Impact on Economic Performance Fluctuation - MyAssignmenthelp.com

Questions: 1. Identifying and critically discussing 2 key roles of bank in terms of contribution to country financial system. 2. Critically evaluating the problems associated with relying on debt finance being provided by bank with those parties who are a financial surplus unit to those who are a financial deficit unit. 3. Critically changing the capital adequacy, liquidity and leverage as stipulated by Basel III and discussing the impact of these changes in banks financial condition. 4. Critically explaining the process of asset securitization and why banks may wish to securitize. 5. Critically discussing the implication of global crisis on banks financial shortly after the crisis and discussing the measure used by the country to calm the crisis. Answers: 1. Identifying and critically discussing 2 key roles of bank in terms of contribution to country financial system: There are certain roles that is played by OCBC Bank in Singapore, Barclays Bank in UK and Citigroup in USA, which directly helps in smoothing the functioning of financial system in the country. The identified organisations mainly contribute to the distribution of monetary system in their country, which efficiently helps in improving financial operations. The credit provision and liquidity provision is effectively conducted by OCBC Bank in Singapore, Barclays Bank in UK and Citigroup in USA, which helps in supporting the financial system of the country. The increment in credit provisions could directly fuel the economic activity of the country, where business could flourish and generate higher cash flow. This credit provision could fuel economic activities, where investment beyond cash on hand is conducted (Ocbc.com 2018). This helps in increasing homes purchase without savings the entire cost in advance and government to smooth their spending for investing in infrastructure projects. Liquidity provisions are also conducted by OCBC, Barclays Bank and Citigroup, which allows both demand deposits and credit provisions. These banks directly conduct financial market services such as buying and selling securities, which help in supporting financial requirements of organisations. The banks are the main provider of liquidity to the organisation and customers in their respective countries. 2. Critically evaluating the problems associated with relying on debt finance being provided by bank with those parties who are a financial surplus unit to those who are a financial deficit unit: There is different level of problems that arises from debt finances, which needs to be accommodated by banks before providing finance to companies. In addition, banks support the companies with financial surplus rather than financial deficit, as they have higher capability to repay the financing amount with interest. The main problem associated with the financing companies with financial deficit is the increasing accumulation of interest payment, which cannot be conducted with the existing revenue stream. The company with increased debt accumulation could lead to insolvency, which might hamper the repayment of banks finances. For example, Lehman Brothers increased debt accumulation before the crisis, where banks did not support the company due to its excessive financial deficit. Thus, it could be understood that banks do not support companies with extra debt financing if they have financial deficit. The problems in repayment and chances of default by the company having financial defi cit is very strong, which could hinder actual financial condition of the bank. 3. Critically changing the capital adequacy, liquidity and leverage as stipulated by Basel III and discussing the impact of these changes in banks financial condition: The Basel III was mainly drafted after the financial crisis of 2008, which mainly liquidated financial sector of the world. The extensive debt accumulation conducted by banks was mainly reduced with the help of Basel III, as it could help in smoothing the function of banks. The new capital requirement directly represents tighter equity definition maintained by banks. In addition, the common equity requirement under Basel III mainly increased from 2% to 4.5% in 2015 with the increment in mandatory reserve from 4% to 6%. Moreover, under leverage ratio the banks need to be maintain a 3% leverage all time, which could help in thickening the cushion of cash reserves. Moreover, the liquidity coverage ratio needs to be no lower than 100% under Basel III, which could help in reducing the chances of default by a bank (Angelini et al. 2015). Net Funding Stability Ratio (NFSR) needs to be maintained by banks, which could help in maintaining capital stability. Furthermore, the liquidity needs to be maintained by banks for 30-day time horizon under acute liquidity stress scenario. These changes could help in strengthening the financial position of banks during any kind of financial crisis. 4. Critically explaining the process of asset securitization and why banks may wish to securitize: Figure 1: Depicting how securitization works (Source: Finance and Development 2018) The above figure mainly helps in depicting how securitization works, which allows banks in generating higher revenue from the operation. In addition, the process is adequately explained in the diagrams, which could allow the bank to pool different securities and repack them into interest bearing securities. The loopholes in the securitization process was the main reason behind the augmentation of financial crisis. Banks and financial institutions were merging securities and loans into the securitization process without adequate process. The banks mainly originate the asset, where assets immune from bankruptcy will be polled together. After which the pooled security will be handed to agency of the selling process in capital market. Therefore, the pooled security after reaching the capital market with the help of agency are bought by capital market investors. The selling process conducted in the capital market will only be conducted when adequate credit rating is assigned to each poole d security. Therefore, banks wish to securitise for attaining flow of cash after providing loans to its borrower. 5. Critically discussing the implication of global crisis on banks financial shortly after the crisis and discussing the measure used by the country to calm the crisis: During the financial crisis the profit of OCBC bank mainly declined from the level of 2,183,240,000 to 1,860,010,000 in 2008 as compared from 2007 (Eresources.nlb.gov.sg 2018). This mainly indicates the incapability of the company to attain higher profitability after the financial crisis. However, Singapore mainly pledged S$2.9 billion in 2008 and S$20.5 billion in 2009 for reducing the impact of financial crisis on banking operations. On the other hand, performance of Barclays Bank in UK increased from 2008 to 2009 from 5,249,000,000 to 10,289,000,000, which indicates high end performance conducted by the company (Home.barclays 2018). Moreover, the UK government mainly used 39 billion as their bailout package to reduce the impact of financial crisis. In addition, merger of HBOS and Lloyds was nationalised, where 200 billion was available for new debt issue under the special liquidity scheme. Lastly, the guarantee of the depositors was raised from 35,000 to 50,000, while Bank of England cut the interest rate in half to reduce the problems portrayed by financial crisis. Furthermore, performance of Citigroup in USA mainly declined during financial crisis, where the group earned net loss from 2008 to 2009. The net loss in 2008 was at 27,684,000,000, while the loss declined in 2009 to 1,606,000,000 (Citigroup.com 2018). The US government conducted the largest government intervene in the financial crisis, where $700 billion bailout programme was conducted to support banking industry. In addition, the bank deposits were raised from $100,000 to $250,000 by the end of 2009.moreover, the FED also cut interest rate to 1.5%, which helped in creating liquidity into the market. Reference Angelini, P., Clerc, L., Crdia, V., Gambacorta, L., Gerali, A., Locarno, A., Motto, R., Roeger, W., Van den Heuvel, S. and Vl?ek, J., 2015. Basel III: Long?term Impact on Economic Performance and Fluctuations.The Manchester School,83(2), pp.217-251. Citigroup.com. (2018). [online] Available at: https://www.citigroup.com/citi/investor/quarterly/2010/ar09c_en.pdf?ieNocache=157 [Accessed 12 Jan. 2018]. Eresources.nlb.gov.sg. (2018).Singapore is first East Asian country to slip into recession - Singapore History. [online] Available at: https://eresources.nlb.gov.sg/history/events/3cacf256-82cc-4776-b7f8-83757723b502 [Accessed 11 Jan. 2018]. Finance and Development | FD. (2018). Finance and Development. [online] Available at: https://www.imf.org/external/pubs/ft/fandd/2008/09/basics.htm [Accessed 11 Jan. 2018]. Home.barclays. (2018). 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