Financial crisis with the emergence of modern age is
invariably interwoven with the fabric and fate of modern society especially by
way of financial contagion as it varies markedly from clime to clime
.Recessions ,depressions and meltdowns are mere tags and bizarre nomenclatures
as variegated portraiture of the business cycle being widely used to classify
the gravity of financial crisis at a particular period .They are used to define
the precarious climates in which economies might find themselves in the
turbulence cycle of free market or other ways round .
In this elaborate piece let us first define the term
‘’Financial Crisis’’ prior to its intricate analysis which is necessary if we
are to address ,prevent and if possible prohibit the reoccurrence of the
financial crisis and its precarious impact often unbearable especially in the developing countries .
The term ‘’financial crisis ‘’ extremely differs by usage
and definition across the world based on the level of each country’s exposure though
varied and multidimensional by impact.Altman-1997] describes it as the
simultaneous crash of related financial institutions brought down by the action
and inaction of investors including its speculators and depositors probably
stricken under duress in an attempt to liquidate their assets or offload their
savings into safer assets .Another study captured the intensity and broadness
as it applied to diverse climate confronted by crisis in which some financial
institutions lose a larger chunk of their assets .For instance ,according to
Aliber -2005] banking panics were responsible
for the crash and many financial crisis of the 19th and 20th
century and these panics also coincided with the recessions of the period
.Financial crisis also includes stock market crash and financial bubble bursts ,currency
crisis ,sovereign defaults –Valencia-2008].
Cases of financial crisis abound worldwide ,over the last
few centuries at least eight centuries have occupied the attention of nations
in the international community as they grew so despondent and desperate for
faster solution to prevent future reoccurrence .The fate of modern society
hangs in the balance and crises have persisted as it were from the ancient.This
speaks volume of the fundamental weakness of modern civilization.
Wikipedia refers financial crisis to ‘’a broadly applied
variety of situations in some financial institutions that suddenly loose a
large part of their assets or some financial assets lose a larger chunk of
their nominal value .It also admits that in the 19th and 20th
centuries ,banking panics were associated with diverse financial panics and
almost all panics coincided with recessions .Stockmarket crashes ,financial
bubble bursts, sovereign defaults and currency crisis are similar types
associated with such crisis .It directly occurs as a result of loss of paper
wealth value but not necessarily impact negatively yet on the real economy.As crisis persists and defy
all solution , the fundamental fabric of mordern civilization is similarly
threatened .
It also refers to a situation in which the supply of money is
outpaced by the demand for money .This now indicates liquidity evaporation
orchestrated by mass withdrawals of Banks ‘ available money as they sell other
short term investments to raise cash to bridge the shortfall and avoid
impending crash.It is a situation in which assets value drops so easily and rapidly and also includes
the erosion of the value of financial institutions. It is caused by bank runs
and bank panics in which investors sell off assets or withdraw money from
savings account as they envisage future drop in the value of these assets
.should they remain at that particular period , in such ailing institutions panics
or runs can be caused as a result of assets being overvalued or directly caused
by investor vulnerable behavior .Lower asset prices can be caused by a rapid
string of sell off including more
savings withdrawals.If prolonged and unchecked ,economy can dovetails into a
recession and even a depression .Lack of
necessary liquidity in financial institutions can be attributed to economic
recession or depression .Financial crisis may be
caused by natural disasters ,negative news among unknown
causes .It causes a decrease in economic activities and can easily also
reinforced itself .It refers to acclimate in which a large financial
institutions lose a large part of its
value or some institutions through
financial contagion .Financial crisis is different from economic crisis which
affects the entire economy .Its rampant occurrence in modern society tends to
affect specific sectors of the economy .It can hit a single sector and not
necessarily multiple sectors .
Business cycles have much in common ,they also vary and
complex in size and depth ,have never being identical let alone precise and
regular and also vary in duration and pattern of occurrence .Economists try as
much as possible to forecast the movement and twists and turns of the economy
.In most cases even when velocity is noted disputations often occur about its
pace,longevity,level of stability and steadiness.
Ordinarily ,as the periodical ups and downs of economic
activity market forces rational or irrational immensely contributed to the
configuration and reconfiguration of
the nature of business cycle at a time
utilising the structural imbalance between aggregate supply and aggregate
demand curves .The interaction between these curves tend to move economy forward or backward.
In this context ,business cycle passes through four stages
and subsidiary cycles .This ranges from trough to expansion, peak and then
contraction.Trough indicates a low part of the business cycle and may be called
a recession,for a short term drop or for at least two or three consecutive
quarters or can be termed as depression for a longer period ,very deep in
decline like the great depression of 1930s .In this scenario business activity
often drops ,characterized by closure of factories ,production and workforce
reduction including productivity decline and high unemployment .The situation
is also characterized by drops in aggregate demand due to contraction on
aggregate consumer spending.Consequently the stagnation of consumer demand
lowers prices to attract unwilling customers and stimulates
inventories’reduction .Other features such as poor profits ,low investment
,undercapitalization and gross underinvestments cannot be easily detached from
this stage .
As soon as economy cools off ,it enters into the second
phase –expansion .It start slowly with its silver linings as merchants who once
sold off excess inventories during recession will now restart reordering
,reinvestments and gradually restocking
their shelves . New investment access, profiting from the launching of government programs to stimulate spending
automatically boosts the economy .The return of animal spirits in a conducive
environment can boost the dire need to borrow repayable in anticipation of
future profits fuels aggregate demand in the long run.This upside is attributed
to output expansion ,income growth ,and increase in business investment and high employment.The growth in aggregate demand
in the long run is responsible
for bigger drops in high unemployment .Cheap funds mobilises investment at a
relatively low cost .The scenario drives
up consumer prices faster and creep up
wages even faster.
Peak is the final expansion and the limit of expansion which
is characterized by scarcity of some factors of production further growth
cannot continue when full employment of available resources had been reached.The
peak cannot go on forever like the trough.Challenges abound such as the corporate
high costs of labour and raw materials .Consequently ,the rate of aggregate
demand begins to slow down by tight labour cost and equally slowing down the
rate of finance.Car sales and housing prices also drop giving smart investors
the capability to read the danger signals.
Contraction is the result and opposite of the peak period
.At this stage ,characterized by excess inventories ,slumping sales ,investment
automatically slumps ,the same for
production as aggregate supply exceeds aggregate demand .As the flipside of
expansion phase , optimism vamoosed at the end of contraction period .These
stages are perennially recycled.
We agree that business cycle swings is the origin of financial crisis including
the unpredictability and the unworkability of market forces that aggravated
this position so that it will be very hard to predict the unforeseeable years
ahead .Our earlier assertion noted that it is because market forces are not rational .There had been
assumption that the hurricane-like and tornado-like natural phenomenon was
exerted as a reflection nature’s cause
even though it may not comprehended by mankind struggling to survive and simply
can do nothing about it.For instance , in the United States ,business cycle recorded runaway boom and
bursts from 1815,1837,1893,1907 and then 1929.She experienced financial panics
in an alternating periods of prosperity .It is also believed that as an integral part
of capitalist enclaves ,no one could out law business cycle .Even the extreme fluctuation
that western economists though are controllable have never ceased to spin out of control
especially with the emergence of meltdown only indicates the fundamentally
nature of free market still requires surgical operation eco-psychiatric
rehabilitation not as it were over the previous centuries.Otherwise it ought to
be suspended by or for marsolism-a
better panacea and can indeed be even by
the acrimonious troughs of nature ushering in new trend line.
Since world War 11 the American economy has not experienced
a depression of the likes of 1930,apart from its common recessions as recorded
in 1949 , 1954, 1958,1961 ,1970,1975,1982,1990-92,and the 1999-2000 dot com
burst menace. Though it was claimed that economists who monitored business
cycle movement have not been able to do proper curtail and meltdown was a
living evidence .As long as recession keeps turning up ,marsolism believes the frequencies and the unpremeditated frequencies of the meltdowns
and possible depressions cannot be detached from the unpredictability of
business cycles for development or cultural cycle that can acts as neuter to
this sole economic is still yet to be theorized and moreso,knowledge cycle as
ultimate panacea has not not been theorized either .Any avoidance of this common perils cannot be
possible without the adoption of marsolism in a fast changing new world order .
EXTERNAL AND INTERNAL CAUSES OF BUSINESS CYCLE
According to different schools of thoughts the causes of the
business cycle have been linked to both internal or external factor-forces
beyond the control of the economy. Such as crisis, wars, weather ,foreign trade
conflicts , immigration rate and threat, population time bomb, new growth
resources ,technological innovations have been linked to these causes
.Therefore these external theorists or theories imply that it cannot be
controlled or predictable.
The opposing school of thoughts places much emphasis on the
external causes such as flow of money theory ,total spending theory and wage
rate theory and a host of psychological factors .Either causes of the opposing
internal or external have contravened and linked to inequalities of wealth .But
does wage ,total spending, and flow of money theory ever really matter? We
critiqued data sources and unveil reason .How tenable are they with the benefit
of history and the maturity of the millennia?
TYPES OF FINANCIAL CRISIS
Financial crisis
offers its manifold and popular types of
banking crisis tend to occur when the system is overheated .We shed light on
evolution of bank crisis ,
Bank run occurs in a fractional reserve banking system .This
entails simultaneous withdrawal of their deposits by a large number of bank
clients either by cash demand or funds transfer into government bonds .Consequently
, this precipitates a run on the Bank .They can also put money in a safer
investment ,a safer institution or precious metals etc
It progresses if not curbed and even far more dangerous
,building its momentum as number of clients withdraw their deposits and
potentially default. A bank runs out of cash ,insolvency rears its ugly head as
institution reaches for the exit door .Examples of Bank runs such as the United
States Bank runs in 1931 and the embarrassing episodes of Northern Rock that
happened in 2007 .
In case of Bank panic ,it happens when several Banks
experienced Bank runs at the same time As banks experience run and panics ,
clients withdraw deposits and convert them into cash to escape and this worsens
the situation.If prolonged it can lead to systemic banking crisis .Systemic
banking crisis indicates that the entire system is technically affected and
virtually all banking capital is wiped out .The consequences of bankruptcies
can lead to economic recessions as domestic businesses starved of capital and
banking system shuts down .If prolonged , depression or greater depression
results and the total crash of an economy .
So Banking crisis as a type of financial crisis builds from
bank runs into bank panics otherwise known as mass bank runs and then
through financial contagion leads to systemic distress .Inspite of the
struggle to revamp the quality and quantity of Banking regulation in modern
times by policy makers and central bankers ,this form of financial crisis has not
yet abated especially in this volatile 21s century .
BUBBLE BURSTS
Another form of
financial crisis is the bubble bursts popularly known as speculative
bubble.A major contributory factor to this phenomenon is the presence of market
buyers who purchase assets in hope of an
expectation to sell at a higher rate .This is often preferred instead of future
income computation and the amount it can
generate during the envisaged period .Of course for every bubble there is a
possibility of a crash in assets prices .They can buy as many as they desire but when the sell the market
will fall .It s almost pretty difficult to predict the bubble burst outcome the
quality of asset prices and its fundamental value .
Speculative bubble burst samples abound worldwide involving
bubbles and crashes in the stock market and asset prices crash .For instance Reihart
and Rogoff trace inflation to the
Dionysius of Syracuse of the 4th
century BCE which begin the eight centuries
in 1258 in addition to the debasement of currency which also occurred
under watch of Roman Empire and the remains –the Byzanthine empire .They trace
it down to earliest crises onto the 1340 default study of the Bank of England-an indication of her
setbacks with France in the hundre years war.Infact the defaults lasted seven
defaults and this was by imperial Spain
including four under Philip 11 and three under his successors. –
The voluminous trends unmasked the imperfection of free
market .Others include -14th century Banking Crisis-the crash of Peruzzi and
the Bardi family of Compagnia dei Bardi
in 1345, Dutch Tulib bulb crisis in
1630s ,the 18th century crisis such as South Sea Bubble
-1720-U.K.,Mississippi Company-1720-France,Crisis Of Amsterdam ,begun by the crash of Leenderert Pieter de
Neufville which spread to Germany and Scandinavia ,Crisis Of 1772 was begun by the
crash of Bankers Neal ,James ,Fordce and
Down ,Panic of 1785 and 1792 in United
States,,Panic Of 1796 -1797 in both U.K.
and U.S.,Danish State Bankruptcy of 1813,Post-Napoleonic depression –Post 1815
Panic of 1819-Bank failures precipitated by U.S.recessions and led to first
boom to burst economic cycle ,panic of 1825 in which almost banks failed
including Bank of England a pervasive economic threat,Panic of 1837-another
recession linked Bank failures succeeded by 5 year depression ,Panic of 1847-unmasked the crash
of financial markets in the U.K.which truncated the 1840s railway industry boom
,Panic of 1857-a recessionary Bank failures ,Panic of 1866 was a global financial downturn which followed the failure of Overend,Gurney
and Company in London ,Long
Depression-1873-1896,Panic of 1873-Bank failures linked also to recession in
the U.S.seconded by 4 years depression ,Panic of 1890,Recessionary panic of
1893, Australian Banking crisis of 1893,Panic of 1896.
Now in the 20th century others include ,the panic
of 1901,another American recession was begun by the battle for financial
control of Northern Pacific Railway ,Panic of 1907-the last recession prior to
great depression ,German inflationary crisis of 1920s, Wall Street crash of
1929 and Great Depression of 1929-1945-the worst in modern history ,the crash of Vienna Stock market on Black
Friday , 9th of May ,1972,1973 oil crisis,1973-74 stock market crash
caused by oil crisis ,1973-75 Secondary
Banking crisis ,Latin America debt
crisis in 1980s beginning from
Mexico in 1982-the Mexican weekend ,Bank Stock crisis-Israel-1983 ,the Japanese
Bubble burst of 1980s and the 90s,1987-Black
Monday as the largest one day percentage decline in Stock market history ,1989-91 U.S. Saving and Loans
crisis,Scandinavian Banking crisis of early 90s involving Swedish and finish
,Early 90s recession,1992-93-Black Wednesday –a sort of speculative attacks on
European Exchange rate Mechanism ‘s currencies,1994-95 Mexican crisis ,Asian
97-98 financial crisis led to Asian Banking crisis and the Russian financial
crisis .In the 21st century,the
Turkish 2001 economic crisis , 1999-2002 Argentine economic crisis ,the 2000/2001recessions and dotcom bubble and the asset price bubble and late recessions-2000
which caused the real estate boom in America,energy crisis of 2000,the Indian
property bubble of 2005,the British property bubble of 2006,Irish property
bubble of 2006.housing bubble ,
U.S.housing bubble of 2007,the former Florida Swampland real estate bubble ,Spanish property bubble
of 2006,China Stock and property bubble of 2008 ,Rhodium bubble of 2008, the Uranium
bubble of 2007, the 2008 Subprime mortgage crisis in the
U.S.,Australian first home buyer property bubble of 2009 , 2007-2008-Global
economic and financial crisis ,Icelandic financial crisis -2008-2011,2010
European sovereign debt default crisis
till date, Greek Government debt crisis of 2014, Russian financial crisis and Chinese stock
market crash of 2015.
INTERNATIONAL CRISIS , SOVEREIGN DEFAULTS AND CURRENCY CRISIS
International financial crisis includes currency crisis , sovereign
defaults fall under this survey .While the currency crisis or balance of
payment crisis as regarded is a
situation in which as a result of speculative attack on its currency a nation
is forced to devalue its currency under the regulation of fixed exchange
rate.But sovereign default implies that or can be regarded as a situation when
a country fails to pay back its sovereign debts but i .These nomenclatures are driven by the voluntary decisions of
governments and not voluntary decisions of private investors .This means
sovereign investors ‘sentimental change in decisions can result in capital
inflows or suddenly fuels capital flight phenomenon .
In the period 1992 /1993 season ,several currencies of the European foreign exchange rate
mechanism .Consequently , were forced to
devalue or withdraw from it .The currency crisis in Asia in the 1997/98
financial crisis precipated by the devaluation of Thai Batch, the Russian
financial crisis of 1998 and those in
Latin America defaulted in early 80s was caused by Rubble devaluation etc .The
financial crisis of the 19th and 20th centuries were in
most cases associated with Banking panics and diverse recession also coincided
with the
panics .
But the crash of stock market ,financial bubble-burst
,sovereigh defaults and currency crises which directly result in loss of paper
wealth which often does not results in real economy changes are often regarded as financial crisis.Many economists have
questioned its sources and how it occurs and also development of theories and
how it could be prevented .Still they share no consensus on methods of
resolution –a major reason why they have persistently occur from time and time
calling for economists to unite .,,.
The currency literature explores these details for
researchers, central bankers and policy
makers .
RECESSIONS AND
DEPRESSIONS
In the exposition of the market ,we unmask here the nature
of recessions and depressions as noted above
.As coined by Anna Schwartz and Milton Friedman –exponent of monetarism
–they argued that the crash of 1929 was caused by first bank runs ,then Bank
panics and later aggravated by systemic crisis .In the 20s America had 30 ,000
Banks at its peak and by 1933 almost
13,000 banks had crashed in that crime
against humanity in the greatest depression in America .Therefore they believed
it was caused by policy recklessness basically the monetary policy blunders of
The Fed .Ben Benanke former Fed. Chairman under whom meltdown exploded also
concurred in like manner that central Bankers were to be held responsible for
this fiasco .
During financial crisis government can use its political
power to prevent widespread contagion.For instance the Tesobono Swaps which
were instrumental to the Tequila crisis in Mexico in 1994 was bailed out by the
American presidency to avoid contagion .Unfortunately when Thailand defaulted
on the Baht in 1997 and later devalued its
currency ,there was no such intervention since they hardly shared borders .
CAUSES AND
CONSEQUENCES OF FINANCIAL CRISIS
Rather than been regarded as causes, sources such as Wikipedia among others are
strategically contented to regard them as mere types and not causes .The main
causes now include –leverage; Strategic complementarity and self fulfilling
prophesies ;moral hazard ;Asset liability mismatch ;Herd behavior and
uncertainty ; Over regulation, under regulation and regulatory failures
;Systemic risk and financial contagion; theories of financial crisis ; Games of
self-coordination ;Herding models and learning models .
But before expository perusal ,it is also expedient
that further market or creation of new
market for diversification of risk spread or competitive risk spread can better
handle these consequences and even avoid or reduce or where appropriate
eradicate the causes .On a single day of August 21 , 1998 ,as a result of
runaway or break away plain vanilla interest rate swaps ,long term capital asset management LTCM –a
large hedge funds an invention of Nobel prize winning economists –futures and
options inventors , crashed and lost over 500million dollars in a single trade
.With that single collapse ,global apocalypse thus was begun which coincided
with the 97/98 Asia financial crisis and in
Russia and Brazil.
During the period –Alfred Steinherr –high finance rocket scientist
published her book and examined the derivatives markets .In 1998 she noted the
sheer size of over the counter-OTC derivatives market in terms of contracts
outstanding stood at 80 trillion dollars At the end of 1998 had become the most
important market prone to highly
contagious and virulent crisis ever experienced in history .Widespread failure
of policies and successive policy regimes had persisted and aggravated this
climate .To be precise in 2007 OTC
derivatives market ballooned to
600trillion dollars .Even after the storms including losses and unwinding that still towered above 500trillion dollars
.Yet it has no oversight
We shall examine the causes and consequences of financial
crisis as noted below.
THE BANKING SYSTEM
STABILITY ,DISTRESS PREVENTION AND THE ROLE OF MONETARY AUTHORITIES IN DISTRESS PREVENTION
Financial panic ,financial distress or banking
panic and banking distress is not new nor restricted to Nigeria like elsewhere around the world
.Truly speaking ,financial liberalization is a global development that has come
to be associated in particular with the economies where banking crisis is
prevalent .However , contrary to ancient
method of finance ,there is a widespread
belief that banks occupy the very pillar of universal economic
development and the bedrock of modern
civilization .Strategically ,through their indispensable roles of monetary inclined disposition ,wealth and financial engineering
technologies and techniques such as creator of money , allocation and
mobilization of savings ,principal savings depository ,financial advisory
role,credit management ,financial intermediation and the managers of the nation’s payment
and settlement system ,they ve been able to oil the wheels of modern commerce .In
short , based on this operative architectural mode , it can be also regarded as the general financier
of the economy and the lubricator
of the financial system .
Nevertheless the
Banking system and the stability of banking and the effectiveness of
Banking in an economy is quite the same
as the quality of Banking regulation in that same clime ;so that alteration or
enhancement in the latter has a reverberative effect on the former .In this
context the conduct and the practice of banking is subject to existing banking
regulation in that clime and with the growth in the quality and quantity of
banking services experimented at a
particular period. This remains the ultimate risk and boon of banking regulation hinged upon the quality
of adjustments ,disclosures , reforms
and tardy change that can be mustered at a given period .
Consequently, this entails a robust policy and
institutional platform to support
regulatory quality ,regulatory arbitration mobilisable in the mechanization of appropriate policy
making process ,policy planning ,policy consensus planning , visible policy
making critique and rational policy analysis under control of its regulatory authorities .It is a major
leverage in the regulatory regime of the monetary authorities being altered as
deem fit to ensure regulatory and institutional sanity, soundness, efficiency
and safety of the macroeconomic or financial
system at large . In this regard ,the primary responsibility of the
banking regulators is basically systemic distress prevention for the purpose of
macroeconomic and price stability in an economy
.This is necessary in an attempt
to safeguard against the hurdles of Bank
panic ,Bank runs and Bank distress that
can trigger total collapse of the
nation’s banking industry and its credit payment system.
Therefore the prudent
management of assets and
liabilities and the ability of BANKS to
guarantee the safety of depositors funds ought to constitute the paramount
objectives of the deposit money banks as they go about the performance of their banking activities and the statutory
role of financial intermediation .As a vital public resource for the
maintenance and sustenance of Banking
confidence, it must not be impugned, as regulators avoid regulatory arbitraging
and ensure institutional compliance with
the stringent provision s guiding Banking activities. Or that Banks play by the
rules .The maintenance of this
confidence –a scarce resource is
required for the health and wealth of the nation’s financial system. The
moment the confidence crashes our financial system also automatically crashes
.Banks ‘failure and insolvencies
worldwide based on historical review had been strategically linked to such
confidence fiasco and with it the bedrock of the nation’s Banks .
Sometimes ,confidence impairment can disrupt
efficient functioning of the
financial system especially in a
volatile highly underdeveloped financial market.Since Banks are the conduit and
the catalysts through which monetary policies are communicated via the transmission mechanism onward to the broader economy ,macroeconomic
instability and financial contagion can destabilize the entire system.Banks
failure can impair the health of the system .Consequently the attainment of price stability can become an elusive
nightmare as the ultimate goal of bank regulators is defeated in an unpredictable
financial system .
In the words of James Akpan Adams to quote verbatim’ ’the
insolvency of a bank has far more reaching consequences on the economy than
mere losses to the shareholders and creditors of the Bank .Bank distress and failures has serious adverse effects on economic development .For instance , large scale Bank failures limit the ability
of banks to create money ,jeopardized the payment mechanism and disrupt lending
activities’’.
UNDERSTANDING THE CONCEPT OF
DISTRESS ,CAUSES AND PREVENTION
Before we embark on the journey of discovery the root causes
of Banking panic ,bank runs, and Bank distress it is expected and
naturally expedient in this candid
section of the paper to define distress , causes identified and proffer measures
for distress prevention .
In a normal parlance ,the
term ‘distress ‘refers to an
unhealthy or precarious situation .So to be precise a distressed institution is
a vulnerable institution caught in the
midst of survival storm and unhealthy situation. This is an institution whose
daily practices and performance are
not in tandem or compatible with
industry norms and established standards and so therefore lacks a good clean
bill of health .Now let us apply this concept to the Banking industry our focal
point of study and the exposition and review of available research literature .
Banking Distress ,Causes And Prevention
Calomiris -1989 defines distress in the financial services
as an unhealthy situation or weakness in the organisation’s condition that
prevent it from achieving its set goals .Lenston et al -1986 concluded that the
firms distress as a situation of complete or near total loss of shareholders
funds .Ajasin -1993 differs and observes that it is a condition of cessation of
autonomous operation and loss of continuance with the assistance of relevant
monetary authorities such as NDIC.Ologun-1994 says an unhealthy financial institutions
is noted by managerial weakness and severely truncated operational ability .
In a compendium ,to put it succinctly it is the exhibition
of ‘’severe financial ,operational and
managerial weakness and inability to meet both owners’ and customers obligation
and the rest of the economy at large-Adams-2003].When this happens at the level
of individual bank distress ,its contagion can spread so quickly to infect the
entire system if not quckly identified and resolved .Bank panic and Bank run
from a single Bank runs can precipitate
the crash of the system if it spreads uncontrolled or uncurbed .Aja-Nwachukwu
-1993;12]admits systemic distress could
result from a Bank failure in particular and spread too quickly to infect the
entire system through financial contagion .This may become negative to pose
some threats to the industry stability in general.Consequently the nation’s payment system maybe affected
including savings mobilization and financial intermediation services
–Balino-1987]
Distress in Banking can be likened to Banking illiquidity
and insolvency and the fear of depositors
for the loss of their deposits .This therefore leads to breakdown of contractual obligation ,subject to bank
panic,then bank run and distress.-Ebhodaghe-1997;57;Ibikunle-2014]This
unhealthy situation begins due to bank’s inability to meet customers obligation
as fall due.That is illiquidity on one hand .On the other hand , this leads to
insolvency as it brazenly manifests when
Banks’realisable asset value is far below or less than its aggregate
liabilities .The inability of a Bank to meet customers obligation as an early sign of distress is a reflection
of this two way factor syndrome crisis prompting interbank indebtedness and tardy or dead depositors withdrawal disability. Weak
depositors base ,poor management and inability to meet requisite
recapitalisation requirement.
There also a handful
of performance criteria widely used
to determine the operational fitness or bank deficiency .This build upon the basis of two factor
crisis syndrome crisis to include low
earnings , huge operational cost and losses ,weak management ,poor internal
controls ,insider abuse .
Regulatory Mechanism And
Distress Prevention Measures
In the light of the foregoing , dual factor syndrome crisis
is a central bane in a banking distress .However regulatory measures widely used to avert Banking crisis are technically being
subject to critique by finance pundits worldwide . Inasmuch as they have positive implication are also
confronted by logjam of drawbacks
especially in a banking climate that has been heavily
deregulated-Ibikunle-2014] .
While sect oral policy of
deregulation was seen as a means
to check undue advantage of
shareholders and a boon to depositors
.The capability of depositors on the other hand
to critically assess the Bank’s risky
portfolio can be subject to restraint driven by several factors
.Adams;2003 admits that the capability
of depositors to adjust for appropriate rates
to compensate against default risk
could be hampered in such
scenario and with deregulation may be
vulnerable institutions with inherent liability structures and lulled into
distress borrowing.-a condition that often fuels the dual factor syndrome
crisis which can sets in and hence the crash of the ailing
institution.-CBN;1995;Ibikunle;2014].
In this context ,government intervention is rational to protect depositors fund
against default risk .This insulates the system against envisaged
drawbacks inherent in market mechanism and a
proven evidence that market mechanism is unreliable and inefficient .
There is no doubt
that the debate about government intervention dates back to the days of David
Hume and Adams Smith and the generation
of classical economics that followed them
and later neo-mercentalists and the former includes economists such as J.B. Says . ,David Ricardo
,Thomas Malthus and even before Thomas
Mun ‘s Mercantilism and its followers also contributed immensely to the importance of government intervention
in the economy like the Keynesians .This
was leveraged to bridge likely failure of the market and correct its anomalies
,relative to the capability of the market to effectively allocate resource over
times .The statutory
responsibilities of the CBN such as CBN licensing and revocation of Banking licenses and the
practice of deposit insurance by NDIC are prominent forms of
self regulatory activities in the system .The concept of deposit
insurance is embedded in its essence .If this prevent Banks from excessive risk
taking it automatically also increases their chance of failing
–Adams;2003;Whetlock;1992;Mishkin;1997].
Further studies have also unearthed that Banks have greater incentives to take bigger risk
and bigger bet than they otherwise could manage .or than they otherwise
would when insurance premiums are
unrelated to expected cost of failure to the insurance system . –Belong;1998,Balino and
Sundaravajani;1991 and Adams;2003].In this context,the concept lowers risk
and cost of deposit and wildly encourages Banks to use depositors funds
to heavily finance their activities in
contrast to equity and non-deposit
liabilities .According to the studies ,Banks therefore prefer to hold riskier
assets ‘’when deposits are insured ‘’It
concluded ‘’unless regulation hinders risk taking deposit insurance could
precipitate more Bank failures than otherwise would be’’While Nwankwo-1989
admits the countrywide banking historical evolution is determinant of
regulatory pattern in such country it might be difficult to subscribes to Calomiris-1989
that supports a viable condition for
deposit insurance that can be better exploited by strict enforcement of
regulation .It is risk if one dares to believe and express disputation with the
meltdown crisis in the U.S. which portends the unworkability of even regulation
.To further dispute Wheecock -1992 support for effective supervision by regulatory authorities to beat banks into
compliance with legal framework as by ibikunle2014 - including its effective
impact one can critique also leaves much to be desired often counteract
public interest .Even when Bank regulators ,devise prudential standard to avoid
insolvency and main banks’adjusted book value .This followed fixed rules such as :Capital
Adequacy ;Asset Quality Management Competence ;Earnings ability and Liquidity
position abbreviated as CAMEL.Any adverse deviation from this critical and
required standard level ,then the Bank begins to experience symptoms of bank
distress –Ebhodaghe ,1997].
Methinks , the disputation is justified with the study
Rojas-Suarez-1998 when it fails to exonerate over regulation.or admits sound
CAMEL are not still good indicators of Bank’s bill of health sometimes induces
systemic instability .Contrary to Mishkin-1997 of those who think regulators
and Banks managers have adequate
knowledge ,information and sufficient resources for technical supervision and
self regulatory functions better think again and such foibles can be compounded
by moral hazard or the so called principal agent challenges. Sheng -1990 unmasks the objective of
supervision tends to be destroyed by
over regulation and failing depositors assets,competitive banking ,promote
monetary instability and a weak financial system.
Noel Sacasa –IMF Senior financial sector expert on Capital
Market and money market department in
the piece ‘ Preventing Future Crises ’ also
admits the need for ‘effective regulation ……………to realize the potential of an
open financial markets’’He further noted ‘financial innovation and integration
have increased the speed and extent to which shocks are transmitted across
asset classes and countries blurring boundaries between systemic and
nonsystemic institutions .But regulation and supervision have remained geared
towards the individual financial institutions .The regulatory mechanisms do not
adequately consider the systemic and international implications of domestic
institutions’ actions ’’ He therefore provides direction for proposed
reform .In what went wrong ’unraveling
the crisis and what reform proposals should address and include causative
factors not included needed to correct the destabilizing trends in the markets
and regulation .Here he notes-First ,global macroeconomic imbalances resulted
in lower interest rates during the past decade inducing more risk taking and
contributing to the creation of asset price bubbles worldwide .Second,changes
in financial sector structure and the failure of risk management to keep up
with financial innovation during the past two decades rendered the system more
prone to instability .And third ,leveraged financial institutions have inherent
incentives to take on excessive risk without internalizing systemic risk which
is the main they need to be regulated’’. Sacasa like previous studies all agree
that with the risk of moral hard ,soft landing can be difficult and then still
calls for appropriate or effective
regulation .How effective is the
regulation without understanding the foremost theoretical contraptions that
underpinned these regulations as it were
over the ancient .Dealing with systemic risk or not as to avert fast credit growth and prevent
asset class bubble burst does not make regulation efficient .There is no doubt
about it that modern financial products such as securitization have contributed
immensely to the risk taking tendencies
and bourgeons risk of moral hazard though unarguably have improved access to credit but the risk of volatility
associated with market forces is certainly a far greater problem in the years
to come .Contrary to Sacasa it is not true efficient dispersal of risk in
favour of institutions that could manage them from a transfer of burden of the
destabilizing shift of risks from the institutions that could not manage them
‘’to the reversion of some of these
risks to banks that had supposedly
offloaded them’’ promoting high uncertainty among participating institutions correctly
counts and hardly can this be a one size
fits all .
The swing and shift in monetary policy is responsible for the growth of credit market debt in the stormy
decade under Sacasa review when some economies ran persistent current account surpluses
.This led to cumulative financial assets issues in deficit countries especially
financial assets in America .Low
interest rates was responsible in heightening moral hazard and accelerated excessive risk taking
and ballooned fast credit growth .Sacasa notes this ballooned households and
non financial entities’ credit market debt from 118 to 173 percent of GDP
between 1994 to 2007.Household credit debts since 2000 accelerated even more
ballooned in seven to 136 from 98 percent .The U.K.also experienced staggering
growth from 120 percent to 180 percent and in the Euro zone rose from 72 to 91
percent of GDP.Sacasa and his ilks are maiden statistical behemoth consumers and yet could not grab
nor come term with the grievous cost that monetary policy shift
and its excessive regulation can cause
or is causing the modern markets.It is
the central motivation of excessive risk taking
and asset price inflation and the best structural changes that can be to
avoid Adam Smith theory of market forces and can save modern free market economy from total
crash.This structural abstinence can allow all modern reforms to work in the
long run when market forces are replaced by market rational forces .
Almost all recommendations and resolutions proffered to end
banking and financial crisis dwells solely on the need for efficient regulation
and nothing more and to be bemused that it is the primary catalyst and panacea
cannot be nothing more than hallucination
and object of malediction inviting the new round of crisis . With these new technological trends financial
institutions can excessively regulate and
manage themselves and disregard systemic risk and leverage can increase
moderately without burden of asset price bubble burst and with flat interest
rates and trading of micro financial
assets , where virtually all credit sectors are supplied to bridge inequality
of wealth in modern society .This allows for holistic review of financial market ,its
system and its restructuring to adopt marsolist macroeconomics .
Cross-country data
analysis by Balino-1991 and empiricism of banking and financial crisis from Argentina to Chile
,Malaysia ,Spain ,Philippines to Thailand and Malaysia inspite of diversity of
antecedence observed similar trends .This evaluates the macroeconomic condition
causing distress ,the regulatory framework ,the intensity of the crisis and
standard approaches .The findings
revealed following challenges ;weak management ,inadequate capital base ,poor
asset quality and liability management,political interference, macroeconomic
instability , fraud and insiders abuse ,inadequate legal framework ,delayed
supervisory method of actions towards bankrupt institutions.In Argentina , the
decline or loss of loan portfolio which feeds from general economic development
environment..
The Eurozone Debt Crisis
The still exploding global financial crisis started with the credit crunch in the United
States and the crash of subprime mortgage market during the summer of 2007 and
became much intense in September 2008 with default by 140 years old Lehman
Brothers and having undergone different phases spilled into the real economy
and global economy at large evidenced by ongoing recession in almost
industrialised economies .With the cheap interest rates leveraged policy ,has
monetary like fiscal policy been better having countered the menace with
unprecedented vigor ?Why would fiscal
policy be allowed to widen public deficits only to set up bail out packages to
rescue failing financial institutions inspite of rebounded economic activity of
2010 and what happened thereafter?
Now in 2011 tensions in sovereign debt markets accelerated
with the concern of long term debt sustainability worldwide given the fact most
of these countries entered the market
crisis with huge public and private debt .This further aggravated the scenarios
threatened financial and macroeconomic stability as most financial institutions heavily traded
the troubled government bonds .Government debt to GDP ratios are now much
higher than before the crisis and historically
high with the benefit of guarantees added more potential liabilities With the growth of ageing population which a
rising cost for the states over the next 3 decades ,there is evidence this
problem can be worsened with the growth of public debt .In a cursory look at
the State of public finances in the Euro area according to IMF debt to GDP
ratio ranges or varies markedly acroos the region.In Estonia is about 6 percent
,152 percent in Greece-the worst economy
in western Europe in 2011 and about 87percent aggregate in the Euro area
.Nevertheless the public debt burden is a global issue ;in the U.K. stands at
83 percent,100 percent in the U.S.and 229 percent in Japan.This can be a great
burden to central bank in view of its ability to maintain price stability at
all times
Moreover ,the Eurozone debt crisis can be linked too much
dependent on foreign capital and that ‘s the same problem that precipitated the Latin American crisis of the 90s
especially Argentina ,Asia 97-98 financial crisis, and later the meltdown .Not understanding
how to restructure knowledge and macroeconomic cycles can be major problem and
of course it is as they profited cheap capital guaranteed by monetary authorities.
Although inflows of capital is from the Eurozone but it has subjugated the
capability of the borrowing governments to handle turning surpluses into
massive current account deficits as crisis deepened. Almost all the country in
the region are inmesss of spiraling deficits now with the emergence of the
Eurozone over the years and only Germany seemed to be enjoying the show of a
creditor nation.The sovereign influence of the Eurozone countries is fast
eroding with the slide into obscurity of their financial independence
