Causes of the Global Financial Crisis and Its Impact on the Banks Behavior on the UAE Banks - Case Study Example

Causes of the Global Financial Crisis and its Subsequent Impact on the Bank’s Behavior on UAE banks. Inserts His/Her Inserts Grade Course Customer Inserts Tutor’s Name 18 November 2011 The global financial crisis created a huge dent in the United Emirates banking system. The research focuses on the effects of the global financial crisis. The research centers on how the United Emirates banks weathered the global financial crisis. The United Emirates banking system successfully reversed the effects of the 2008 global financial crisis. Global Economic Crisis and subsequent Impact on the UAE banks. Alexandre Chailloux (2009) emphasised the economic debacle suffered by the United States’ banking system triggered the global financial crisis. The complicated interplay of the United States banking system’s valuation and liquidity problems were the root causes of the current global economic crisis (Nanto 2010). Daigee Shaw (2011) stated Japan suffered a -5.2 growth rate in 2009. The financial crisis is characterized by the collapse of the United States housing bubble in 2007. Consequently, the housing bubble triggered the devaluation of the securities listed in the United States stock exchange markets; the securities were secured by real estate properties. The United States market situation created rippling effects simultaneously spreading to the United States trading partners within the global market place. The economic downfall of the United States stocks unfavorably created after shocks. The aftershocks include the significant decline in several stocks listed in the stock markets as well as and commodities markets around the world. The central banks of other countries were unfavorably influenced by the United States’ economic depression, starting in 2008. Benton Gup (Gup 2011) emphasized the United States’ Levin –Coburn Report gave the reasons for the United States financial disaster. The investments in high risk financial investments are part of the economic depression. The conflicts of interests among the United States financial entities contributed to the unprecedented United States economic debacle. The failure of the government agencies to check the reliability of the credit status of a majority of United States companies contributed to the United States economic crash of 2007. The credit-monitoring agencies failed in their duty to monitor and report the credit ratings of each company listed in the United States companies listed in the stock exchange. May Khamis (2010) theorised the current financial status of the banks in the United Arab Emirates suffered minimal effects from the global financial crisis that cropped up in 2008. UAE’s Dubai was the hardest hit (Katzman 2010). Consequently, Dubai had to push for a debt restructures (Rice 2011). UAE’s Abu Dhabi came to the rescue of Dubai (Walker 2010). Specifically, The United Arab Emirates Banks had minimal adverse effects from the write-downs of many sub-prime assets. In fact, the United Arab Emirates Banks have abundant cash inflows from the sale of the country’s increased oil sales. The countries that trade heavily in real estate properties have been severely affected by the 2008 global financial crisis. The countries that primarily engage in oil drilling and sales have been spared the same dismal effects suffered by the United States and some of the European Union countries. Likewise the size of United Arab Emirates is an influential factor. Since United Arab Emirates is a small country, the United Arab Emirates Banks take a small share of the negative effects of the 2008 global financial crisis. In fact United Arab Emirates Banks have low mortgage loans shown in its balance sheet figures. Geoffrey Kemp (2010) discovered the global financial crisis of 2008 negatively influenced the United Arab Emirates Bank. The effect of the global financial crisis of 2008 included the placing the majority of the United Arab Emirates Banks under material liquidity pressures. The liquidity ratios include the current ratio. The current is computed by dividing the company’s current assets by the company’s current ration in the same year. The ratio indicates the company has enough current assets to pay its currently maturing current liabilities during the year. Positively, the United Arab Emirates Banks had witnessed influential capital outflows against the backdrop of widening sovereign risk spreads, substantial declines in the Dubai and Abu Dhabi stock markets. The situation occurred in companies engaged in the real estate business. The 2008 financial crisis precipitated to the material tightening of foreign financial help for non-bank organizations that triggered a corresponding reduction in the United Arab Emirates’ real estate and construction market segments. The Dubai World asked for a restructure of its $26 billion global bank debt (Mirakhor 2009). The capital outflows had been exacerbated by the change in the outlook of foreign as well as local investors who had previously speculated on a revaluation of the dirham currency. The United Arab Emirates Banks maximized a major portion of the prior speculative cash inflows to fund longer term investment projects. The liquidity shortfalls had been increased by the liquidity constraints in the international money market segments. In addition, since United Arab Emirates Bank’s dirham current conversion rate is pegged on the United States dollar, the short term interest rates in the United Arab Emirates had largely influenced by the United States federal funds rate. The United Arab Emirates Bank s’ interbank offer rate (EBOR) currency transfer rate had been reduced from 5.5 percent during the start of 20007 to only 1.9 percent during the June month of 2008. The reflection of the harsh tightening of liquidity conditions in United Arab Emirates during the summer of 2008 indicated that the EBOR rate had climbed to more than 4 percent (Hilton, 2008). The same percentage will increase the United Arab Emirates Banks’ interbank EBOR rate. Further, the United Arab Emirates Central Bank countered the global financial crisis of 2008 by implementing the purchase, installation, and maintenance of a liquid financial statement data. The United Arab Emirates Central Bank reduced the United States funding pressures to ensure the appropriate measures are implemented to reduce the effects of the 2008 global financial crisis of 2008.The United Arab Emirates Central Bank implemented activities that would lessen the dirham funding pressures. September 22, 2008 was set aside for commercial banks to borrow funds against their reserved needs, wants, and caprices (Giugale 2010). Further, Eric Weiner (2010) stated the large scale real estate investments were established in Dubai, located inside the United Arab Emirates. Dubai became a global financial center. The Dubai real estate properties included the world’s tallest skyscrapers. The skyscrapers include the Emirates Towers, and Dubai’s most expensive hotel, Burj Al Arab, and many huge residential projects called Palm Springs, which were constructed in the Gulf area. The financial crisis of 2008 was characterized as having a decline in the world oil prices. Dubai’s tight credit policies had a chilling effect on Dubai’s real estate businesses. Consequently, the crisis triggered the end of many of the projects envisioned. Dubai World’s had to restructure its loan in order to $26 billion debt owed to global investors. The global investors were caught by surprise at the sudden financial turn of events in Dubai. The investors could not understand why the Dubai government would not guarantee the payment of the bank loans under another phone service competitor. The investors included Abu Dhabi Commercial bank, HSBC Holdings (UK), Barclays Bank (UK), Lloyds Banking Group. Another group of cars include the Lloyds Banking Group. The other investors include Standard Charter and ING Group, Barclays, and the Royal Bank of Scotland Group (Oxford 2010). Sascha Noack (2009) reiterated the United Arab Emirates Central Bank has been very instrumental in reducing the impact of the global financial crisis of 2008. First, the United Arab Emirate central bank continues to serve the greater global market by backing and supporting the activities of all United Arab Emirates Banks. The United Arab Emirates central bank helps restore the ailing 2008 British economy bye statement. To avoid more dismal effects of the global financial crisis of 2008, as well resolve the liquidity benchmarks with the United Arab Emirates Banks. The Central bank offers other possible resolutions and recommendations to alleviate or install new software. Further, United Arab Emirates government insists the country’s banking system is on firm ground. The United Arab Emirates central bank mentioned the United Arab Emirates banking system is both sound and liquid during the 2008 accounting period. The local United Arab Emirates Banks as well as the United Arab Emirates branches of foreign banks installed special additional liquidity facility that will directly influence the current accounts within the jurisdiction of the United Arab Emirates central bank territory during 2009. The United Arab Emirates central bank also specified that the country’s foreign interbank deposits, Euro commercial papers, and euro medium terms bank notes issues by United Arab Emirates Banks had been reduced by 25 percent. The United Arab Emirates retail commercial banks have a strong base composed of stable deposits and the country’s banking model has weathered the current global financial crisis. In addition, the 2009 consolidated balance sheets of United Arab Emirates Banks indicated there were interbank deposits in the United Arab Emirates banking system (Oxford 2010). Evidently, the United Arab Emirates banking system was able to weather the financial crisis of 2008. The 2009 United Arab Emirates central and the United Arab Emirates finance ministry opened a Dh50 bn ($13.62 bn) within its local United Arab Emirates banking system credit facilities. Both the United Arab Emirates central and the United Arab Emirates finance ministry state they will guarantee all United Arab Emirates bank deposits. The United Arab Emirates central and the United Arab Emirates finance ministry also infused another Dh50bn ($19.06bn) financial package into the United Arab Emirates banking system. During 2011, United Arab Emirates banks have pledged an additional Dh70bn ($19.06bn) support package as counterpart contribution made by the United Arab Emirates central bank. In addition, the United Arab Emirates central bank invested another Dh50bn ($13.62bn) emergency liquidity facility to financially help the United Arab Emirates banks. Another United Arab Emirates bank, Rakbank, remains one of the top four banks in the United Arab Emirates territory. The bank focuses on the retail segment and has increased it customer base by as many as 340,000 clients. The bank has established over 25 branches within the United Arab Emirates territory. Rakbank is United Arab Emirates’ fastest growing bank. The bank is a major player in the mortgage finance and small to medium size enterprise market segment. During 2010, the Rakbank bank manager, Graham Honeybill, stated the bank the company’s return on equity is a high 25 percent. Likewise, the Rakbank’s interbank market continues to qualify as liquid. The Rakbank’s market segment focuses on business loans, personal loans, credit cards, and the like (Oxford 2010). The decline in the customers’ enthusiasm to retain or increase their bank deposits has changed for Bank Customers since the Global Financial Crisis. The global financial crisis triggered in the demand for products in the United States. Consequently, the demand for exports from United Arab Emirates suppliers of goods and services to the United States market declined. The United States unemployment rate increase triggered a reduction in the average American customer’s purchasing power. Consequently, the United Arab Emirates suppliers’ cash inflows declined. In turn, the bank deposits as well as bank loans of the United Arab Emirates suppliers’ declined. To reverse the declining interest to deposit or transact with United Arab Emirates banks. The United Arab Emirates banks implemented measures to reverse their current and prospective customers’ reduced interest to transact with the United Arab Emirates banks. First, the United Arab Central Bank approved the United Arab Emirates banks’ request to increase United Arab Emirates banks’ customer deposits and other related deposit requirements. In addition, the United Arab Emirates banks had reduced their interest rates on their customers’ bank loans. In addition, the United Arab Emirates banks received funds from the United Arab Emirates government during February 2009 amount to Dh1billion or (U.S. $54.4 billion). Consequently, the bank deposits of the United Arab Emirates banks increased Dh849 billion (U.S. $ 258.7 billion as of June 2008). Likewise, the 2009 first quarter generated a high deposit transaction amounting to Dh950 bn (U.S. $258 billion). Likewise, the customers renewed interest created an increase in the United Arab Emirates banks’ capital reserve balance. The capital reserve increased from the September 2008 Dh159 billion (U.S. $ 42.3 billion) amount to the higher Dh 188.2 billion (U.S $51.2 billion) during the 1st quarter of 2009. The United Arab Emirates banks’ financially liquid balance sheet and the financial help of income statement and the financial help provided by the United Arab Emirates government will surely persuade the bank’s clients to enthusiastically engage with the United Arab Emirates banks (Group 2009). The financial position of United Arab Emirates banks and about their lending activity. The United Arab Emirates government had instituted financial measures to alleviate the ill effects of another financial crisis. After the global financial crisis of 2008, the United Arab Emirates government stopped giving licenses for new foreign banks to operate in the United Arab Emirates. Citibank is the only United States bank company given by the United Arab Emirates magistrates a license to operate. The largest banks, in terms of assets, include the Emirates NBD. The other financially big banks in United Arab Emirates are the Mashreq Bank, Abu Dhabi Commercial Bank, National Bank (Group 2009). Main risks that UAE banks are managing today Dalia Hakura (2009) proposed there are main risks that United Arab Emirates banks are managing today. The sound liquidity risk is a priority risk (Horngren 2009). Liquidity is the risk that the available current assets will not be able to pay the currently maturing current liabilities. In addition, the debt to equity ratio shows if the relation of the company’s equity to the liabilities. The best ratio is a one to one ratio. Many public sector managers, supervisors, and the central bank officers have stated the importance of reducing the liquidity risks of the companies concerned. The United Arab Emirates banks’ liquidity risks are constrained by the insufficient diversification of the liability base, cropping out of an embryonic money market and a growing resistance to external investments. The liquidity risks are influenced by off balance sheet commitments as well as the risks arising from the substantial reliance on cross currency funding. Likewise, some risks are insufficiently identified. How the UAE banking sector compares to the UK Asli Kunt (2011) theorized the banking sector in the United Arab Emirates fared generally better than the banking sector in other countries, especially the United Kingdom banking sector. The United Arab Emirates banks’ better performance is due to its oil production revenues. On the other hand, the United Kingdom banking sectors has lesser dependence on oil production compared to the United Arab Emirates banks. The United States financial crisis created ripples crossing over to the global banking community. The United States banking sector’s economic depressions was linked to economic slowdown of European banks, especially the United Kingdom banking sector. Liquidity shortages translated to the freezing of bank credit transaction in the United Kingdom’s banking sector. A bank run occurred in United Kingdom’s Northern Rock bank. The United Kingdom stock market activity was unfavorable. Ireland’s sovereign credit risks took over the United Kingdom banking sector risks as guarantees where put into immediate motion. William Sun (2011) opined the United Kingdom banking laws had been inadequately constructed to cushion or prevent the effects of the global financial crisis. Consequently, a scramble to draft new special resolution regimes in an effort to rescue failing United Kingdom banks and to maintain the United Kingdom market stability. Other United Kingdom legal remedies, including the company law obligations of directors’ provisions and shareholder rights’ mechanisms were less adequate to reduce or eliminate the global financial crisis British banks like Northern Rock Bank. How the UAE banks were impacted if Greece defaults on its debt obligations John Labrosse (2011) reiterated the United Arab Emirates banks have been impacted by the Greece defaults on its debt obligations. The United Arab Emirates banks will not be able to collect the payables of Greek companies. In turn, the United Arab Emirates banks will have lesser cash on hand to service the loan applications of current and prospective United Arab Emirates bank clients. Consequently, lesser clients generate lesser interest earned from bank client loans. The Greek debts are denominated in Euros. Greek debts were contracted under the Greek loan laws. One possible remedy is to revise the Greek loan law in order to reduce the current economic effects of the defaults. In addition, implementing additional Greek law provisions are needed to avoid a repeat of the current Greek debt crisis since the first Brady Bond transactions in 1990. Based on the above discussion, the global financial crisis created a negative effect in the United Emirates banking system. The effects of the global financial crisis created a slowdown in the global economy. The United Emirates banks overcame the major effects of the global financial crisis. Indeed, the United Emirates banking system recovered from the negative effects of the 2008 global financial crisis. REFERENCES Chailloux, A. (2009) "Systemic Liquidity Management in the United Arab Emirates." International Monetary Fund 9, no. 261. Giugale, M. (2010) The Day After Tomorrow. London, Bank Press. Group, O. (2009) The Report. Abu Dhabi, O B Group Press. Gup, B. (2011) Banking and Finance. London, J Wiley & Sons Press. Hakura, D. (2009) Systemic Liquidity Management. London, International Press Hilton, R. (2008) Managerial Accounting. London, McGraw Hill Press. Horngren, C. (2009) Accounting. London, Prentice Hall Press. Katzman, K. (2010) United Arab Emirates Issues for U.S. Policy. London, Diane Press. Kemp, G. (2010) The East Moves West: China, India, and Asias Presence in the Middle East. London, Institution Press. Khamis, M. (2010) Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead. London, International Press. Kunt, A. (2011) The International Financial Crisis: Have the Rules of Finance Changed? London, World Scientific Press. Labrosse, J. (2011) Managing Risk in the Financial System. London, Edward Elgar Press. Mirakhor, A. (2009) Globalisation and Islamic Finance. London, J. Wiley & Sons Press. Nanto, D. 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