In one of the studies done by The American Enterprise Institute for Public Policy Research (AIE), the researcher Peter Wallison stated, ―fair value, as applied by accountants in the current credit crunch, has been the principal cause of an unprecedented decline in asset values and an unprecedented rise in instability among financial institutions. The system has to be rethought, not only because of its contribution to financial instability but also because its pro-cyclicality tends to create asset bubbles and exacerbate the effects of their collapse. This is additional example of how much debate that fair value has contributed to a decline in the value of assets and the variability of financial institutions eventually leading to their failure. According to an article in The Wall Street Journal, ―banks generally loathe mark-to-market rules, which rely on what they feel are too often irrational market prices. The market value did fall excessively in the depths of the crisis.
The most usual example of fraud is that managers lie about the nature or the value of their investment (Coggan 2009). Finally, the another worry about hedge funds is bring the system down. What this means is that hedge funds haven’t ability to repay the money they borrow when they make a bad bet. If hedge funds managers borrow money from bank, it may lead bank lost a lot of money. However, financial institutions bulid up a system which is Counterparty Credit Risk Management, so this system become the first line defense between unregulated hedge funds and regulated financial institutions (Kambhu 2007).
Delinquency Delinquency refers to a situation when a loan payment to an MFI is past due (CGAP, 2001). Delinquency results in a slower turnover of the loan portfolio and an inability to pay expenses due to reduced cash flow. If the loan principle is not recovered at the scheduled time, loans to other borrowers cannot be made and payment of any expenses may also have to be delayed. Also delinquent loans result in postponing or lost interest revenue (Ledgerwood, 1999) Delinquency is deliberate for the reason that it signifies an amplified risk of defeat, caution of effective problems, and could assist forecast how much of the collection will ultimately be misplaced because under no circumstances get hold of reimbursement.
In this paper below will explain some causes of the crisis in general then will discuss the GCC crisis in brief. Financial crisis is caused because of different factors and there are three main branches which are policy implementation and regulatory failures, financial market causes and macroeconomic causes but will focus more on the financial market. Starting by macroeconomic causes and it’s including the low interest rate and low inflation. there 's a term called the Great Moderation which will be simplified by saying
Many companies respond to risks that have a low impact in supply chains and tend to overlook the high-impact and low-likelihood risks (Chopra & Sodhi, 2004). An understanding needs to be obtained by managers between the connection and variety of the supply chain risks to develop an effective risk response strategy. Hauser (2003) recommends that due to today’s complex environment, adjusting and understanding risk will result in an improvement in financial performance and competitive advantage for an organisation. Hise (1995) states that the objective of supply chains is profit maximisation by finding a balance between productivity (efficiency) and profitability (effectiveness) (Mentzer & Firman, 1994) to shift raw material and products between countries in a timely manner ( Bowersox & Calantone, 1998a) resulting in profitability of supply chains as a whole ( Manuj & Mentzer, 2008). Managers need to consider the different factors that create uncertainties and risks as a global supply chain have numerous delay points, greater uncertainties, and hence the need for greater coordination, communication and monitoring (Manuj & Mentzer,
So huge was the debt that concerns as regards to the solvency of banking systems, as well as the sovereigns are negatively reinforcing. DeGrauwe (2010) noted that the basic cause of the government debt crisis is mainly the unsustainable accumulation of debt by the private sectors. In other words, the poor performance of the SGP has very little role to play in this
Macroprudential policy aims to manage financial stability through a much more targeted approach than monetary policy. Using monetary policy to fix a problem in the economy (e.g. asset prices are too high or too low) has many risks involved with it, for example causing high inflation or on the other hand causing deflation. Macroprudential policy takes a different approach and tries to correct imbalances in the economy more on a case-by-case basis instead of “shocking” the whole economy with monetary changes. So instead of trying to aid a housing bubble by raising interest rates and risking a rise in unemployment, a macroprudentialist will look to impose higher loan-to-value ratios on mortgage lendors, and will try to reign in just the housing part of the
The Act gave the Fed the power to impose stricter prudential management on banks and also tighten the regulatory key financial institutions. It also limited bank mergers and acquisition to a certain level. In the event that a major bank holding company encounters financial difficulty and early remediation efforts fail, the Federal Reserve is to recommend to the Treasury Department and the Federal Deposit Insurance Corporation (FDIC) that the company be resolved and shut down under the FDICs new orderly liquidation authority. As an alternative approach, the Independent Commission on Banking(ICB) in the UK recommends that, a high ring-fence be placed around vital retail banking activities.4 Richard W. Fisher, president of the Federal Reserve Bank of Dallas, in 2011 declared in the annual report that, there is only one safe and effective way to end the TBTF. Fisher in the introduction of the report, writes; The TBTF institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism.
Particular interest was paid to the impact of the financial crisis and the proportion of capital held by the banks depending on how they measured the exposure to operational risk as well as in relation to their exposure to credit and market risk. It was found that most of the banks were using the default approaches provided by the regulatory body as it did not pay off to use a more sophisticated approach. The use of more advanced approaches depends primarily on the size of the banks, but also its ownership. Finally, there is a strong relationship between the banks’ choice of operational risk approach and their regulatory approach used for measuring exposures to credit
This is called securitisation and has constituted an alternative fund raising avenue for firms from the capital market. and renders traditional band services less attractive. Disintermediation also occurs due to high inflation rates but, bank interest rates remain stagnant which is often associated with government control. Therefore, where depositors are able to get better returns for their investment in mutual funds or securities, disintermediation
Another new rule is the stress test. It applies not only to banks but also for any large hedge fund that is considered a systematically significant nonbank financial company (SSNF). The SEC examiners want to understand how the firm communicates investment values and handles liquidations because during the financial crisis we know that large financial institutions faced a critical sell-off or liquidity. It is important that the firm complies with contingent capital requirements and tighter risk management models. If for example the firm trades swaps, the SEC wants to see that the firm has made risk adjustments for clearing