The financial crisis in various countries
SHRADHA CHURI
Literature review-
1. Finland
Beginning in 1990, Finland’s financial system experienced rapidly increasing loan losses and declining earnings following a period of quick financial liberalization and a record credit expansion in the 1980s. In April 1992, the Finnish Parliament established the Government Guarantee Fund (GGF) to provide loans, capital, and guarantees to banks. The government stated that the GGF will “ensure the stable functioning of the banking sector under any conditions” in a news statement that was released on August 6, 1992. Six months after that, the Finnish Parliament specifically demanded that the GGF ensure the ability of all Finnish banks to fulfill their obligations. The government offered limitless funds for this guarantee, claiming that it fully protected depositors and other creditors. It was made clear, however, that equity holders, who are not creditors, were not covered by the guarantee. The GGF never used its general promise to compensate creditors or depositors of a failed bank. On December 8, 1998, the Finnish Parliament replaced the available facility with standing deposit insurance, with a coverage cap of 150,000 Finnish markkaa (US $27,000) per depositor per bank.
(Makhija, 2022)
2. Indonesia
On November 1, 1997, the Indonesian government shut down 16 banks. The government promised to protect depositors’ funds up to 20 million Indonesian rupiahs (IDR; USD 6,000) per account at the time. Large depositors were not immediately and fully protected, which led to deposit runs throughout the banking industry and reduced international confidence in the Indonesian financial system. As a result, on January 26, 1998, the Indonesian president issued a Blanket guarantee and established the Indonesian Bank Restructuring Agency (IBRA) to oversee the guarantee and other bank rehabilitation initiatives. All depositors and non-subordinated creditors in commercial banks with local incorporation were covered by the blanket guarantee. As a point of reference, Indonesian banks had USD 209 billion in liabilities in June 1997, of which USD 110 billion were in rupiah deposits and USD 34 billion were in foreign currency deposits. No official estimate of the total amount of covered liabilities is known. The government replaced the blanket guarantee on September 22, 2005, with a limited deposit protection program run by the Indonesian Deposit Insurance Corporation.
(George, 2022)
3. Sweden
The post-World War II era brought about the worst shock to Sweden’s financial system. Foreign credit was a major source of funding for Swedish banks, but it dried up when symptoms of instability emerged. On September 24, 1992, the Swedish government announced a blanket guarantee for all bank commitments, excluding share capital and perpetual subordinated loans. The goal of the blanket guarantee, according to a 1995 IMF Working Paper was “to ensure the integrity of the payments system and to guarantee the general supply of credit.” The blanket guarantee allowed the Riksbank to lend to any Swedish commercial bank, even ones that were about to go bankrupt, and to provide emergency financial assistance to struggling banks without requiring collateral. To oversee the guarantee and other measures, the government established the Bank Support Authority. In 1991, Sweden’s banks had balance sheets of 1.5 trillion Swedish kronor (SEK; USD 270 billion), or around 100% of GDP. The standby deposit insurance, which had a coverage maximum of SEK 250,000, took the role of the blanket guarantee on July 1, 1996, however, it was never used. After the blanket guarantee was replaced, the government only insured depositors and not any other bank creditors.
(Makhija,2022)
4. India
Businesses in India turned to domestic financial institutions for finance as overseas funding sources dried up during the Global Financial Crisis of 2007–2009 (GFC), placing pressure on banks and driving up the cost of short-term lending. The steep asset price corrections, currency depreciation, and liquidity constraint all combined to constrain credit expansion in India. In response, the Reserve Bank of India (RBI) implemented several liquidity-related policies, including a reduction in its two reserve requirement ratios, the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). In October 2008 and January 2009, the RBI reduced the CRR, bringing the ratio from 9% to 5%. In November 2008, it reduced the SLR once, from 25% to 24%. Most commercial banks, as well as several cooperatives and regional banks, were affected by the CRR and SLR reductions made by the RBI. The RBI did not compensate CRR reserves, nor did it use various ratios for various obligations. The reduction allowed 32.7 billion USD to enter the Indian financial system. In October 2009, the RBI increased the SLR to its pre-crisis levels, and in March 2010, it started to raise the CRR once more. The changes, when combined with other liquidity measures, according to the International Monetary Fund, were “rapid,” “completely deserved,” and resulted in looser lending conditions in India.
(Mott, 2022)
5. Russia
After Russia invaded neighboring Georgia in August 2008, there were large capital outflows from Russian banks and financial markets. Lehman Brothers bankruptcy on September 15 triggered more capital flight and a 25% decline in Russia’s primary stock index. Regulators stopped trading on the stock market on September 17. To increase the liquidity of the banking sector, the Central Bank of the Russian Federation (CBR) later that day announced reductions of 400 basis points to each of the three required reserve ratios (RRRs) it imposed on commercial banks, based on their rubble liabilities to foreign banks, rubble liabilities to individuals, and other liabilities, effective September 18. By March 1, 2009, the CBR promised to increase RRRs to their prior levels. Whereas less than a couple of months later, the CBR carried out a second unforeseen RRR reduction, bringing all three RRRs to a similar 0.5% ratio. According to the CBR, the RRR reduction released RUR 260 billion (USD 10.2 billion) on September 18 and RUR 100 billion on October 15 into the banking sector. RRRs were increased by a total of 200 bps by the CBR in 2009, which happened in four equal increments on the firsts of May, June, July, and August. Up until 2011, the new 2.5% RRR on all reservable liabilities was in effect.
(Hoffner, 2022)
6. Jamaica
Investors withdrew from liquid Jamaican dollar assets in October 2008 as a result of the Global Financial Crisis (GFC) and liquidity shortages that shook the US and European markets. The Jamaican dollar (JMD) exchange rate to the US dollar was in danger of “disorderly depreciation,” according to the Bank of Jamaica (BOJ) (BOJ 2009, 44). In responding, and for the first time since 2002, the BOJ increased the needed reserve ratios for cash and other liquid assets. Because the central bank was unable to alter its requirements by more than 200 basis points each month, the BOJ increased reserve ratios three times in December 2008, January 2009, and February 2009. To limit the number of Jamaican dollars that may be exchanged for foreign currencies, the BOJ increased the threshold for domestic currency assets. The BOJ also stated that increasing the bank reserves on local currency would assist in ensuring that banks have cash on hand when investors retrieved their money. According to the BOJ, the increase in the cash reserve ratio cost JMD 4.7 billion (USD 62.6 million) in the fourth quarter of 2008 and JMD 7.2 billion (USD 96 million) in the first quarter of 2009.
(Runkel, 2022)
7. Venezuela
The Banco Central de Venezuela (BCV) raised its interest rate goal and the marginal cash reserve ratio for banks, which it had implemented in 2006, to combat inflation prior to the Global Financial Crisis (GFC). By late 2008, Venezuela’s state oil producers and banks were being impacted by the GFC. The interbank lending rate increased to 28% as a result of widespread deposit withdrawals that put pressure on banks. In response, the BCV reduced the marginal reserve requirement for deposits exceeding 90 billion bolivars (USD 4.2 million) from 30% to 27% of deposits in December 2008. It maintained a 17% minimum cash reserve requirement. The income of PDVSA, the largest exporter in the nation, was similarly impacted by the global recession. Between June and October 2010, the BCV reduced the marginal requirement three times, bringing it to the minimum requirement of 17% in order to free up bank liquidity for the purchase of 70 percent bonds and to boost the economy. The initial decrease in the marginal reserve requirement, from 30% to 27%, allowed the banking sector to absorb VEF 6 billion (USD 2.8 billion) in additional liquidity.
(Runkel, 2022)
8. Denmark
Danish banks were more dependent on short-term borrowing when international credit in Denmark dried up during the summer of 2008. The eighth-largest bank in the nation, Roskilde Bank, was taken over by the government in late August. A General Guarantee Plan to completely cover deposits and other senior obligations of participating banks was announced by the government on October 5, 2008. By joining the Private Contingency Association (PCA), the banking consortium for the financial industry, before October 13, 2008, banks may take part in the plan. From October 5, 2008, until September 30, 2010, all depositors, and senior unsecured creditors of PCA banks were completely covered by the General Guarantee Plan for a legally enforceable two-year term. A total of 133 banks, which represented 99% of Danish deposits, participated as PCA members. The PCA was in charge of funding the guarantee funds up to 35 billion Danish kroner (DKK; USD 6.25 billion) from fees paid by member banks, with the government agreeing to pay for any excess expenses. The Financial Stability Corporation, a new state-run organization, was also established under the Act. Its duties include liquidating bankrupt participants and managing the PCA guarantee funds. By the time it was over, the General Guarantee Program had paid out DKK 12 billion to six participating banks that had guaranteed claims.
(Benjamin,2022)
9. Ireland
The Irish banking system was fragile, and the Global Financial Crisis exposed this, sparking massive bank runs in Ireland. On September 22, 2008, Irish authorities tried to stop the runs by expanding the deposit coverage from 90% to 100% and raising the country’s deposit guarantee ceiling from EUR 20,000 to EUR 100,000 (USD 28,800 to USD 140,000). While the runs persisted, the Irish finance minister unilaterally guaranteed all bank debt on September 30 without contacting EU authorities. According to the declaration, the broad guarantee would go into effect right now and last for two years. For six systemically significant banks, the broad guarantee would cover all deposits, covered bonds, senior debt, and dated subordinated debt. Later, the finance minister reaffirmed that the guarantee would extend to five domestically significant subsidiaries of multinational banks. Irish taxpayers paid a total of EUR 41.7 billion for the government’s recapitalization, nationalization, and restructuring of the insured banks. In order to strengthen its banking sector, Ireland borrowed EUR 85 billion from the IMF in November 2010. Several analysts have blamed Irish officials for underestimating the scope of the difficulty they faced early in the crisis since the guarantee was very divisive both in Ireland and overseas.
(Schaefer-Brown, 2022)
10. Argentina
Concerns about the nature and security of government debt spread throughout Latin American nations, including Argentina, after the depreciation of the Mexican peso in December 1994. In order to restore liquidity across the financial system and protect the currency peg to the US dollar, Banco Central de la Republica Argentina (BCRA) adopted three adjustments to the reserve requirement policy in late 1994 and early 1995. Secondly, it reduced the minimum reserve requirement that obliged banks to always retain all reserves in cash. According to the Argentine government, this allowed for the flow of more than ARS 4 billion (USD 4 billion) in resources into the banking sector. In order to increase liquidity for banks who required it, it also implemented a “safety net” reserve requirement in US dollars (USD). Finally, a Minimum Liquidity Requirement (MLR) was introduced to replace the cash requirement, which banks may meet with a variety of highly liquid assets. Others claim that the introduction of the MLR increased the financial system’s resistance to market volatility. (Leonard, 2022)
Conclusion
In previous decades, there have been several financial crises throughout the world, each with its own specific origins and effects.
A few debt crises in emerging nations occurred in the 1980s as a result of excessive borrowing and poor economic management. Due to overinvestment and speculative booms, the Japanese real estate market collapsed in the 1990s, which also coincided with the Asian Financial Crisis. A market slump was triggered by the early 2000s dot-com bubble burst, and a global recession was brought on by the 2008 global financial crisis, which was brought on by the collapse of the US subprime mortgage market.
Each crisis has serious economic and social repercussions, such as high unemployment rates, rising levels of poverty, and decreased economic expansion. In response, governments and international organizations implemented a variety of policy measures, including stimulus plans, bailouts, and more restrictions.
Notwithstanding the fact that the world economy has already recovered from these crises, they serve as a reminder of the value of sound financial practices, efficient regulation, and strong risk management.
References
George, Ayodeji, 2022. “Indonesia: Blanket Guarantee, 1998,” Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(4), pages 201-213, April.
George, Ayodeji, 2022. “Jamaica: FINSAC Blanket Guarantee, 1997,” Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(4), pages 232-244, April.
Hoffner, Benjamin, 2022. “Denmark: General Guarantee Scheme, 2008,” Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(4), pages 150-166, April.
Hoffner, Benjamin, 2022. “Russia: Reserve Requirements, GFC,” Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(4), pages 559-575, April.
Leonard, Natalie, 2022. “Argentina: Reserve Requirements, 1994-1995,” Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(4), pages 318-337, April.
Makhija, Anmol, 2022. “Finland: Government Guarantee Fund, Blanket Guarantee, 1992,” Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(4), pages 188-200, April.
Makhija, Anmol, 2022. “Sweden: Bank Support Authority, Blanket Guarantee, 1992,” Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(4), pages 285-299, April.
Mott, Carey, 2022. “India: Reserve Requirements, GFC,” Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(4), pages 456-478, April.
Runkel, Corey, 2022. “Venezuela: Reserve Requirements, GFC,” Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(4), pages 596-612, April.
Schaefer-Brown, Stella, 2022. “Ireland: Credit Institution (Financial Support) Scheme, 2008,” Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(4), pages 214-231, April.