Banking of Canada, the USA, the UK and France - Assignment Example

Questions of banking of Canada, U.S.A, U.K and France The Global Financial Crisis The downfall of Lehman Brothers, an extensive global bank, in September 2008 nearly led to the collapse of the world’s financial system (Cornett, Jamie, Philip and Hassan, 2011; Grant & Wilson, 2012). It threatened the collapse of large banks and financial institutions. It took enormous taxpayer-financed bail-outs to support the industry. Despite that, the resultant credit crunch turned what was already a horrible downturn into the nastiest recession in 80 years since the great depression (Reyes, 2013). Enormous monetary and fiscal inducement prevented a depression, but the recovery remains shaky compared with preceding post-war upturns. Nations’ GDPs are still below their pre-crisis peak in many rich countries, particularly in Europe, where the financial crisis has progressed into the euro crisis (Cummings, 2013; Grant & Wilson, (2012). The impacts of the crash are still heaving through the global economy (Cummings, 2013). After the 2008 financial crisis, some countries began modifying their financial and monetary policies to protect the interests of their countries and their economies (Franken, 2010). This essay examines the actions of France, UK, USA and Canada following the financial crisis (Cornett et al., 2011). The U.S was worst hit by the financial crunch. Market participants, investors and consumers were hastily losing trust in the America’s financial system stability (Cummings, 2013). Confronted with this reality, the U.S. federal government acted with powerful force and speed to stem the country’s panic. The first series and sequence of actions, including large guarantees of bank accounts, cash market funds and liquidity by the Federal Reserve, were less (Hall, 2009; Reyes, 2013). Realizing that extra tools were required to address a swiftly deteriorating situation, the Bush Administration recommended a law that created the Troubled Asset Relief Program (TARP) (Cummings, 2013). The Congress passed that measure with bipartisan support; President Bush signed it to law on October 3, 2008 (Federal Reserve, 2009). The Bush Administration implemented some of the programs under TARP (Cornett et al., 2011). The Obama Administration carried on with the programs and added others (Dorsey, T. W., Asmundson, Khachatryan, Dorsey, Niculcea, Saito & IMF, 2011). Under TARP’s authority, the administration ensures to keep credit flowing to businesses and consumers. Additionally, the administration helps straining homeowners avoid foreclosure, and inhibits the collapse of the American automobile industry, which is approximated to have saved a million jobs during the crunch (Reyes, 2013). The crunch laid naked the vulnerability of U.S financial system on a very large scale (Cornett et al., 2011). It exposed disjointed and archaic regulations that permitted large parts of U.S economy to function with little or no oversight, including some reckless lenders, who applied hidden charges and fine print to exploit consumers (Cummings, 2013). The U.S established the Wall Street Reform to change such activities (Dorsey et al., 2011; Hendrickson, 2013)). President Obama endorsed into law, In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act that establishes new rules that make U.S financial system safer for investors, consumers, and other market members (Reyes, 2013; Federal Reserve, 2009). Canada was not spared in the crunch as it went through a period of bewildering financial instability, losses in historic marketplace, and severe threats to its financial stability (Reyes, 2013; Maximilian 2008). Like other central banks, in Canada the Bank of Canada lowered policy interest rates aggressively and publicized substantial fiscal stimulus packages to benefit the consumers, investors and other market players (Strahan, 2012). Despite all that more was still needed and in response the government and central bank of Canada initiated a liquidity policy in response to the crisis (Dorsey et al., 2011; Grant & Wilson, 2012). From the August of 2007 to August of 2008, the Bank of Canada made two momentous changes to support liquidity, and thereby stabilize the financial system in Canada and the efficient functioning of its financial markets (Cummings, 2013; Gorton, Gary, and Andrew, 2011). First, the Bank of Canada presented a term “purchase and resale agreement” (PRA) facility to procure securities from primary traders and resell them to their original vendors at term. Second, the bank expanded the range of securities agreeable as security for the “Standing Liquidity Facility (SLF)” – the overdraft facility available to market participators in the Large Value Transfer System (LVTS) – to include particular types of “Asset-Backed Commercial Paper” (ABCP) and U.S. Treasuries (Reyes, 2013; Franken, 2010); and since August 2008, the Bank of Canada has both stretched its liquidity facilities and presented new ones (Federal Reserve, 2009; Hendrickson, 2013). In the UK, the situation was the same. The crunch was collapsing banks and destroying markets (Cummings, 2013; Maximilian, 2008). Consumers and investors lost faith in the financial system and the government, and the Bank of England, kept mum about the situation (Franken, 2010; McCarty, Poole, & Rosenthal, 2013). Some argue that the government was very slow to bailout the banks, though the intervention was adequate to protect the rudiments of the banking system. On 8 October 2008 the UK Government publicized an extensive plan to protect depositors, restore financial stability, and re-refresh credit flow to UK’s individuals and businesses (Hall, 2009); Reyes, 2013). The bank of England initiated a £400 billion bailout plan that embraced three elements (Cummings, 2013). The elements includes an enormous enlargement in emergency liquidity support; recapitalization of UK building societies and banks using taxpayers money; and the delivery of a Government assurance of new medium and short term debt issuance made by UK-incorporated building societies and banks (Cornett et al, 2011). This action plan attested necessary following a substantial and continuing feebleness in many banks share prices despite the Financial Services Authority’s temporary ban on short-selling (Golin, 2010; Franken, 2010). The plan followed two revisions to domestic deposit guard arrangements and the acceptance of a piecemeal approach to failure resolution (Ivashina and David, 2010; Keister & James, 2009). The resolution saw the consequential nationalizations of Northern Rock in February 2008, of Bingley and Bradford in 2008 and the brokering of takeover salvation of Alliance and Leicester and HBOS by Banco Santander and Lloyds TSB respectively in July and September 2008 (Gorton et al, 2011). The UK parliament has changed laws and policies following the financial crisis that proved the need for a new tactic to financial regulation in the UK. The policies have resulted in a major enlargement in the responsibilities of the Bank of England as from April 2013 (Hall, 2009; Reyes, 2013). The UK’s Financial Services Act (2012) instituted an independent Financial Policy Committee (FPC), a new sensible regulator as a secondary of the Bank, and formed new duties for the supervision of financial market infrastructure providers. FPC functions to reduce or remove universal risks with a sense to enhancing and protecting the flexibility of the financial system in UK. The Committee also has a secondary objective to aid the Government’s economic policy. The Prudential Regulation Authority (PRA) on the other hand is liable for the supervision of building societies, banks and credit unions, insurers and key investment firms (Ivashina and David, 2010). The PRA’s role is distinct based on two statutory objectives; to promote the soundness and safety of these firms – precisely for insurers – and to contribute to the safeguarding of and suitable degree of security for policy holders (Federal Reserve, 2009; Savona, Kirton, & Oldani, 2011) France was the whistle blower of the economic crunch by late 2007. France played up politics and state intervention during the crunch. At the end of 2008, a single stimulus package was introduced and managed under a new ministry that president Sarkozy established. The complicated political and social structure resulted to less significant changes in France (Cummings, 2013). Bank Failures and Depositors When a bank fails, the deposit holders are unlikely to lose their deposits and savings. Different nations have bodies that seek to protect the depositors. Golin (2010) and In Claessens, In Kose, In Laeven, & Valencia (2014) outlines that in the U.S; in any case of a bank failure, the bank deposit holders are protected by two government bodies. These bodies are the Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC). While the FDIC protects deposit holders against bank failures the SIPC protects security holders against failure of a brokerage firm (Cornett et al., 2011). The SIPC is not a not regulatory body or agency like the FDIC but funded by its members for their self-protection (Yingbin, 2009). The FDIC safeguards the depositors by organizing for a resale of the bank to another stable bank and pay directly the depositors to their respective bank accounts. The stable bank that buys the closing bank pays out the account holders of the insured deposits through a process regarded as the purchase and assumption transaction. In this case, the insured depositors immediately become depositors of the new bank and they can access their deposit balances through the new bank. The new bank also buys out the loans that the bank had given to its customers. On the other hand, if the closing bank is not sold out to another bank, then the FDIC pays out the insured depositors through a check up to the insured amount. However, the FDIC is required by the Federal Law to deposit the money to the depositors as soon as possible upon the failure of the financial institution. In Canada, there is deposit insurance for ban account holders and depositors. The Canada deposit insurance corporation (CDIC) functions in a similar manner as the FDIC (Hendrickson, 2013; Reyes, 2013). The UK and France are both members of the EU that has deposit guarantee schemes (Cummings, 2013; Jackson, 2009). A Deposit Guarantee Scheme (DGS) acts as a safety net for depositors or account holders in case of bank failure. If or when a bank is closed down, the DGS scheme is to reimburse depositors or account (Bank) holders of the bank up to a particular coverage level. A 1994 EU directive guarantees that all EU Member States accommodate or have DGS in place (Golin, 2010; Jackson, 2009). According to The Economist (E.H. /P.C. 2013), the magazine that created the ‘Bail-in’ term, a bail-in happens when the creditors of borrowers are obligated to endure some of the burden by having a share of their debt written off. For instance, in Cyprus banks, bondholders and depositors with more than 100,000 euros in their bank accounts were obligated to write-off a slice of their holdings (E.H. /P.C., 2013). Among the studied countries, none has applied Bail-ins to the borrowers’ creditors. However, Canada is in the process of acquiring and using the term in its domestic stance (Golin, 2010). In its “2013 Economic Action Plan” that was presented to the government and submitted to the House of Commons, the new budget proposed “to implement a ‘bail-in’ rule for systemically significant banks” in Canada. The proposal argues that Canada’s large banks generate spectacular strength for the Canadian economy. They have become gradually successful in international market front, creating jobs at home (Cummings, 2013). Also, the paper said that the Government recognized the need for risk management related to the ‘systemically important banks’, that is, those banks whose failure or distress could cause a disturbance to the country’s financial system and, in turn, negative effects on the economy. According to the paper, that requires strong, sensible oversight and a vigorous set of options for resolving the institutions without involving taxpayer funds (Golin, 2010; Hendrickson, 2013). References Anthon Reyes. (September 2013). U.S. Department of Treasury: The Financial Crisis, Five Years Later, Response, Reform and Progress. Washington. Department of Treasury Cornett, Marcia, Jamie McNutt, Philip Strahan, and Hassan Tehranian. (2011). “Liquidity Risk Management and Credit Supply in the Financial Crisis.” Journal of Financial Economics 101(2), pp. 297–312. Cummings Conor. (2013, March 13). Crisis Legislation – The 2008 Financial Crisis and Economic Legislation-Political Science. Washington, DC. Grin Verlag Dorsey, T. W., Asmundson, I., Khachatryan, A., Dorsey, T. W., Niculcea, I., Saito, M., & International Monetary Fund. (2011). Trade and Trade Finance in the 2008-2009 Financial Crisis. Washington, D.C: International Monetary Fund. Economist E.H./P.C. (2013, April 7). The Economist explains: What is a bail-in? | The Economist. Retrieved from http://www.economist.com/blogs/economist-explains/2013/04/economist-explains-2 Federal Reserve. (2009). “The Supervisory Capital Assessment Program: Design and Implementation,” Federal Reserve, Washington DC Franken, A. A, M.(2010, February 1). International Monetary Fund: Bank Credit During the 2008 Financial Crisis: A Cross-Country Comparison. Washington, DC. IMF working Paper-Business and Economics. Golin, J. L. (2010). The bank credit analysis handbook: A guide for analysts, bankers and investors. Singapore: Wiley. Gorton, Gary, and Andrew Metrick. (2011). “Securitized Banking and the Run on the Repo.” Journal of Financial Economics 104(3), pp. 425–451. Grant, W., & Wilson, G. K. (2012). The consequences of the global financial crisis: The rhetoric of reform and regulation. Oxford, UK: Oxford University Press. Hall, M. J. (2009). The sub-prime crisis, the credit crunch and bank “failure”: An assessment of the UK authorities response. Journal of Financial Regulation and Compliance, 17(4), 427-452. doi:10.1108/13581980911004398 Hendrickson, J. M. (2013). Financial crisis: The United States in the early twenty-first century. New York: Palgrave Macmillan. In Claessens, S., In Kose, M. A., In Laeven, L., & In Valencia, F. (2014). Financial crises: Causes, consequences, and policy responses. Ivashina, Victoria, and David Scharfstein. (2010). “Bank Lending during the Financial Crisis of 2008.” Journal of Financial Economics 97(3), pp. 319–338. Jackson K. J. (2009). The Financial Crisis: Impact on and Response by the European Union. Congressional Research Service. Diane Publishing Co. Keister, Todd, and James McAndrews. (2009). “Why Are Banks Holding So Many Excess Reserves?” FRB New York Current Issues in Economics and Finance 15(8). McCarty, N. M., Poole, K. T., & Rosenthal, H. (2013). Political bubbles: Financial crises and the failure of American democracy. Princeton: Princeton University Press. Maximilian J. B. Hall. (2008).The sub-prime crisis, the credit crunch and bank "failure": an assessment of the UK authorities response. Loughborough University institutional Repository. Strahan, P. E. (2012). Liquidity risk and credit in the financial crisis. Federal Reserve Bank of San Fransisco. Savona, P., Kirton, J. J., & Oldani, C. (2011). Global financial crisis: Global impact and solutions. Farnham, Surrey, England: Ashgate. Yingbin Xiao. (2009). French Banks amid the Global Financial Crisis. International Monetary Fund working paper WP/09/201. Washingtone, DC. International Monetary Fund Appendix 1-the economist Read More