Banking And Finance Assignment Sample

Banking And Finance Assignment

Question 1

Introduction - Banking And Finance Assignment

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Banks play a vital role for the investors, borrowers, and depositors in the market. It provides many kinds of services to the people such as deposits, lending money, borrowing money, and many more. it also serves asan intermediary between depositors and borrowers. Depositors required funds and money immediately and borrowers are unable to pay on demand. This situation creates fundamental fragility and all assets of the bank can not be liquidated in the event of a crisis to pay all depositors.This situation arises when a bank's assets decrease to the market value of the bank’s liabilities. The obligation to pay creditors and depositors is increased over the assets. There are many causes of banking crises such as unstainable macroeconomic policies, current account deficit, excessive credit booms, large capital inflows, and many other factors that affect the banking system. Political and economic factors that affect the bank’s working.

With the change of time size and scope of banks, the way of working in the banks has also changed,it has completely changed from its origin. Many crises occurred in the banking sector and it established fragile institutions. These crises are too large an extent and unavoidable for any bank. The impact of the crisis directly made upon the economy. Fragility in the current banking system is can be referred to as a situation when countries’ banking stock indices reported as very low. Many determinants show the fragility of the banking system in the country. Depreciation of the domestic currency is also a factor of fragility. The soundness of any banking system can be assessed with the degree of fragility.

This report attempts to identify the factors that may cause the fragility in banks. Currency crises are the main reason for crises in banks. In this report, some topics are discussed such as the concept of bank fragility or soundness, bank failure, and systematic banking sector fragility. Another part of the report will discuss the factors that may determine the degree of fragility of the bank. Foreign currency assets in the analysis are also described in the report. In this manner, the report provides some reasons for the fragility in the banking sector and measures that are to be taken for removing this. This fragility can be reduced in many ways such as holding more liquid assets jointly, better capitalization, and more competition. Foreign banks and wholesale funded banks can also reduce the bank’s fragility.

Bank’s Fragility or soundness

Primarily banks were failed due to so many risks in events and these events were turned out to be worsemany timesthat provided unexpected results. the degree of any bank's soundness can be measured with the ability to handle the shock or financial crises. Bank's fragile position can be explained as poor asset quality, excess credibility, or vulnerability. But any bank can be fragile due to any shock although it was solvent before the shock. After occurring of any shock, a bank can be solvent or insolvent. Before the occurrence of shock soundness of any bank can be measured based on probability and the more fragile the bank there are more chances of falling into insolvency. Even adverse shock often reveals the actual degree of fragility of a bank.[1]

Adverse shock can occur in many numbers of forms such as at the institution-specific level or the macroeconomic level. Such as unanticipated changes in the level of interest rates, the exchange rates, inflation rate, and many times structural changes that make a major impact on enterprises or industries. Due to these shocks and characteristics intrinsic to banking widespread failures makes a threat for the whole financial system and economy at large. Generally, banks are highly leveraged means it has more liabilities over the capital of the institution. It is very difficult to maintain it with the confidence of depositors.Even a bank's assets are mostly in liquid form as they can be used for payment at any time and securities can be redeemed at market value for the payment of money or liabilities. A major part of a bank's liability is in the form of deposits payable at par to the depositors at demand. It can also be stated that loss of public trust for any bank can be very risky because people withdrawals their money in a larger form that makes extensive liquidity problems in the banks. So, it is very necessary to maintain public trust in the bank. In any situation, if banks are forced to liquidate their assets at a huge loss, then it can create a solvency problem. All these things will make a huge impact on borrowers, lenders, and the economy at large.[2]

Factors that cause bank failure or fragile

The bank’s soundness and fragility can only be measured with some factors that must be explained. Generally, economic failure and the regulator's recognition of bank failure cannot happen at the same time. When a bank’s net worth becomes negative or the bank is unable to regulate its operations without incurring losses that would turn out as negative net worth then this situation can be called market insolvency or economic failure. Along with it, any bank can be officially a failure when bank regulators determined that no bank can continue its operations without assistance to remain open or it is no longer viable.[3]It can also be termed as closure when any bank is insolvent or decide to liquidate its assets and it cannot run activities without many kinds of assistance. In the terms of assistance, the banks can be provided with the merger, acquisition, direct injections of additional capital, or different restructuring schemes. There are many ways to assist any solvent bank. Many times, it is difficult to identify whether it is insolvent economically when there are no accurate estimates of the bank's assets on market value. It can also be possible that there is a difference between the market value and book value of any bank's assets. The book value of any asset is recorded according to the acquisition cost but market value can be changed with market prices and values. Insolvency and closures can be different for all banks. When larger institutions fail then it will be controlled by regulators and when the period between closure and insolvency is very long then it would ensure any small institution.[4]

When many insolvencies are occurring during a short period then regulators are not in favour of closing other banks. In any situation when the net present value of any bank's assets falls negative or very short than the net present value of liabilities then it is called the economic failure of that institution. Whether it is quite difficult to identify that a bank is confronting the liquidity issue or insolvency. When the bank is having insufficient liquid assets then it can become insolvent after some time. Any bank can face the liquidity issue when at one time all the debt holders decide to withdraw their funds or exercise the contracts and banks do not have sufficient resources, cash, or its equivalents, unable to borrow additional funds then the bank has to confront the issue of liquidity. So, in this way a bank can face the liquidity problem. A higher capital provides the cushion against insolvency. The fragility can occur due to negative extreme returns jointly by banks. When more countries' banking systems simultaneously face a negative shock.

There are many reasons for a bank's fragility as stock market volatility, which is majorly affecting the bank’s fragility. The market volatility can be measured through indices that are representative of the capitalization of stocks these stocks can behold by investors. Specifically different indices are examined of different countries such as international finance corporation indices from many countries. For each region, distinct conditional volatility of related stock indices is estimated. After that mean and standard deviation of conditional volatility are reported. Two types of volatility are calculated as individual countries' volatility can be measured with market indices and conditional volatility can also be measured with the help of IFC indices.[5]

Another major factor that affects the fragility of the banking system is changes in exchange rates. Under this daily change in the exchange rate against other currencies for each country is calculated. Mean and standard deviations are also calculated and reported for these exchange rates. To find out the daily change in exchange rate the weighted average method is used for calculating the changes in rates.

The ways to remove banking fragility

The regulations of the government play a vital role in removing or dealing with the banking fragility. With the help of these regulations, the banking system can be kept safe from fragility and its impact can be reduced over the whole economy. many solutions are available to deal with the fragility issue. There are many ways to reduce the banking fragility such as:

Circuit breakers: it refers to capital controls that can be used for preventing crises from one country to another country and it acts as the circuit breaker. Under this groups are divided and some countries made one group for free capital flows between them but this capital flow can not be possible for groups.this system is created for the countriesin the situation of crises capital outflow is to be cut off for the other countries so, these negative impacts can not affect other countries. In this manner, circuit breakers area beneficial method that can be adopted for the removal of fragility.

Taxing liabilities:the fragility in banks or financial institutions occurred when there are improper resources or liquid assets to fulfil the liabilities. When any bank is unable to pay its liabilities or debts demanded by depositors and all its liquid assets are very low than to the liquid assets then this situation can be turned out into fragility. If any bank or financial institution is having sufficient liquid assets then it can remain stable in the market with the other participants. If any bank is having trust in cheap short term fundings from any financial institution then it could be very risky for it. With the help of government tax policies and regulations, the risk of excessive liabilities can be controlled and the situation of fragility can be removed.

Maximize the Liquid assets:it is also an effective method to reduce and safeguard any bank or a financial institution from fragility or closure.In a period of crisis, many kinds of liquid assets can help to mitigate the fragility. As cash accounts, savings, certificates of deposits, and these assets can be easily convertible into cash for the payment of debts. Every bank or financial institution should attempt to maximize these liquid assets in banks. In the situation of fragility, any bank shall convert these assets because these are not fluctuating with the market rates as stocks, index funds, and exchange-traded funds.

Increase capital requirements for shadow banks: this funding is raised through capital markets by implementing special purpose entities. Banks gradually increase their funds and capital ratios. Under the shadow banking system, lenders, brokers, and many credit intermediaries are involved. These are generally unregulated and have different kinds of risks, liquidity, and capital restrictions. So, in this manner enhancement of capital requirements can be helpful in the fragility situation.

Conclusion

It can be concluded from this abovementioned report that Banks frequently face shocks both on their resource and responsibility side. A shock that at first affectsa couple of organizations can become foundational and contaminate the bigger neighbourhood economy. Theglobalization of banking further suggests that shocks influencing a specific bank or nation no can influence the neighborhood genuine economy as well as the monetary framework and genuine economy in different nations. Many different kinds of determinants are detailed out in this report regarding fragility in banks or financial institutions. Many reasons are mentioned in this report of fragilities such as unavailability of capital resources and fundings in banks, poor liquid assets, and insufficient resources to pay the liabilities. When any bank fails to pay the liabilities with liquid assets and there is no market funding then this situation can be called fragility. There is quite a difference between bank closure and fragility.

This fragility can be removed from the banks and financial institutions with the help of many ways that are described in this report. Some ways are defined as above in the report that can prevent the fragility situation in banks. As there should be various methods to reduce the fragility such as maximizing the liquid assets and adopting the tax regulations of government. Capitalization of resources and many other funds, ratios from the market. In this manner, some effective methods are described in the report for preventing the fragility of the banks and financial institutions.

References

Baldursdóttir, S., Gunnlaugsson, G. and Einarsdóttir, J., 2018. Donor dilemmas in a fragile state: NGO-ization of community healthcare in Guinea-Bissau. Development Studies Research, 5(sup1), pp.S27-S39.

Degryse, H., Matthews, K. and Zhao, T., 2018. SMEs and access to bank credit: Evidence on the regional propagation of the financial crisis in the UK. Journal of Financial Stability, 38, pp.53-70.

Dell'Ariccia, G., Rabanal, P. and Sandri, D., 2018. Unconventional monetary policies in the euro area, Japan, and the United Kingdom. Journal of Economic Perspectives, 32(4), pp.147-72.

Rybacki, J., 2020. Are Central Banks’ Research Teams Fragile Because of Groupthink in the Area of Monetary Policy?–Evidence on Inflation Targeting. Gospodarka Narodowa. The Polish Journal of Economics, 304(4), pp.81-103.

Taskinsoy, J., 2020. COVID-19 Could Cause Bigger Cracks in Turkey’s Fragile Crisis Prone Economy. Available at SSRN 3613367.

Part 2 Banking and Finance

Question 2

This is taken into account that the role of financial regulation in influencing the development of corporate governance principle and United Kingdom anthem on the roof has been considered to be one of the most important only see where it includes the issue that has been received little attention in the literature.[6]

It is identified that effective corporate governance is considered to be critical for every organisation to function in the proper manner where the banking sector and the economy is working perfectly. Bank reforms or Bank perceptions are considered to be identified as a crucial factor that works under the economy by intermediating funds from syllabus and depositors to provide the activity to support the enterprise and help drive the economic growth. The banks and the safety and soundness are considered to be the key financial stability functions where they have the proper identification related to the conduct of the business hence they are considered to be defined as the central to the economic health of the organisation Earth the country. The governance weakness and banks are considered to be one of the most important factors which play a significant role in the financial system which can result in the transmission of problems across the banking sector and the economy as a whole.

The primary objective of corporate governance which should be identified and saved by the stakeholder author of government are the banking industry should identify an interest in conformity with the public interest on a sustainable basis. Here the stakeholders particularly concerning the retail bank were considered the interest and would also be considered to be a secondary depositors interest.[7]

This is identified and corporate governance in the timings for the allocation of the authority and responsibility that is provided by the business which includes the affairs of the banks which are carried out by the board and it also to the senior management of the company there are various forms of corporate governance practices which are required to become side which includes setting the strategy of the bag as well as the objectives it includes selecting and overseeing the personal and operating the banks business on daily basis. Includes operating the many businesses daily and identification of the various contracts in the interest of depositors which meet shareholders obligations and also take into account the investor and stakeholders.[8]

Various reforms have been made by the government of the country of which one of the reformers includes identification of the various aspects in the year 2013 it wasn't a fine, not the usual 3 norms were used and work me driver out the result of the use the different forms of criteria to sort out the national deposit takers. it includes the interconnectedness complexity and business type as a criterion for the national investment. Here this is identified that the corporate regulation in the financial sector has been considered as one of the most important factors which include the speciality in the area with the standards and rules fashioned to achieve the overriding objectives of financial regulation safety and soundness of the financial system. It is taken into account that banking regulation, the traditional principal-agent model, is used to analyse the relationship between the shareholders as the characters and the managers have given different assumptions to meet the financial stability of the bank in which they operate. Various factors are promoting broader economic growth and also help in enhancing the shareholder's value.[9]

Unlike the forms in the non-financial sector may collapse. this is an intimate that this can cause the back to get filled into the various counterparty patients on that having to mean by the government.

following one of the most severe crises to have a fact in the financial institution the markets and the regulations and practices of the banks are considered at important crossroads. This was identified that that was not husband mean by the promoter when the stability and prosperity of the financial system shown as the next process for the same. Therefore, it has been identified that there are various independent commission banking which was considered through which the mandate so take in where it helps to avoid the Russian into the in the conceive solution and assuring where the willingness is required to consult for the broad range of options.[10]

To thwart and possibly mitigate future financial crises, we ought to at first appreciate the causesof current/past events. In any case, it is ill-defined whether made by the ICB relies upon a comprehensiveunderstanding of the secret purposes behind our most recent financial crisis causes that, for the mostpart, are identical to for past crises – money related or regardless. It is sensible that the explanations behind the financial crisis will continue to beexchanged words for quite a while. Nevertheless, we certainly find considerably more concerning the crisis and its most likely causesthan is reflected in the paper. In particular, there is a verifiable danger that the degree of the ICB's examination is exorbitantly slight: we acknowledge that it is in danger for over-highlighting the money related andrelated hidden aftereffects that depicted the new crisis to the burden of something differenthead the chiefs and social components.

The Forum's assessment shows that the ICB's money related driven point of view on the financial crisis isn'tall things considered recognized by positioning chiefs chipping away at the post. Nor is the associated view thatbasic issues, for instance, the blend of retail and adventure banking or financial advancement perse, were key causal factors. In light of everything, the assessment shows that the financial crisis was, by and large, theoutcome of a feeble organization, for both the financial establishments and theirregulators/supervisors. The key inadequacies began from human or possibly progressiveneeds danger wisdom, perilous correspondence, and appreciation and risk culture.[11]

The headway of better risk social ordersTo affect suffering change in the monetary region we can't dismiss the occupation of culture.Essential change may have all the earmarks of being a straightforward course of action. In any case, it will in all actuality do not near anything to change thesignificant requirements, points of view and abilities of banks and their managers/bosses.

Taking out temptation simply makes the trickiness of proper lead with dreadful works on returningquickly when one more wellspring of temptation is recognized.Understanding the risk social orders of banks and finding methods of propelling more appropriate peril social orderswas considered the first worry for our interviewees and roundtable individuals. In this manner, the ICB shouldnot misconstrue the meaning of the direct rule, as it seems to do in region 4.3, butrather consider its work and benefits impressively more carefully.[12]

The present monetary guideline is established with the understanding that making each bank safemakes the framework safe. This deception of the organization goes far towards clarifyinghow worldwide money turned out to be so delicate without sounding administrative alerts. Thispart contends that moderating the expenses of monetary emergencies requires taking amacro-prudential viewpoint to supplement the current macroprudential rules.The administrative framework stands blamed for having neglected to give any check or obstructionagainst the win and-fail cycle in the monetary framework. It was to a great extent an observerduring the development of influence and the disintegration of credit guidelines in the credit blastfurthermore has been generally frail as the win has gone to fail with an overwhelming effecton the genuine economyFor the sake of advancement and value delicate danger the board, Bank 2 is energizedto stack up on openings when estimated chances are low, just to shed them as quickly as itcan when dangers emerge, regardless of the outcomes of the remainder of the framework.Tragically, the drawing back from hazard by one foundation produces more noteworthy emergedhazard for other people. Put in an unexpected way, there are unavoidable externalities in the monetary framework.What we are seeing now in the worldwide monetary emergency is that these externalities moreoverreach out to the genuine economy. The stacking up and resulting shedding of dangers appearin the influence pattern of banks.[13]

The worldwide monetary emergency constrained states confronting bombing monetary foundations topick either jumbled insolvencies or exorbitant infusions of public assets. Thissection contends that unique goal systems are a superior other option. It examinations theirdesign and capacity and contends EU part states should present and fortifysuch systems.

The new monetary emergency made obvious the nonattendance or insufficient extent of goalapparatuses to manage bombing monetary foundations across the globe. Specialists were frequentlyrestricted to two other options:

Corporate insolvency, as picked for example by the US experts on account ofLehman Brothers, a worldwide monetary administrations firm; and An infusion of public assets, as picked by the US experts on account of AIG.Occasions have shown that both these choices can be expensive. A cluttered chapter 11(as on account of Lehman Brothers) can amplify the foundational effects of the disappointmentof a monetary establishment.

At the point when the specialists expect to keep away from these effects by infusingmoney to help the organization (as on account of AIG, or in the German instances of HypoLand and IKB), an open-finished responsibility has been displayed to require hugefinancial costs. A unique goal system would permit specialists to keep away from the decision between 'muddled chapter 11' and an 'infusion of public assets, along these lines improvingeffectiveness by containing both monetary expenses and foundational way.[14]

References

Aikman, D., Bridges, J., Kashyap, A. and Siegert, C., 2019. Would macroprudential regulation have prevented the last crisis?. Journal of Economic Perspectives, 33(1), pp.107-30.

Baker, A., 2018. Macroprudential regimes and the politics of social purpose. Review of international political economy, 25(3), pp.293-316.

Biermann, F., Guérin, N., Jagdhuber, S., Rittberger, B. and Weiss, M., 2019. Political (non-) reform in the euro crisis and the refugee crisis: a liberal intergovernmental explanation. Journal of European Public Policy, 26(2), pp.246-266.

Braun, B., 2020. Central banking and the infrastructural power of finance: The case of ECB support for repo and securitization markets. Socio-economic review, 18(2), pp.395-418.

Davey, R., 2017. Polluter pays?: Understanding austerity through debt advice in the UK. Anthropology Today, 33(5), pp.8-11.

Howarth, D. and Quaglia, L., 2017. Brexit and the single European financial market. J. Common Mkt. Stud., 55, p.149.

Kastner, L., 2018. Business lobbying undr salience–financial industry mobilization against the European financial transaction tax. Journal of European Public Policy, 25(11), pp.1648-1666.

Loopstra, R., Fledderjohann, J., Reeves, A. and Stuckler, D., 2018. Impact of welfare benefit sanctioning on food insecurity: a dynamic cross-area study of food bank usage in the UK. Journal of Social Policy, 47(3), pp.437-457.

Mertens, D. and Thiemann, M., 2019. Building a hidden investment state? The European Investment Bank, national development banks and European economic governance. Journal of European Public Policy, 26(1), pp.23-43.

[1]Baldursdóttir, S., Gunnlaugsson, G. and Einarsdóttir, J., 2018. Donor dilemmas in a fragile state: NGO-ization of community healthcare in Guinea-Bissau. Development Studies Research, 5(sup1), pp.S27-S39.

[2]Degryse, H., Matthews, K. and Zhao, T., 2018. SMEs and access to bank credit: Evidence on the regional propagation of the financial crisis in the UK. Journal of Financial Stability, 38, pp.53-70.

[3]Dell'Ariccia, G., Rabanal, P. and Sandri, D., 2018. Unconventional monetary policies in the euro area, Japan, and the United Kingdom. Journal of Economic Perspectives, 32(4), pp.147-72.

[4]Rybacki, J., 2020. Are Central Banks’ Research Teams Fragile Because of Groupthink in the Area of Monetary Policy?–Evidence on Inflation Targeting. Gospodarka Narodowa. The Polish Journal of Economics, 304(4), pp.81-103.

[5]Taskinsoy, J., 2020. COVID-19 Could Cause Bigger Cracks in Turkey’s Fragile Crisis Prone Economy. Available at SSRN 3613367.

[6]Aikman, D., Bridges, J., Kashyap, A. and Siegert, C., 2019. Would macroprudential regulation have prevented the last crisis?. Journal of Economic Perspectives, 33(1), pp.107-30.

[7]Baker, A., 2018. Macroprudential regimes and the politics of social purpose. Review of international political economy, 25(3), pp.293-316.

[8]Biermann, F., Guérin, N., Jagdhuber, S., Rittberger, B. and Weiss, M., 2019. Political (non-) reform in the euro crisis and the refugee crisis: a liberal intergovernmental explanation. Journal of European Public Policy, 26(2), pp.246-266.

[9]Braun, B., 2020. Central banking and the infrastructural power of finance: The case of ECB support for repo and securitization markets. Socio-economic Review, 18(2), pp.395-418.

[10]Davey, R., 2017. Polluter pays?: Understanding austerity through debt advice in the UK. Anthropology Today, 33(5), pp.8-11.

[11]Howarth, D. and Quaglia, L., 2017. Brexit and the single European financial market. J. Common Mkt. Stud., 55, p.149.

[12]Kastner, L., 2018. Business lobbying under salience–financial industry mobilization against the European financial transaction tax. Journal of European Public Policy, 25(11), pp.1648-1666.

[13]Loopstra, R., Fledderjohann, J., Reeves, A. and Stuckler, D., 2018. Impact of welfare benefit sanctioning on food insecurity: a dynamic cross-area study of food bank usage in the UK. Journal of Social Policy, 47(3), pp.437-457.

[14]Mertens, D. and Thiemann, M., 2019. Building a hidden investment state? The European Investment Bank, national development banks and European economic governance. Journal of European Public Policy, 26(1), pp.23-43.