Economic Crises - Case Study Example

Overview The end of 2007 and the whole of 2008 were years in which the financial sector in the world was severely affected by a financing crisis. The impact of the crisis varied from one country to the other and the Canadian banking sector was perceived to be resilient to the crunch. The paper explores reasons that led to the resilience of the banks in Canada as well as the structural features of the Canadian economy that prevented the Canadian banks from falling. The paper is divided into section with the first section exploring conditions of the banks before the crisis and the second one exploring regulatory issues which played a role in minimizing the impact of the crisis. (Ratnovski & Huang, 2009) Authors Approach The authors recognize that there are various factors that have led to the resilience of the banking sector in Canada. To this effect, he has subdivided the paper into two sections dealing with factors that may have contributed to the resilience. In the first section, they identify capitalization, liquidity as well as what funding structure the banks have employed. These are the conditions that existed before the crisis began and they play a major role in the paper to identify some of the strengths of the Canadian banks. To get the real picture, the authors have compared the structure of the Canadian banks with that of other countries in the region. This enables a reader to identify the differences in Canada and other countries, which was the sole reason for the banks being able to withstand the crisis. It is important to understand that these differences may not be the same in each country but, generally, there are structures that are common in the other OECD countries that are not present in Canada. The authors have identified these differences and the reader can be able to understand why the structures are an important part of the banking sector. Still in the first section, the authors explain how capitalization can be a problem to banks whenever a crisis appears. The authors define capitalization and this enables the reader to understand how this aspect of the banking sector plays a role. For simple comparison, the authors define capitalization as the ratio of the net worth of the bank, having subtracted its debts, to its total assets. This definition sets the pace for the reader to catch up with the authors. The article shows the strengths of the Canadian banks with regard to this aspect. The relative strength of the banks is seen as one of the advantages that Canadian banks have over other OECD banks. Liquidity in banking refers to the ratio of total liquid benefits to its liabilities. Liquid assets for an organization are the items that can be redeemed for cash in a short period to repay debts or to achieve other goals for the company. The article identifies the high liquidity in the Canadian banking sector as one of the main players in the strong resistance of the banks to external effects. The authors look at the funding structure that is used in financial institutions. This identifies sources for money that the bank uses to lend to its customers. The article explores wholesale funding in the banking sector and its effects. It argues that the depository funding structure used in Canada played a great role in strengthening the resolve of the Canadian banks. Without a proper funding structure, a bank is vulnerable to the slightest shake in the wholesale funding sector. The structure used by the authors enable the reader to understand bank operations and features that can be detrimental to the operation of the bank. The above issues are the conditions which existed before the crisis began. They were guided by regulatory restrictions on the banking sector and thus, the authors define the structures that were present before the crisis began. According to the authors, the regulations put in place for the banking sector in Canada ensured that the banks did not take unnecessary risks. This meant that the banks maintained a healthy relationship with their funding and lending criteria. The banks in the country are required to have a risk-based capital. This discourages banks to hold too much risk as the deposits required for such risks is quite high. Avoiding risks has, therefore, been part of the strategy for the Canadian banking sector. (Ratnovski & Huang, 2009) Type of Data Used The authors use both descriptive and numerical data to explore the strengths of the Canadian banking sector. The depository funds available to the banks are a good indicator of the differences between the different banks. This enables the reader to understand how the banks in Canada were stronger than their counterparts in other countries. The description of the terms and data in the articles also helps the reader understand what the data represents. This structure of mixing quantitative and qualitative data augurs well with the exploration of the authors view about the issues involved. The reference period for this study was between 2006 and 2009. This reference period accounts for the immediate start of the crisis and continuous to explore the period that started to record slight recovery. It enables the reader to identify which organization and countries were most affected and why they were affected. Recommendations An important aspect of the Canadian banking sector which played a role in shielding the banks from the crisis was the funding structure. The lack of wholesale funding in the economy was considered strength for the banks and this enabled them to remain relatively strong as compared to banks in other countries. The liquidity available in the banks is also seen as a major reason why the banking sector remained strong despite the crisis hitting the country hard. Capital in an organization plays a crucial role and this was no different in Canada. Having a relatively stable capital, therefore, played a role in keeping the banks safe. The regulatory structure that has been established in the country has been of great help in developing the banking sector and adoption of these measures in other countries can lead to stronger banking sectors. This will enable the banks in other countries to reduce the risks which they undertake. The core depository bank structure can also improve lending in the country as the banks will have more liquid assets and reduce their liabilities. This was a vital factor that led to the strong Canadian banks. References Ratnovski, L., & Huang, R. (2009). Why Are Canadian Banks More Resilient? Washington, DC: International Monetary Fund. Read More