Monday, November 28, 2011

The Global Economic Crisis and the Challenge of Reforming Banking and Finance Practice

As world economic leaders convene at the 40th World Economic Forum in Davos, Switzerland (DAVOS 2010), polls have shown that fears are mounting among business leaders being increasingly fearful of over-regulation by Governments. How to get out of the global economic crisis is key on the agenda but the concern for business owners particularly owners of financial institutions is how the outcome of their deliberations can affect the competitiveness of their actual and potential investments.
The general trend of responses by Governments to the global financial crisis is a tightening of regulatory freedoms for industry operators. In Nigeria for instance, more regulation has resulted in the Central Bank of Nigeria placing a straight 10-year ceiling on the maximum number of years an individual can serve as a Chief Executive Officer of financial institutions. This is in addition to stricter financial reporting obligations, the introduction of the common year-end policy coupled with the adoption of International Financial Reporting Standards (IFRS), amongst others.
It is expected that the call for thorough banking reforms will be a key agenda at the DAVOS 2010 Forum. As world economic leaders and their Governments debate the thoroughness of the proposed banking reforms, attention should be paid to their implementation in a way and manner that does not lead to Government over-regulation.
Business owners in all sectors of an economy, particularly owners of financial institutions have a genuine fear of industry over-regulation. This is because over-regulation can drastically alter the balance of competition that is so central to service delivery and consequently corporate and industry recovery. The modus operandi of the financial regulator is critical to the restoration of industry confidence both from the client and industry investor points of view. With the introduction of sound policies and practices, the industry will in no time be back on the path of growth and stability.
What may be termed over-regulation of the financial industry is at best relative. This will depend on the peculiar circumstances of the financial industry in each nation. The level of operational sophistication of the regulator and the operator are key determinants. As fears of over-regulation have become a global issue, it is important to note that what may be termed over-regulation in one country may be regarded as under-regulation in another. The industry structure, established systems, level of sophistication, historical antecedents and industry peculiarities are key factors to consider whether a policy initiative by the financial regulator is deemed to be over-regulating.
The unprecedented failure of financial institutions in developed economies has given credence to the argument that financial self-regulation is itself not entirely effective in dealing with the sort of economic crisis the world faces today. There is absolutely no doubt that some form of stiffer Government regulation is required. However, Government regulation should strive to strike a balance between maintaining depositor confidence as well as maintaining investor confidence in the industry. This is because over-regulation poses a serious risk to investor confidence.
The present global economic crisis has highlighted some of the weaknesses inherent in the purely pro-capitalist system of economic management. The free market economic system while being effective in the allocation of some scarce resources cannot effectively cater for some basic human elements such as fear of the unknown, greed and ambition. Some of these elements are prime motivators for individuals who are saddled with the responsibility of taking economic decisions on behalf of their financial institutions and Governments.
The bottom-line is that Banking and Finance reforms regulation need to be comprehensively focused and specialized so that the financial regulator can closely and constantly monitor the performances of financial operators. With such an approach, individual institutions or groups whose performances deviate from the norm can be quickly and accurately corrected. To this end, proactive strategies of regulation can be developed to preempt likely undesirable tendencies while reactive strategies can be implemented to deal with actual deviations from the norm. In line with the above, firm Government regulation is likely to be the popular clarion call for a long time to come.

Role of Central Banks in a Less and More Developed Economy

In developed nations, central banks conduct a wide range of banking, regulatory, and supervisory functions. They have substantial public responsibilities and a broad array of executive powers. Their major activities can be grouped into five general functions:
(1) Issuer of currency and manager of foreign reserves: Central banks print money, distribute notes and coins, intervene in foreign-exchange markets to regulate the national currency's rate of exchange with other currencies, and manage foreign-asset reserves to maintain the external value of the national currency.
(2) Banker to the government: Central banks provide bank deposit and borrowing facilities to the government while simultaneously acting as the government's fiscal agent and underwriter.
(3) Banker to domestic commercial banks: Central banks also provide bank deposit and borrowing facilities to commercial banks and act as a lender of last resort to financially troubled commercial banks.
(4) Regulator of domestic financial institutions: Central banks ensure that commercial banks and other financial institutions conduct their business prudently and in accordance with relevant laws and regulations. They also monitor reserve ratio requirements and supervise the conduct of local and regional banks.
(5) Operator of monetary and credit policy: Central banks attempt to manipulate monetary and credit policy instruments (the domestic money supply, the discount rate, the foreign-exchange rate, commercial bank reserve ratio requirements, etc.) to achieve major macroeconomic objectives such as controlling inflation, promoting investment, or regulating international currency movements. Sometimes these functions are handled by separate regulatory bodies.
Central banks are capable of effectively carrying out their wide range of administrative and regulatory functions in developed nations primarily because these countries have a highly integrated, complex economy; a sophisticated and mature financial system; and a highly educated, well-trained, and well-informed population. In developing countries, the situation is quite different. LDCs may be dominated by a narrow range of exports accompanied by a much larger diversity of imports, the relative prices (the terms of trade) of which are likely to be beyond local control. Their financial systems tend to be rudimentary and characterized by:
(1) foreign-owned commercial banks that mostly finance domestic and export industries.
(2) An informal and often exploitative credit network serving the bulk of the rural and informal urban economy.
(3) A central banking institution that may have been inherited from colonial rulers or operates either as a currency board issuing domestic currency for foreign exchange at fixed rates or simply to finance budget deficits.
(4) A money supply that is difficult to measure (because of currency substitution) and more difficult to regulate.
(5) An unskilled and inexperienced workforce unfamiliar with the many complexities of domestic and international finance.
(6) A degree of political influence and control by the central government (over interest rates, foreign-exchange rates, import licenses, etc.) not usually found in more developed nations.
Under such circumstances, the principal task of a central bank is to instill a sense of confidence among local citizens and foreign trading partners in the credibility of the local currency as a viable and stable unit of account and in the prudence and responsibility of the domestic financial system. Unfortunately, many LDC central banks have limited control over the credibility of their currencies because fiscal policy - and large fiscal deficits - call the tune and must be financed either by printing money or through foreign or domestic borrowing. In either case, prolonged deficits inevitably lead to inflation and a loss of confidence in the currency.
Given the substantial differences in economic structure and financial sophistication between rich and poor nations, central banks in most of the least developed countries simply do not possess the flexibility or the independence to undertake the range of monetary macroeconomic and regulatory functions performed by their developed-country counterparts.

India Interest Rates: Banking and Economic Growth

The benchmark interest rate in India, as reported in the beginning of 2011, is 5.5%. During 2000-2010, the average Indian interest rate was 5.82%, reaching the historical high mark of 14.5% in August 2000 and a record low of 3.25% in April 2009.
In India, the Reserve Bank of India (RBI) takes all the decisions on interest rates. Recently, the RBI has urged banks to raise their deposit rates in order to attract more investors. The reason for this step is that credit growth is already in good shape in India, while deposit growth is still to catch up. Following this, Kotak Mahindra Bank has offered its highest ever rate of 9.25% on deposits for 700 days.
Banks in India
India is considered the 'most regulated' banking sector globally, with more than 170 banks in the urban, semi-urban and rural areas. Many banks remained tough even during the worst ever global recession of 2008. Here are India's top 10 banks with high interest rates, as ranked by Business Review India:
  • State Bank of India (SBI)
  • HDFC
  • Allahabad bank
  • The Bank of Baroda
  • Punjab National Bank
  • Canara Bank
  • Axis Bank
  • Union Bank of India
  • IDBI
  • Kotak bank
The Indian banking industry is sufficiently funded and synchronized. Although the share market has dipped to half its value within one year, the nation's banking sector has declared a profit rise of 40%. SBI features in the list of 500 prominent companies in the world, and this has strengthened the trust of investors as well as the FDIs. This achievement, along with the direct support of the Indian government, has contributed to its high interest rates.
Economic growth in India
According to the data released by India's Central Bureau of Statistics, India's GDP grew 8.8% in the second quarter of 2008. Its information technology industry has attracted many investors, leading to this industry becoming highly focused. Additionally, the series of related back-up policies executed by the Indian government has also advanced economic growth.
A lot of issues still need to be addressed if we are to achieve the status of a 'sound economy', such as inflation control, increase in employment opportunities and equal wealth distribution. Interest and deposit rates are expected to remain high going forward, and 2011 is likely to be a profitable year from the perspective of the common man.

Quantum Economics - Philosophy of the Economy - Central Banking System Policies

A central banking system allowed issuing of capital and underwriting of low interest rate loans to countries around the world is possible in the new economic environment of Market Globalization, Great Capitalization and Rising Productivity when all these new developments are capitalized by the most developed countries by imposing new economic regulations and requirements to the rest of the world to enhance the less developed and developing markets' "security" and make these "markets" play under the same rules, but first, these financial, business and other economic regulations must be implemented by the most developed countries and markets themselves (as explained in Quantum Economics-Philosophy of the Economy's articles). The central bank lending system is to finance not just less developed and developing countries and markets but also any market which present projects complying with the general policies of Global development such as environmental protection, renewable energies, etc.
World Bank, IMF and WTO as we all know well exist and do what they are thought and tell to do: lend on high interest rates over tight deficit, social expenses and infrastructural matrix; these kinds of policies were well justified by:
  • First, political division in a Cold war World, isolation and political struggles, remoteness and socialization created sometimes great instability and interruptions of international relations to the extend of disrupting paybacks of international loans.
  • Second, closed and independent market structures such as the Communist of Eastern Block countries and China, or the constantly changing market structures of South America, Asia and Africa shifting left or right provoked constant inflations and other economics turbulences as many of these less developed and undeveloped markets had very diverse system of economics consequently effected the needed "security" for the lending institutions therefore the interest rates were to be set high enough to offset the estimated risk.
  • Third, low productivity and market remoteness could bring to a less developed or undeveloped country a "quick" turn to a recession if financial discipline is not followed
Which new economic developments in the world are making low rates lending possible?
Obviously, the ongoing market globalization and rising productivity are setting a prejudice in the ways of global development where new possibilities of central bank financing with "controlled" deficit matrix and "very low" interest rates are possible to be the new economic tools for such global development that could allow "quantum" leaps from underdevelopment onto high tech environmentally friendly development; The new "Quantum Economics-Philosophy of the Economy" is not only "production" related (tighten to) as the Marx's systems are but it (Quantum Economics-Philosophy of the Economy" is related (tighten to) the equity of (limited and controlled deficit) social and infrastructural expenses, the return on the invested capital and the value of intellectual properties.
What is "quantum leap" in "Quantum Economics-Philosophy of the Economy?"
Quantum leap is a possible jump in economic development based on "artificial (externally)" financed projects for practically financing and loan servicing environmentally friendly projects on a Global scale. Quantum leap is financed by a capital issuing central banking system more like the World Bank and IMF on a very low interest rate, because of the enhanced "security" in a new Global marketplace. This financing is done and promoted through private commercial banks on very low margin and set matrix.

Economic Indicators of a Healthy Banking Industry

Do you have savings in banks? Are you afraid that your bank will become bankrupt or insolvent due to economic crisis? With the current economic state, it is just normal to worry about the financial standing of banks due to the prevalence of bank closures and bankruptcies nowadays.
Did you know that the global economic crisis that took place between 2008 and 2009 not only affect ordinary individuals, small and medium businesses, financial institutions and organizations, but also small and big banks worldwide. The dire economic situation resulted to massive dismissal of employees, shutdown of industrial factories, closure of stores and filing of bankruptcies not only for individuals, but also business enterprises.
Because of these scenarios, investors are afraid to put up their investments, while some people, like you, are afraid to save their money on banks. To avoid risking your money on unhealthy companies, you should assess their financial performance and evaluate signs of unhealthiness.
Instead of depending on press releases and advertisements, it is best to conduct research yourself. With the cornucopia of information found on the web, use the Internet to conduct an unbiased investment analysis of the bank or company that you intend to put on investment.
Signs of a healthy bank or organization:
  • Healthy companies have increasing or higher profit margins on operations than the average set by the industry.
  • These companies have excess cash flow.
  • These firms managed to have earnings growth despite the onset of recession.
  • These banks by reasonable price-to-earnings ratio (P/E) and their P/E should not be greater than 25% of their stock earnings growth rate.
Other signs of a healthy bank or organization:
  • Management and employees have one focused mission.
  • Healthy companies have pervasive service attitude focused on the needs of customers.
  • These companies have faith in their ability to win, to profit and to prevail.
  • They are committed in boosting the health and well-being of their employees.
  • They offer employees opportunities for career development and further learning.
  • They show commitment for corporate social responsibility.
  • These firms have diverse product lines and diverse type of customers.
  • Healthy companies have low level of employees' complaints, fightings and power struggles. Workers in healthy firms are willing to jump to other departments to help out.
  • Healthy working environment has a two-way communication and management values employees as its intangible assets.
  • Top management show supportive supervision to their workers and employee participation are practiced and highly encouraged.
  • These companies offer workers opportunities to learn things and gives priority to work-life balance.
  • Ways to determine the financial standing of a bank before opening an account:
  • Check news reports of the bank where you consider opening an account.
  • Inquire from the FDIC on the general financial status of the company.
  • Select banks that have improving ratings for several quarters and managed to maintain their ratings despite the onset of recession.

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