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International Banking - Assignment Example

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Bank risk taking strategies before the crisis Short term interest rates This strategy was applied to minimize the chances of bank customers withdrawing their deposits. This serves to ensure that the bank liquidity and capital base is maintained high. With the high capital base, the bank dilutes the regulations that govern lending to their customers and thus making loans more accessible…
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International Banking Assignment
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Download file to see previous pages Monetary policy A lower monetary policy increases the bank’s risk taking. When the monetary policy is low, it impacts on the loan industry’s ability to lend and give mortgage. It also impacts on the consumer and the business loan interests. These insufficient considerations to protect the losses that could be incurred through loan defaulters, just served to increase the inappropriate usage by the loan borrowers. This created a need to put into place the measures that reduced the misuse of these funds. Therefore, a well laid down strategy integrating the mode of pay and the borrower’s loan thresh hold and ability to service it had to be established (Jaffee, 2010). This measure was meant to eliminate the motivation that encouraged the borrowers to take higher risks of unplanned for huge sum borrowing. Executive compensation arrangements is an arrangement that enabled the executive to get huge cash amounts of equity based and bonus compensation before the long-term consequences of decisions are realized. This motivated the executive to only pay attention to the short-term outcomes and fail to focus on the long-term adverse effects this had on the shareholders. This therefore called for the implementation of adequate legislation that would minimize the chances of the executive undertaking activities that exposed the banks to higher and excessive levels of risk taking. There has been found to have a need to instill into the banks management a good system of eliminating these risks. Secondly, internal Investment is another strategy that was applied by most of these banks. There was a high tendency of the executives of these banks to invest heavily on the shares of the banks they headed. Consequently, this tendency made them disregard the possibility of falling into the crisis. They only perceived the upward trend of investing more and more to increase their share holding in their companies. According to Calomiris and Mason (2004), it is against this background, that a need to regulate the executive pay was realized. This move is to ensure that the executives’ financial capacity is strongly linked to the shareholders interest. This being he case, the executive is hindered from possessing the great ability of investing highly into the organization they are heading. This ensures a reduced executive’s ambition, and consequently instills a sense of vigilance and supervision of lending activities by their banks. Bank performance Inflow of foreign currency Banks total assets in millions AGRI BANK 39866.5 47007.4 52264.0 63285.8 66143.3 AMEGY 9351.94 10359.2 11836.1 12354 11089.3 ALLIANCE 9490.5 10601.1 9368.8 8503.5 172313.0 Years 2005 2006 2007 2008 2009 There was an influx of foreign currency from other continents. It is this influx of these foreign currencies that resulted to relaxation of the lending terms by the banks. This served to enable business community to invest in the housing market. Later, the value of the houses greatly declined and consequently there were greater losses incurred by those who had invested in homes. These loses in turn enhanced the high rate of defaults in loan repayments, which in to a large extent minimized the financial stability of the banks. The banks instability affected the overall performance of the economy by slowing ...Download file to see next pagesRead More
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