How the World Crises Happened and What are the Causes - Essay Example

? World crises (international business)Introduction The latter part of the year 2008 witnessed rapid weakening of the global economy. The turbulence in financial market was felt from all over the world. Initially it was thought the crisis to be one of solidity and would affect only a small number of organizations. But soon the crisis began to show its acuteness which called for involvement of states. The banks and the financial institutions suffered from the crisis. The rates of the interbank lending continued to take the rising curve despite high decline in the interest rates of the Central bank around the world. This indicated the banks lacked confidence in each others’ financial strategy. The resultant was steep fall in both personal and corporate credit. This multiplied with the fast recession that occurred in the housing and the construction markets. The financial institutions especially the investment banks have been lending to each other at lower rates. The reason is that the banks have been well aware about the solvency of other institution and don’t want take high risk rather they want to keep the cash reserve for themselves. As lending by the bank lowered due to the economical instability, the bank increased the borrowing cost to increase the operational revenue. This strategy was taken by the banks in order to maintain the sustainable business operation in the financial market. The company undertaken for discussion is Barclays PLC. The company is a multinational bank of Britain. It operates in the financial sector and is headquartered at London. The operations of the organization spread over 50 countries and territories. The company emerged as the fourth largest in terms of total assets in the year 2010. The organization has got two business clusters namely retail and Business Banking as well as Corporate and investment Banking. The company is listed in the London Stock Exchange. How the crises happened and what are the causes The collapse of the U.S. housing market regarded as the housing bubble is characterized as one of the prime reason for the situation to occur. The collapse resulted in surge of default of mortgage loans (World Health Organization, 2009). The collapse of the real estate market and the subprime mortgage market of the U.S. can be held responsible to spread the severe effects of the crisis. Uncertainties accrued in the financial system. The creditors became inclined to pull out their funds and cashed out the securities issued by the financial institutions. The situation thus caused led to shutting down of many institutions while others just managed to survive. The loan and credit facilities available from the banks dried up. The investors began to dump their holdings and the obvious situation was downturn in the share market. In order to create securitization, the banks started to borrow more money. The dependency of the banks on the savers can only be felt when the banks are not able to pull out by selling loans on the basis of securities. Some of the banks launched to buy securities which increased the exposure of the banks towards risk. When the problem got realized, the process of lending got slowed. Some of the banks were on the verge of the most risky loans which was beyond the intention of the investors. The lenders fell upon to take back their loans. The investment banks fell drastically as they had no or little deposits. The problem got intensified and even the banks with large capital reserves began to feel the pressure. They turned to the government for support. The banks began to feel nervous to loan out the injected money and the shrinking banks sucked money out of the economy. In spite of the fact that the global financial crisis has shown its effects a year ago, yet the prime banks of UK were able to accrue a profit in the second quarter of the financial year 2009 in the area of non-recurring items. The retail business of Barclay got affected along with the top three banks of UK. In the middle periods of the year 2009, Barclays reported that profit has decreased far more than what it was in mid 2008. The organization reported that profit before tax has gone down by more than ? 300 million in the half year ended in 2008. The impairment charges increased as the organization acquired the North Business of Lehman Brothers in the year 2008. The total assets of the bank decreased and two reasons can be sited for this situation. These are reduction in loans and advances and derivative balances. The bank moved towards more foreign exchange rather concentrated on domestic landings. At the same time customer current as well as term deposit also decreased (Barclays, 2009). The deterioration in the performance of retail business can be accounted for the following reasons. The second half of 2008 witnessed reduction in non net interest income due to the customer withdrawal of single premium payment that is based on products relating to insurance and even reduced the fees more. The margin on domestic funding of Barclay reduced due to lower funding and deposit margin also fallen down. The overall costs of funding rose not because of the reprising of the assets. The level of unemployment continued to rise along with the increase in arrears. So it can be accounted that the overall decline in retail business of Barclays was due to the backdrop of the sustainable growth in consumer lending (KPMG, 2009). The overdraft court case also contributed to the deterioration of the retail business of the bank. During the periods of financial crisis, institutions like building society, seven major banks and the office of Fair Trading started a case with the aim to analyze the legality of unauthorized institutions as well as personal overdraft charges. More than 90 percent of the current accounts of UK were offered by these institutions. The case shed huge impact on the current account holders of UK and they started to withdraw the accounts from the banks. The company under consideration faced huge loss in the current net interest income. Barclays had large number of institutional as well as current accounts belonging to individuals which contributed in the operating revenue of the bank. The global retail cluster of the bank took place in four different areas worldwide in the time of recession. In the periods prior to the financial crisis, the bank was bound to take a lending of more than ?1.5bn from the bank of England. During that time the bank was not able to settle down the debts with other banks at the end of trading on each day. Therefore the lending was the act of the lender of the last resort. A rumor regarding the liquidation of the bank spread. The main reason behind the lending procedure to take place was malfunctioning of the computerized settlement network of the bank. In the later part of 2007, the shares of the company dropped 9%. The bank was temporarily suspended from trading of its share due to the rumor of ?4.8bn bad debts in the US market. In the initial part of 2009, the Barclays bank of Uganda closed its operation as the operational revenue of the bank was so low that it had to lay off 200 workers (Chinaview, 2009). Barclay capital was affected by the prevailing market conditions in mid 2008. The negative impact of recession on the Barclay is reflected through its year ending financial results of 2008. Profit before tax of Barclays group declined to ?6,035miilion, a 15% decline from 2007 year end. This declined in its profit was largely due to the massive losses in the credit market. Profit after tax increased 2% from 2007 and this was due to 12% reduction on the tax on profit because of its noticeable acquisition of Lehman Brothers North American Business. Management of the crisis Barclays reported in the results of the second quarter of 2009 that it has been able to increase the level of profit by around 8.4% in the last 52 weeks. Experts are of the opinion that buying back of debt worth ?1,192 million of Barclays Capital contributed to the success. The British government started to nationalize the banks in early part of 2009. Therefore, the authorities decided to inject ?37 billion to the banking industry. A large proportion of the money they decided to inject acme from the tax payers’ money. If the process is actually implemented then, the major percentage of the stake of the five major banks would become public ownership. Barclay rejected this proposal as they were not eager to sell their stakes to the public. The company rose over ?7 billion of new capital from the market. The newly raised capital included ?2 billion from cancelation of dividends and the rest mainly from both the new and already existing shareholders of the company (The Telegraph, 2008). The bank started loss in net profit in the year 2007 and the lowest point was achieved in 2009 in the last five years of business. In order to reduce the concentrated geographical risk of the economy, the management took the initiative to diversify into different sectors of the market where the financial crisis has comparatively shed less impact. When all the banks was about to sell a major percentage of their stakes to the public, Barclays did not followed the footsteps. The organization showed confidence in them to recover from the turbulence. In mid 2008, the company announced to purchase the trading as well as the investment divisions of Lehman Brothers. As a part of the deal, the company also acquired the New York headquarter of Lehman Brothers. A revised version of the deal was announced within few days to acquire the core business of Lehman Brothers. The plan involved a sum of ? 700 million. The yearend report of 2009 indicated that the footprints of the recession and the recovery process undertaken by the organization. The report witnessed a 96% increase in net profit. The major reasons that can be accounted for such a significant increase in net profit are buy-backs and extinguishment. In order to avoid the curse of recession, the management took the initiative to diversify. The statement of the Group Chief Executive published in the trading update, 2007 says that the policy of the management to diversify the profits paved them the path to make business both inside and outside the boundary of UK. The good underlying growth in the Global retail and Commercial Banking contributed in their success in the nine months till September, 2007. The company was able to lend ? 18bn to the households and business of UK and they were able to keep the balance sheet under control. The sound risk management policies undertaken by the authorities and the broad based banking lines both by geography and business line contributed to the success of the organization. Barclays Bank had documented impaired loans worth ?19.9 billion, which was a raise of 27.0 % from ?15.7 billion at the end of the year 2008. The values of impaired loans as well as advances to clients amplified throughout all areas. The impaired loans computed as a percentage of gross loans and advances augmented to 4.5 % from 3.1 % for wholesale clients. For the retail clients the percentage rose from 3.7 % to 5 %. The major amplifications in the value of wholesale impaired loans were observed in the Barclays Capital as well as the Barclays Commercial Bank. Conclusion The global financial crisis had major impacts around the world especially on the financial institutions belonging to both developing as well as developed countries. Along with the overall banking industry in UK, the selected company was also affected badly by the crisis. Barclays bank was largely affected by the global financial crisis in its overall business perspective as well as financial perspective. The maximum losses in the market for credit lead to huge loss for the company. As the company is mainly an investment bank, it had huge lending in the credit markets of UK as well as other developing countries. Lack of operational revenue forced the company to close down the overseas operations. The company lacked the potential to bear the operational expenses. These factors forced the existing customers and the shareholders of the organization to take into account the risk of liquidation of the overall group. The initiative from the part of the company to acquire other banks or the business of other banks and penetrate into the market more effectively cannot be held as the reason. The bank also followed the strategy of funding some potential medium scale business in Europe. The company used to earn interests from such strategies and they used it to cover the operational expenses of their business worldwide. While some the institutions preferred to sell a large part of their stakes to the tax payers, Barclays showed confidence in their own potentials and proved successful as implicated in the financial results of the year 2007 and thereafter. Reference World Health Organization, (2009). The Financial Crisis and the Global Health., 2-3. Barclays. (2009). Barclays Bank PLC Annual Report 2008. 9-12. KPMG, (2009). UK Banks : Performance Benchmarking Survey. 15-16. Chinaview. (2009). Uncertainty continues as global financial crisis takes toll on Uganda. The Telegraph. (2008). Financial crisis: Government UK unveils bail-out of UK bank. Appendix Read More