoil without any apparent signs of wear and tear (The winners' dilemma, 2010). Reliance on old fashioned mores of banking Banks in India, China and Brazil still prefer to do banking in the so-called old fashioned manner of carrying out business. They depend almost entirely on deposits they can mobilize and never lend out more than they collect through deposits. Also, they never depend on economically unstable international financial instruments that promise huge possibilities of return but are forever volatile and dependent on a host of economic factors that are linked to health of diverse economies of the western hemisphere. If there is turmoil in one developed economy, its impact spread across the entire banking sector via these volatile international financial instruments (Rambo in cuffs, 2010). This conservative approach to banking is also reflected in the comparatively meager salaries and perks that chief executives of banks in emerging economies receive as remuneration. An example might put things in proper perspective. The chief executive of Chinese bank ICBC, the world’s largest bank in terms of market capitalization, received only $134,000 in 2009 which is way behind the remuneration of his peers in western banks (The bigger and bigger picture, 2010). Role of Governments of emerging countries The biggest difference between developed and emerging economies with regard to banking is the extent of involvement of government in banking activities. While governments of developed economies hardly have any say in how banks would be run, governments of emerging economies actively participate in the business of banking. This might initially seem to be an unwarranted governmental intervention in the mechanism of free market but on deeper analysis it becomes clear that governmental involvement shielded banks in emerging economies to a considerable extent from global turmoil during 2007-2009 (Mutually assured existence, 2010). In the matter of growth and expansion Chinese banks have beaten their emerging economy counterparts hands down. The profits of China Construction Bank, the second largest bank in the world, have grown to $16 billion which is decidedly higher than the profits of JPMorgan, Wells Fargo and Goldman Sachs, the three largest banks in United States of America. With such large scale expansion, the problem of bad debts has also increased more than proportionately. Chinese government has taken certain explicit steps to prevent bad debts from eating away into the financial soundness of banks. In April 2010, Liu Mingkang, head of banking regulatory authority in China, issued clear instructions to banks that they need to submit periodic comprehensive review of their lending status. The main focus is on infrastructure development programs that are undertaken by local governments. These programs have long gestation periods, no clear indication of the nature of prospective cash inflows and also sometimes suffer from transparency in operations (Domestic duties, 2010). It is not that only government controls the banking sector in China. There are international banks present in Chinese markets but their presence and clout is negligible when compared with that of indigenous banks (Cross your fingers, 2010). Banks in western countries did not discharge their social responsibilities in a proper manner and they exposed their stakeholders to the vagaries of international market and related speculation without providing for an adequate safety net. Banks in emerging countries however exhibited remarkable financial discipline that ensured healthy financial ratios and enough reserves of liquid assets. That surely does not mean that these banks are not innovative. What they have actually achieved is a judicious balance between risk taking and conservative mores of banking. During the financial crisis the state controlled banks in emerging economies continued to freely offer new lines of credit and the private banks also performed reasonably well while the few banks from the developed economies that had set up branches in these emerging economies either put a moratorium on fresh credit or simply pulled their shutters down. Such undependable behaviour has done little to increase the stature and goodwill of these banks and they would find it extremely difficult to regain their lost ground in future (They might be giants, 2010). Conclusion In spite of all the glamour and glory that enveloped Wall Street bosses projecting them as financial magicians that could materialise profit from seemingly nowhere, the subprime crisis and consequent global economic downturn exposed their fragility and economic unsoundness. Banks in emerging economies, on the other hand, did not only withstand the global shock but actually increased in size and value during the entire period when banks in developed economies were literally in tatters. There are two reasons for their success. Firstly, these banks never transgressed the time honoured tenets of banking that stipulate that there should be enough cash reserves with banks and they should be extremely cautious when dealing with potentially volatile assets that might be offered as collaterals. Secondly, majority of banks in emerging countries are government owned which lent them an inherent stability and social relevance that automatically generated market acceptance and goodwill. References Economist, Vol. 395 Issue 8682 . (2010, May 15). Rambo in cuffs. Economist, Vol. 395 Issue 8682 , pp. 7-8. Economist, Vol. 395 Issue 8682. (2010, May 15). Cross your fingers. Economist, Vol. 395 Issue 8682 , pp. 19-20. Economist, Vol. 395 Issue 8682. (2010, May 15). Domestic duties. Economist, Vol. 395 Issue 8682 , pp. 9-10. Economist, Vol. 395 Issue 8682. (2010, May 15). Mutually assured existence. Economist, Vol. 395 Issue 8682 , pp. 10-12. Economist, Vol. 395 Issue 8682. (2010, May 15). The bigger and bigger picture. Economist, Vol. 395 Issue 8682 , pp. 4-6. Economist, Vol. 395 Issue 8682. (2010, May 15). The winners' dilemma. Economist, Vol. 395 Issue 8682 , pp. 16-16. Economist, Vol. 395 Issue 8682. (2010, May 15). They might be giants. Economist, Vol. 395 Issue 8682 , pp. 3-4. Read More