ASSIGNMENT#2

FINANCIAL INSTITUTION
DATE: 22ND OCTOBER’ 2019.
FACULTY: SIR NAEEM UL ANSARI

QUESTIONS 1: HOW THE FINANCIAL CRISES OF 2007-2008 EFFECTED THE

GLOBAL ECONOMY?
Financial crisis of 2007–08, also called subprime mortgage crisis, severe contraction of
liquidity in global financial markets that originated in the United States as a result of the
collapse of the U.S. housing market. It threatened to destroy the international financial
system; caused the failure of several major investment and commercial banks, mortgage
lenders, insurance companies, and savings and loan associations; and precipitated the Great
Recession (2007–09), the worst economic downturn after the Great Depression.

UNITED KINGDOM:
In the UK, the Bradford and Bingley Building Society was effectively nationalised in late
2008 and then partially sold to the Spanish Grupo Santander Bank .Also late in 2008 the UK
Government partially nationalised the struggling Royal Bank of Scotland Group, initially
taking a 58% stake, but eventually by late 2009raising this to some 84%.The UK Government
also effectively forced the UK’s largest mortgage lender, Halifax Bank of Scotland
(HBOS),which was in deep trouble, Into the Lloyds TSB group and, in January 2009,took a
43.4% stake in the combined business. Other UK banks, such as Barclays and HSBC,
although not nationalised, were forced to raise capital by new share issues to preserve their
capital ratios.
Governments in Belgium, France, Germany, Ireland, Spain and Switzerland took similar
actions to the UK to save several of their now illiquid and undercapitalised banks. Iceland
effectively lost its previously heavily aggressive banking sector. In the US, a total of 25
banks failed in 2008.Despite a sharp cut in central bank interest rates worldwide, interbank
lending rates remained stubbornly high (showing the banks’ lack of confidence in each other
financial security), which in turn lead to a severe reduction in both personal and corporate
credit and a rapid downturn in the housing and construction markets.
In the UK there was a large fall in retail sales, especially in the furnishing and DIY sectors.
Businesses, already hit by falling sales and profitability, faced increasing problems in
securing bank support for continued trading. Several known brands either went out of
business or had to close a substantial number of outlets, for example MFI, Woolworths and
Blacks. Unemployment rose, especially in the 18-24 age groups. Falls in retail sales and rises
in unemployment mean falling taxes revenues for governments worldwide. The UK was no
exception. In the 4thquarter of 2008 UK Gross Domestic Product (GDP)*fell by 1.5% and the
country officially entered a period of recession. The recession continued through 2009.
However signs of recovery became apparent in the final quarter of the year, with GDP growth
of just 0.3% although many commentators still have concerns about the robustness of the
recovery. Perhaps one of the most reflective and incisive comments on the crisis period as a
whole was that, at the time of their respective failures, the Northern Rock was building
society trying to act like an investment bank and Lehman Brothers was an investment bank
trying to act like a building society.

CHINA:
The extent of China’s exposure to the current global financial crisis, in particular from the
fallout of the U.S. sub-prime mortgage problem, is unclear. On one hand, China places
numerous restrictions on capital flows, particularly outflows, in part so that it can maintain its
managed float currency policy. These restrictions limit the ability of Chinese citizens and
many firms to invest their savings overseas, compelling them to invest those savings
domestically, (such as in banks, the stock markets, real estate, and business ventures),
although some Chinese attempt to shift funds overseas illegally. Thus, the exposure of
Chinese private sector firms and individual Chinese investors to sub-prime U.S. mortgages is
likely to be small.
Undoubtedly, China’s rapid economic growth and rising influence in the world markets have
changed its image from a dark horse to a successor to the US as the next global superpower.
But is China ready for this? Economic and intellectual development suggests that China’s
recent performance is far from unique, and it is not yet ripe to become the next superpower.
Although the US may be badly beaten by the subprime crisis, it is down but not out. There
are also regional checks and balances that will constrain China from spreading its influence,
despite the fact that China has become the major regional economic growth driver and wealth
creator for many Asian economies. Finally, China’s rapid economic success may, ironically,
make it more difficult for the western economies to recover from the credit quake of 2007–8.
This is already creating xenophobia among the western nations, giving rise to trade and
capital protectionism and political tension, which will also create roadblocks in China’s path
to becoming a superpower. In a more subtle sense, China still lacks the attributes of a thought
leader, which would be required to become a world superpower. This is not to deny China’s
remarkable achievements in recent years, and China will become a huge force to be reckoned
with.

QUESTION 2: WHAT DO YOU THINK THAT CAMELS APPROACH

PLAYS VITAL ROLE IN THE SUSTAINABILITY OF THE BANKING
SECTOR?
CAMELS model is a ratio-based model to appraise the performance of banks. Under this
bank is required to enhance capital adequacy, strengthen asset quality, improve management,
increase earnings, maintain liquidity, and reduce sensitivity to various financial risks.