Factors that Are Driving Globalization of the International Financial Markets - Coursework Example

Financial crisis Name: Course: Tutor: Date: Financial crisis The great depression was the worse global or worldwide economic crisis or depression ever witnessed. It started in the decade preceding World War II in about 1929 until late 1930s (Berlatsky, 2010, p. 223). The great depression varied across nations due to different economic conditions and stability. It was the deepest depression, longest, and wide spread of the 20th century because it shows how the economy declined globally. The great depression started in the US where the stock prices fell drastically from September 4, 1929 (Committee on Capital Markets. 2009, p. 124). It was declared on the worldwide news on October 29, 1929 that there was a global stock market crash popularly known as Black Tuesday. From then on, it spread to other countries very quickly; hence a crisis worldwide (Chapra, 2009, p. 12). The great depression had severe effects in every country, poor and rich, developed and developing. International trade went down or plunged by half to two-thirds while tax revenues, prices, profits, and personal income dropped significantly (Berlatsky, 2010, p. 224). Unemployment rose to 25% in United States of America and in some countries especially the developing ones rose to 33% (Hal, 2009, p. 172). The most affected nations on the issue of unemployment were those dependent on heavy industry. General construction was stopped in many countries as farming in rural areas suffered because of crop prices falling by more than 60%. Areas that were dependent on logging, mining, cash cropping, and informal sector suffered most from the negative effects of depression or economic crisis (Hal, 2009, p. 174). Factors that are driving globalization of the international financial markets There are several factors that are driving globalization of the international financial markets. Technological advancement is one of the main factors that has enhanced and promoted globalization (Nanto, 2010, 102). International financial markets have been promoted by multinational banks and international financial institutions which have been listed in foreign stock exchange. Securities, treasury bills, options, bonds, forwards, and futures can be transacted online through e-commerce (Chapra, 2009, 13). The current competitive economic environment and financial pressure to improve on the performance, earnings, and margins has led to conducive operating environment (Helvia & United Nations. 2009, p. 43). The attempt to gain competitive advantage is forcing many financial institutions to become effective and efficient in service delivery. The management has been trained on the financial management issues so that they can be able to maintain and improve the performance in the financial institutions all over the world. The internal control environment has been set so that every person is accountable for his or her deeds in the financial institutions (Committee on Capital Markets. 2009, p. 125). Rules and regulations have been set to govern all the operations and to ensure stability in all financial institutions. The World Bank and IMF are constantly monitoring and evaluating all the key players in the financial market to ensure stability (Helvia & United Nations. 2009, p. 43). The effective internal control program and policies set by the World Bank are a clear indication of ensuring conducive economic stability of all financial institutions and all the financial markets globally. The standards set apply to all financial institutions in all countries globally. This is aimed at minimizing cases of fraud and mismanagement (Berlatsky, 2010, p. 225). All economic models and structures must be adhered to in order to avoid or minimize future financial crises. The responsibilities of the board of directors and senior financial managers are defined so that consultation is done before a major financial decision is made. The risk assessment of each action or decision should be analyzed so that financial crisis cannot arise in the future. Risk analysis and assessment is important because a single financial institution or industry can lead to financial crisis. If all these factors are not adhered to, then there will other financial crises in future (Chapra, 2009, p. 14). The Failure of Barings Bank The failure of Barings Bank was unexpected due to its consistent financial stability in the financial market. This was a real shock to investors, top management, owner, and shareholders because the bank was able to survive the great depression (Fay, 1997, p. 300). This was the oldest Britain Christian bank but its collapse was caused by transactions of one trader who was based in an office in Singapore. This led to people asking themselves many unanswered questions. This was a trader called Leeson Nick who worked for Morgan after his studies in the university before joining Baring bank (Berlatsky, 2010, p. 226). In both organizations, Nick was the operation manager but after a short time working in Baring, he applied for a transfer to the Far East and received immediately. Baring had it offices in Singapore which were established in 1987 and it was popularly known as Baring's Securities Singapore Ltd, BSS (Fay, 1997, p. 303). The managers of the company stopped trading and this affected the bank negatively because the general manager was a de facto manager of the back office. This arrangement was dangerous but no one raised an alarm to alert other authorities. This caused conflict of interest because other senior management members did not notice what was happening (Helga, 2007, p.344). Leeson took unauthorized speculative position in forwards, options, and futures on the Nikkei. This led to the unused BSF error account being hidden because his speculation was unclear due to speculative circumstances surrounding it (Helga, 2007, p. 345). With this hidden agenda, the bank lost a total of £208,000,000 in a secret account with account number 88888. Nick was dishonesty, secretive and did not consult before making decisions. The bank management remained tongue tied due to this blithely loss that crippled the bank (Committee on Capital Markets. 2009, p. 126). After such an act, he hopped to a plane for Kuala Lumpur, Malaysia leaving the company with a deficit of £GB 827,000,000. Some traders usually speculate without authorization hoping that they will cover the track but some are caught with surprises (Ziegler, 1988, p. 66). Some are fired as the employer carries the entire loss burden. The collapse of Baring bank was due to Nick Leeson transactions which led to the bankruptcy of the organization (Fay, 1997, p. 304). The effects were severe, many customers and stakeholders lost their financial resources. Peter Baring the owner of the bank said the act was deliberate but he blamed the top management for not paying much attention to Nick’s activities (Ziegler, 1988, p. 68). Mr. Nick Leeson was an accomplished liar, who could not be caught very easily because he could easily vague invoices, falsify records, fabricate letters, and make elaborate stories to divert the questions from the management, stakeholders, auditors, and the senior representatives of SIMEX (Helga, 2007, p. 347). After the collapse of the bank, Mr. Leeson Nick was arrested after six days from the time he fled to Frankfurt, London. He was tried in Singapore and was charged with fraud and misuse of office and was sentence to six and half years in Singapore’s Changi prison (Helga, 2007, p. 348). However, due to his good behavior and character in the prison, he was released in July 1999 before his prison term lapses. The bank was liquidated and in 2007, KPMG was reported by the Guardian newspaper that the liquidator of Baring bank had sold a trading jacket which was believed to have been worn by Nick Leeson which was sold for $21,000 (Fay, 1997, p. 306). The global financial crisis The global crisis brewed for a while in 2007. It started in the mid 2007 when effects were felt until 2008. The stock markets in the world fell subsequently as the large financial institutions especially in USA collapsed. Some firms were bought out and the government had to come to rescue in order to bail out their financial systems (Chapra, 2009, p. 16). It is believed and known that, the financial crisis started in US. A global financial crisis melted down with the lives of many people being affected negatively. The problem of global financial crisis could have been avoided if ideologies supporting the current economic conditions and environment would have been incorporated (Nanto, 2010, 103). The major cause was the collapse of US sub-prime mortgage market that led to the reversal of the house booms into industrialized economies; hence, causing a ripple effect in the world. The other cause of the global financial crisis is the complex and twisted financial instruments and products in the market. This was the major cause of the global financial crisis that unravels the poor performance in all markets globally. Poor financial planning and budgeting was one of the contributing factors to the failure of the financial markets and instruments globally (Nanto, 2010, 104). Securitization of financial instruments was a risky decision because banks would pool their loans into assets which are sellable; hence, offloading loans that are risky to others. The mortgage firms usually get regular payments but because they turned them to securities, it did not yield anything. This was the start of the all trouble because banks had lent everything to those who wanted mortgage loans, which were never repaid (Committee on Capital Markets. 2009, p. 126). The effects were severe and it accelerated to other countries in the whole world. Some banks and mortgage firms in US collapsed. This being a global crisis, many companies collapsed leading to high rate of unemployment (Helvia & United Nations. 2009, p. 44). Many people lost their jobs; hence, destabilizing many families and companies financially. It created a major recession in both developing and developed nations. Poverty level increased in developing countries increased because they lacked remittances, grants, and donations from foreign countries. The economic growth all countries dropped by between 2% and 4% depending on their economic stability (Nanto, 2010, 106). Investment Banks such as Lehman Brothers lend more money and they could not get collateral and securitization. They borrowed from other banks which turned out to be bad loans to whoever bought the securities (Chapra, 2009, p. 15). The Asian financial crisis This was a period of financial crisis that was felt in Asia which began in July 1997. It led to fears that the world economic conditions would be affected due to financial contagion it started in Thailand with the collapse of Thai baht which was the leading financial institution in the country (Ngian, 2000, p. 64). It was caused by the decision by the government to float baht by cutting its peg to the USD. The Thai baht wanted to its plans for real estate expansion. Thailand had acquired a debt of in a foreign country that made the country become bankrupt then followed by the collapse of its currency (Radelet, et al. 1998, p. 74). The crisis spread very fast to Japan and Southeast Asia where the currencies slumped, devaluation of assets, stock markets, and precipitous rise in private debt (Ngian, 2000, p. 65). It led to the general agreement on the existence of the crisis, but it was not clear on what was the cause of the crisis as well as its resolutions and scope. The countries which were mostly affected were Thailand, South Korea, and Indonesia. Philippines, Laos, Malaysia, and Hong Kong were hurt by the slump that led to the drop of the economic growth (Radelet, et al. 1998, p. 76). The People’s Republic of China, Vietnam, Brunei, Singapore, Taiwan, and India were less affected though they all suffered the consequences from the loss of demand and lack of economic stability in the region (Ngian, 2000, p. 66). The crisis is also blamed on the deficit most countries had in Asia caused by the debts they owed most foreign countries and international financial institutions such as World Bank and IMF (Radelet, et al. 1998, p. 78). The fixed exchanged rate was a factor which led to crisis because it encouraged borrowing; hence, exposing most countries to foreign exchange and financial risk (Ngian, 2000, p. 68). The development funds rise and it could not be controlled by all financial players but only those closer or at the centre of power. For these reasons therefore, financial crisis was looming because total factor productivity was increasing rapidly yet the capital investment was constant (Hal, 2009, p. 177). From the discussion and arguments above, there is a possibility that another financial crisis will occur. This is because, most financial institutions violate the rules and regulations of doing business (Berlatsky, 2010, p. 227). This has been witnessed in the past since 1929 and eve the most recent one of 2007/2008. Competition has made most institutions to conduct their business and financial transactions secretly leading to decisions that are not up to date. The policies are being violated especially in decision making has been the major challenge because most financial institutions forget all these after every financial crisis. Most governments are still borrowing even if they are unable to repay which will cause a great deficit leading to financial crisis in the long run (Helvia & United Nations. 2009, p. 46). There have been a lot of conferences since the 1929 great depression to maintain a conducive environment but there has been no agreement. The difference in economic conditions of developed and developing nations is a challenge that will encourage future financial crisis. It is not easy to avoid future financial crisis because the business and financial environment is rapidly changing and becoming more complex (Committee on Capital Markets. 2009, p. 129). References: Berlatsky, N. 2010. The Global Financial Crisis. New York: Greenhaven Press/Gale Cengage Learning. Pp. 223-227. Chapra, M. U. 2009. The global financial crisis: some suggestions for reform of the global financial architecture in the light of Islamic finance. Hiroshi Osaka: Center for Islamic Area Studies at Kyoto. Pp. 12-16 Committee on Capital Markets. 2009. The global financial crisis: a plan for regulatory reform. New York: Committee on Capital Markets Regulation. Pp. 124-129. Fay, S. 1997. The Collapse of Barings. New York: W.W. Norton. Pp. 300-306. Forster, J. 2009. The Global Financial Crisis: Implications for Australasian Business. New York: John Wiley & Sons. Pp. 33-36. Hal, S. S. 2009. The global financial crisis. Park: Foundation Press. Pp. 172-177 Helvia, V. & United Nations. 2009. The Global Financial Crisis: What Happened and What's Next. New York: United Nations. Pp. 43-45. Helga, D. 2007. The Dynamics of Organizational Collapse: The Case of Barings Bank. London: Routledge. Pp. 344-348. Ngian, K. J. 2000. Coping with the Asian Financial Crisis: The Singapore Experience. Singapore: Institute of Southeast Asian Studies. Pp. 64-68. Nanto, D. K. 2010. Global Financial Crisis: Analysis and Policy Implications. New York: DIANE Publishing. Pp. 102-106. Radelet, S. J.D; Sachs, R.N. Cooper, B.P. & Bosworth (1998). The East Asian Financial Crisis: Diagnosis, Remedies, Prospects. Singapore: Center for Economic and Policy Research. Pp. 74-78 Ziegler, P. 1988. The Sixth Great Power: Barings 1762–1929. London: Collins. Pp. 66-68. Read More