INTERNATIONAL BANKING
Financial crisis and
International banking activities
2022
4
Objectives
- Describe financial and banking crises in the world
- Analyze of developments, causes and measures to deal with financial crises
- Analyze and interpret the impact of the financial crisis on international banking activities
2
5
Outline
1. Financial crisis
1.1 Great Depression 1929-1933
1.2 Asian Financial Crisis 1997-1998
1.3 Global Financial Crisis 2007-2008
2. Overview of Financial crisis
3. Impact of Financial crisis on international banking activities
3
5
1. Financial crisis
1.1 Great Depression (1929-1933)
1.2 Asian Financial Crisis (1997-1998)
1.3 Global Financial Crisis (2007-2008)
4
1.1 Great Depression 1929 - 1933
3
5
7
1.1 Great Depression 1929 - 1933
v Background
• Throughout the 1920s, the U.S. economy expanded rapidly – “The Roaring 20’s”
• Stock market underwent rapid expansion, speculators borrowed from banks to buy and sell stocks
due to easy borrowing conditions and low interest rates.
Reckless speculation
• Wages at that time were low + The agricultural sector of the economy was struggling due to drought
and falling food prices + Banks had an excess of large loans that could not be liquidated
3
6
7
1.1 Great Depression 1929 - 1933
v Background
• Then, the American economy entered a mild recession during the summer of 1929, as consumer
spending slowed and unsold goods began to pile up, which in turn slowed factory production.
• Nonetheless, stock prices continued to rise
Stock prices
3
7
7
1.1 Great Depression 1929 - 1933
v Background
• On October 24, 1929 - Black Thursday, as • On October 29 , 1929 – Black Tuesday,
nervous investors began selling overpriced Millions of shares ended up worthless, and
shares massively, the stock market crash. those investors who had bought stocks “on
margin” (with borrowed money) were wiped
out completely.
The stock market crash signaled the beginning of the Great Depression
3
8
7
1.1 Great Depression 1929 - 1933
v Consequences
• In the fall of 1930, the first of four waves of banking panics began, as large numbers of investors lost
confidence in the solvency of their banks and demanded deposits in cash, forcing banks to liquidate
loans in order to supplement their insufficient cash reserves on hand.
By early 1933, thousands of banks had closed.
3
9
7
1.1 Great Depression 1929 - 1933
v Consequences
• Between the peak and the trough of the downturn, US industrial
production declined 47% and real GDP fell 30%.
• The unemployment rate > 20% at its highest point.
• The Depression spread and affected virtually every country of the
world
3
10
7
1.1 Great Depression 1929 - 1933
v Causes of the Great Depression 1929 - 1933
The main cause was the “excesses” of the 1920s
• Excessive production of commodities
• Excessive financial speculation
• An excessively skewed distribution of income and wealth
3
11
7
1.2 Asian Financial Crisis 1997 – 1998
3
12
7
1.2 Asian Financial Crisis 1997 – 1998
v Background
• During the late 1980s and early 1990s, Thailand achieved massive economic growth of an 7.7%
increase in its GDP.
• High interest rates + Fixed currency exchange rates (pegged to the U.S. dollar) attracted foreign
investors
3
13
7
1.2 Asian Financial Crisis 1997 – 1998
v Background
• Thailan’s current account and trade are deficit for years.
Table 1: Balance of trade and Current account of Thailand from 1991 to 1996
(Unit: Billion Dollar)
Year 1991 1992 1993 1994 1995 1996
Balance of -5.9 -4.16 -4.3 -3.7 -7.7 -9.5
trade
Current -7.59 -6.3 -6.36 -8.08 -13.55 -14.69
account
(Source: IMF, 2015)
3
14
7
1.2 Asian Financial Crisis 1997 – 1998
v Background
• With a shock in both export and foreign investment, asset prices, which were leveraged by large
amounts of credits, began to collapse.
• The panicked foreign investors began to withdraw (Massive capital outflow)
• The Thai government first ran out of foreign currency to support its exchange rate, forcing it to float
the baht. The value of the baht thus collapsed immediately afterward.
3
15
7
1.2 Asian Financial Crisis 1997 – 1998
v Consequences
• The countries that were most severely affected by the
Asian Financial Crisis included Indonesia, Thailand,
Malaysia, South Korea, and the Philippines. They saw
their currency exchange rates, stock markets, and prices
of other assets all plunge
3
16
7
1.2 Asian Financial Crisis 1997 – 1998
v Consequences
Currency devaluation in 5
Losses and bankruptcies on the Increasing Unemployment rate
Asian countries
extraordinary scale of the financial
system and businesses
3
17
7
1.2 Asian Financial Crisis 1997 – 1998
v Causes of Asian Financial Crisis
01 The weak macroeconomic foundation
02 Speculative attack and Massive withdrawal of capital
03 Poor management and administration in the banking and finance sector
3
18
7
1.3 Financial Crisis 2007-2008
3
19
7
1.3 Financial Crisis 2007-2008
v Background
• Federal Reserve lowered the federal funds rate from 6.5% in
May 2000 to 1% in June 2003 => Lowest interest rate in the
history
• Led to the massive Real Estate Bubble (An upward spiral in
home prices). Even subprime borrowers, those with poor or
no credit history, were able to realize the dream of buying a
home.
3
20
7
1.3 Financial Crisis 2007-2008
v Background
• The banks then sold loans from real estate on to Wall Street banks, which packaged them into what
were billed as low-risk financial instruments such as mortgage-backed securities and collateralized debt
obligations (CDOs).
• Eventually, interest rates started to rise and homeownership reached a saturation point. Then,
during early 2006, home price stated to decline. The most vulnerable subprime borrowers were
stuck with mortgages they couldn't afford in the first place.
3
21
7
1.3 Financial Crisis 2007-2008
v Background
• Many subprime mortgage holders were unable to rescue themselves by borrowing, refinancing, or
selling their homes => subprime borrowers defaulted
• This caused major losses at many banks, hedge funds, and mortgage lenders and forced even some
large and prominent firms to liquidate funds that were invested in mortgage-backed securities to
appeal to the government for loans, to seek mergers with healthier companies, or to declare
bankruptcy.
3
22
7
1.3 Financial Crisis 2007-2008
v Background
June 2007: Bear Stearns’ hedge September 14, 2007: Northern Rock, a highly September 2008: The Fall of Lehman
Brothers
funds collapsed after investing too leveraged British bank, received support
much in securities backed by from the Bank of England, leading to investor
subprime real estate loans panic and a bank run
3
23
7
1.3 Financial Crisis 2007-2008
v Consequences
• The crisis plunged the United States into the worst period in history since the Great Depression of the
1930s. America's leading industry - the automobile industry had completely collapsed with the
bankruptcy of major brands
• The US is an important import market for many countries, so when the US economy is in recession, the
exports of many countries negatively affected.
• The crisis in the United States was the cause of the global economic crisis. Global GDP in 2009
decreased by $5,826 billion compared to 2008
3
24
7
1.3 Financial Crisis 2007-2008
v Causes of the Financial crisis
US Housing bubble
Financial crisis 2007-2008
Subprime loans crisis
3
25
7
2. Overview of Financial crisis
26
2. Overview of Financial Crisis
v Definition
• Financial crisis is the situation in which financial instruments or financial assets lose most of their
value.
• Some other situations are commonly referred to as financial crises such as stock market crashes and
the bursting of financial asset price bubbles, currency crises and sovereign defaults.
3
27
7
2. Overview of Financial Crisis
Types of crisis
Banking crisis International finance crisis
3
28
7
2. Overview of Financial Crisis
v Causes of the financial crisis
01 Strategic complementarities and Sefl-fulfilling prophecies
02 Leverage
03 Asset-liability mismatch
04 Uncertainty and herd behavior
05 Regulatory failures
3
29
7
3. Impact of financial crisis
on IB activities
30
3. Impact of financial crisis on IB activities
3.1 Impact of financial crisis on investment fund activities
3.2 Impact of financial crisis on banking activities
3.3 Financial crisis resulting in the spread in financial markets
3.4 Impact of financial crisis on the operation of financial markets
3
31
7
3. Impact of financial crisis on IB activities
3.2 Impact of financial crisis on banking activities
• A period of excessive optimism was followed by an abrupt reversal in expectations, causing severe
balance sheet problems for banks
• A large number of bank declare bankruptcy.
• Financial crisis led to management changes at some banks, and employees responsible for risk
management and investment were fired or offered early retirement.
3
32
7
3. Impact of financial crisis on IB activities
3.3 Financial crisis resulting in the spread in financial markets
• The financial crisis had a negative impact on depositors' psychology, causing them to quickly
withdraw all their money from the bank => Serious liquidity problems occur, the massive withdrawal
spread to other banks, affecting the entire financial system.
• For international banks, securitization on a large scale is even more risky because traders may be
foreigners, when that country has financial fluctuations that will affect customers' psychology,
international banking activities will be influenced.
3
33
7
3. Impact of financial crisis on IB activities
3.4 Impact of financial crisis on the operation of financial markets
• The financial crisis caused violent fluctuations in the exchange rate. When a country's currency
depreciates, the implementation of international payment activities will encounter great obstacles,
causing difficulties and losses for banks as well as borrowers.
• Bank credit s also affected. The crisis caused banks to tighten credit to avoid risks, thereby causing
difficulties in accessing capital.
3
34
7
3. Impact of financial crisis on IB activities
3.4 Impact of financial crisis on the operation of financial markets
• Investment activities, joint capital contribution and share purchase of strategic investors and the
banking system are reduced, thereby affecting the growth strategy of the bank's charter capital.
• Fluctuations in interest rates and exchange rates in the money market create an environment for
speculative activities and affect the money market and foreign exchange market.
3
35
7
Q&A session
Thank you for listening!
3
36
7
