International Banking and Asians Financial Crisis - Case Study Example

Topic: International Banking and Asian’s Financial Crisis Name: Course Name: Date: Introduction Financial development is paramount for economic growth. The emergence of international banking has boosted the efficacy of financial transactions across the globe. Financial systems and intermediaries, which are constituents of international banking, act as a link between the lenders (financial institutions) and the borrowers (clients) irrespective of their nationality. International banking helps lowers transaction costs, monitors moral hazards of borrowers or clients from different nationalities. Venturing into international banking systems has enabled domestic banks to diversify economical risks. Since the inception of international banking systems, drastic modification and changes have occurred. Ideally, the international banking systems used during the early days have greatly changed due to changes in the technology and customers’ needs and demands in the global market economy. The economic ups and downs have necessitated changes in the banking industry so as to effectively promote stability and economic prowess. This paper attempts to critically analyze transformations that have occurred in the banking industry (international) and the forces that led to these changes (Bank for International Settlements 2008, 38). Discussions 1) Evolution of the International Banking Industry Banking industry has undergone rapid transformations. The structures and systems that are used currently are quite from those used in the ancient days. The inception of the banking industry dates back in 1600 BC in Babylonian Empire. During this time, the currency invented by the Chinese in the east was used. Coin dealers, silversmiths, money changers, inspectors and deposit and transfer bankers were the most common types of trade transactions that employed international banking system. The first International Banking network systems was first establish in Italian city states after a big crusade held between 1095 and 1272. The major change was realized in 13th century when florin and ducat used in Florence and Venice states were first accepted in loans. The Trade Fair and its system of credit was first initiated in early 11th century, during which North and South Europe convene a meeting to discuss international financial integrations systems. The financial interests group who attended a group agreed to establish laws and regulations applicable to the banking industry (Bank for International Settlements, 2008, 39). Italians merchants are applauded for their great efforts towards changing the banking industry to meet the expected needs and demands. Between 12th and 13th century, the early banks used by Italian merchants introduced double-entry keeping systems. Additionally, the exchange banks adopted procedures that led to creation of commercial and clearance of clients’ obligations by the book transfer method. Remarkable changes were noticed between 13th and 14th century when exchange banks, large merchant banks and pawn banks emerged in Italian city states. These financial institutions serve diverse needs of the clients, and this was regarded as dynamic changes that would satisfy traders from both domestic and overseas economies. Rapid expansion in the international banking and overall industry took place between 13th century and 16th century. International banks such as Medici and Fugger of Europe started offering trade finance to private households. These banks also lend money to sovereign states facing bankruptcy problems. In 15th century, the first European hub was established in Antwerp, and it offered capital and credit to sovereign countries depending on the nation’s guaranteed tax revenue. The religious class criticized the operations of this hub and collapsed in the late 15th century. Sophisticated international banking infrastructure and organized markets emerged in 18th century when Amsterdam experienced political stability. The development of Amsterdam Exchange Bank and Stock Exchange led to trading of different types of financial securities. Significance changes also occurred during the rise of Great Britain where the Bank of England established relationships with both domestic and overseas private sectors. This led to strong economic growth and expansion of trade activities. These rapid changes in the banking industry in England owe to political stability that prevailed. Sovereign stated started engaging in free trade under the gold standards. The great bank offered funds to foreign traders and introduced new types of bonds in the banking markets. Importantly, the bank attracted a lot of customers across the world due to its long-term bonds and loan services. The industry was taken to the next level when HSBC was founded in 1865 purposely to finance trade activities in China. Consequently, this led to emergence of superior capital markets which facilitated capital flow across the global economy. It is 20th century when international banking experienced major structural changes. This marks the emergence and development of Euromarkets and multinational exchange, and this resulted in the changes in demand patterns for finance. Due to diversity in customer needs, remarkable changes were carried out as part of financial liberation. International banking has evolved because of supply and demand conditions Transaction and financial services offered by the banking industry are revolutionizing depending on the supply and demand conditions prevailing in the global economy. The developments and evolution of the baking industry are barely at consumers’ disposal at all times and anywhere. Customers require attractive services from the banking institutions. It is therefore imperative for the banking institutions to change their structures and systems to meet customers’ demand. Euromarkets were established after clients demanded more attractive claims from the banking institutions. International banking evolved due to development of world trade i.e. trade between states. It is only possible to undertake trade activities beyond the national borders if there are sufficient funds. Domestic markets rarely offer credit to long distance traders hence necessitated for international banking. The 20th century marked the beginning of urbanization in most parts of the world. This resulted in mass markets developments especially in Asia, Europe and United States; hence increase in consumer demand for credit services. The golden age of international banking gained its momentum following the changes in the demand patterns for finance in the economy. Notably, customers, who encompass both states and private households, have demanded for the liberalization of stock markets and capital accounts to facilitate easy flow of capital between the demand and the supply side. This resulted in remarkable changes in the regulations and rules governing the banking industry. Conclusion The banking industry has undergone total transformations. The supply and demand forces of the market have necessitated for changes in the finance systems. International banking has help traders and investors participate in the international trade because it avails the financial services in the market economy. 2) The policy response of the IMF to the Asian Crisis of 1997 exacerbated existing moral hazards in Asian banking systems Introduction The arguments that Asian markets are paragons of economic prowess were proved otherwise following economic meltdown experienced in the country in 1997. The crisis situation of 1997-1999 led to financial crisis that up to now still confound economic and financial experts. Asia is a region that every investor would wish to invest because of its stable economic base in the past as opposed to checkered past financial position of other regions in the world. The severity of the economic crisis and its aftermaths is associated with the idiosyncrasies prevailing in the economy. Some of the factors that economists have singled out as major causes of financial woes in Asia include poor leaderships emanating from authoritarian politics, cronyism and corruption, inflated asset prices, government overinvestment and inefficiency financial systems present in the country (Chang, & Velasco 2002, 9). Discussions The Asian economic distress is not unprecedented event hence the above mention economists’ reaction is misguiding. Arguably, the Asian financial crash should be considered conventional financial problems as result of illiquidity of the country’s financial sector. Many hypotheses have been put forward to explain what actually led to the currency crisis in Asia. Some postulates that the financial problem occurred following abrupt shifts in the market expectations after poor macroeconomic performances of early 1990s. Arguably, financial turmoil, which some argue that it is a propagation of nation contagion of economic effects of early 1990s, should not be associated with the checkered Asia’s economic condition in the past, but rather on the dissatisfactions of both domestic and foreign investors, which was further reinforced by the harsh policy response of International Monetary Fund (Chang, & Velasco, 2002, 419). Asian countries experienced a lot of pressures from IMF and the International Community following the macro-economics conditions which was characterized by reduction in the national stock markets. The common currencies used in the Asian region were subjected to speculative pressures especially in the first months of 1997. Currencies of countries such as Malaysia, Indonesia and Philippines experienced sharp devaluations following the conduct of International Monetary policies. In responding to the economic problems in the Asian countries, IMF withdrew significant monetary contraction policies which led to increase in the regional domestic prices. The strategic response to the speculative pressures by some of the Asian countries was to sterilize their interventions which they thought could affect the international markets, but this proved ineffective. This heightened depreciations. At first, the monetary authorities did not exert a lot of pressure. When the currencies of various countries fell towards the end of 1997 summer, the body implemented serious monetary policies. It implemented policies that led to sharp increase in interest rates singularly to restore confidence among the investors and to stem any further outflow of capital. This response in turn led to high leverage levels in business firms and corporations which resulted in closure of most them. This had far reaching influence on the solvency position of banking institutions. Most banks became insolvent because most customers could not repay their loans. Bank bankruptcies weakened the financial systems and structures within the Asian economies thus encouraged capital outflow, a situation which led to drastic decline in the exchange rates. These economic changes had adverse effects on the real sector of the economy. Well before the onset of the financial distress, most Asian countries had established extensive economic policies of bailing out financial institutions. The monetary contractions policies introduced by the monetary authorities hit hard the sources of monetary creation. Economically, no bail-out strategy will succeed in the midst of contractionary monetary stance. This response pushed more firms within the Asian economies into financial problems (Corsetti, Roubini, & Pesenti 1998, 5). Conclusion The basis of the financial distress looming Asian economies has nothing to do with the macroeconomic performances of early 1990s. Arguably, the financial fragility has its roots in inappropriate policies imposed by the monetary authorities and the international community. As documented above, the monetary financial measures used as part of financial liberalization led to corrosion of liquidity position of financial systems in the Asian countries Works Cited Bank for International Settlements. International Banking and Financial Markets Developments. BIS Quarterly Review. (2008): 25-34. Corsetti, G. Roubini, N. & Pesenti, P. What Caused the Asian Currency and Financial Crisis? Part II: The Policy Debate. New York: New York University. (1998): 4-8. Chang, R. & Velasco, A. The 1997-98 Liquidity Crisis: Asia versus Latin America. New York: New York University Publishers. (2002): 415-423. Read More