FINANCIAL CRISIS, CAUSES AND REFORMS

HAMDARD UNIVERSITY OF MANAGEMENT SCIENCES

PRESENTED TO :IRFAN SIDDIQUI

PRESENTED BY :NOMAN HASSANRIZWAN ALIYASEEN AMIN

F I N A N C I A L C R I S I S

Financial Crises Comprises of …

– Banking Crises

– Economic Crises

– Capital Market Bubbles

– Currency Crises

F I N A N C I A L C R I S I S

F I N A N C I A L C R I S I S

• Economic Crises

– An economic crisis can take the form of a recession or a depression.

– Economic Crisis will most likely experience a falling GDP, a drying up of liquidity and rising/falling prices due to inflation / deflation

F I N A N C I A L C R I S I S

• Capital Market Bubbles/Crashes

–Market Price of stocks are higher than present value of future Cash flows.

– A dramatic decline of stock prices in a market. Crashes are driven by panic as much as by underlying economic factors

F I N A N C I A L C R I S I S

• Currency Crisis

– A currency crisis occurs when the value of a currency changes quickly, undermining its ability to serve as a Medium of exchange or a Store of value.

F I N A N C I A L C R I S I S

Stock Market Crisis Bank Crisis

• 1910: Shanghai rubber stock market crisis

• 1929: Wall Street Crash

•1980: Japanese property bubble

• 1980: Latin American debt crisis; beginning in Mexico

• 1989-91: United State Saving & Loan Crisis

Economic Crisis Currency Crisis

• 2001-2: Argentine economic crisis [breakdown of banking system]

• 1994-5 Economic Crisis in Mexico, speculative attack and default on Mexico Debts

•1992-3: Speculative attacks on currencies in the European Exchange Rate Mechanism

CAUSES OF FINANCIAL CRISIS

1. Strategic Complementarities in Financial Markets

– Successful investment requires each investor in financial market to guess what other investors will do

– John Keynes compared Financial markets to a “Beauty Contest Game”

– Mr. George Soros an Analyst , has called this need to guess the intentions of other “Reflexivity”

CAUSES OF FINANCIAL CRISIS

2. Leverage

• It means borrowing to finance investments, is frequently cited as a contributor to financial crises

• Leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy

CAUSES OF FINANCIAL CRISIS

3. Asset – Liabilities mismatch

– This is another factor believed to contribute to financial crises, a situation in which the risks associated with an institute‘s debt and assets is not appropriately aligned.

– It is also seen as one of the reason bank runs occur. Such as, bear Stearns failed in 2007-08 because it was unable to renew the short term debt it used to finance Long term investment .

CAUSES OF FINANCIAL CRISIS

4. Contagion

– Financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from 1 country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries

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2. Restructuring the Financial System

–Liberalization of interest rates

–Reduction of controls on credit

–Encouraging the development of secondary market for government securities

–Allowing free entry of private banks

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3. Sound Corporate Governance stabilize & strengthen good capital markets

Benefit of Corporate Governance:

» Protect Shareholder rights

» Robust growth of corporate sectors

» Enables corporations to realize Corporate objectives

» Demonstrate to the wider public about the business

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4. Legal infrastructure must be made

– Bank secrecy laws should be improved

– Financial supervision & Bankruptcy

– Deposit insurance scheme is needed