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LI NA ( PDF) Document Transcript

  • 1. Group Li NaCurrent Global Financial Crisis and Its Implication on International Financial Institutions: The Case of Asian RegionAbstractThe global financial crisis started since July, 2007 in United Stated of American and hasaffected some of the Financial Institutions around the world, including in Asian Region. Thisproject is purely focuses on the current global financial crisis and its implication on internationalfinancial institutions in the case of Asian region. The main purpose of the investigated is toanalysis and explains about why and how the global financial crisis impacts the InternationalFinancial Institutions in Asian region. In this project, the explanation of the impact for Asianregion will be separated according to the directions with several Asian countries, there are EastAsian – China, Japan, North & South Korea, and Hong Kong; South Asian – India and Pakistan;Western Asian – Israel, Saudi Arabia, and Turkey; as well as Southeast Asia – Indonesia,Malaysia, Philippines, Thailand, and Singapore. First of all, the project will briefly discuss aboutthe financial system in Asian region before and after the Asian financial crisis in 1997, theknowledge of the current global financial crisis, and international financial institutions in Asianregion. Then, the project will truly focus the reasons current global financial crisis implicated oninternational financial institutions in Asian Region and identify the impact of current globalfinancial crisis for them. After that, the Asian Region’s responses for the current global financialcrisis will be analyzed. Finally, the project concludes with some limitations.Keywords Global financial crisis, International financial institutions, Asian region1.0 IntroductionBefore the Asian financial crisis of 1997, the Southeast Asian country’s economy has ten yearsconsecutive of rapid growth. Accompanied by rapid economic growth, banking facilities in thesecountries increase at a faster rate and their short-term external debt has reached to theunprecedented levels. During that period, a most considerable part the countries invest in isreal estate. The rapid growth of investment in Asian Region cause the asset price explosionand lead to the inflation happen, especially in Thailand and Malaysia. In addition, the lackflexibility of exchange rate regime makes a lot of foreign debt overlook the exchange rate risk.These help crises foreshadowed. 1
  • 2. The crisis first erupted from Thailand on March 1997. With the development of thecrisis, the Thai baht’s collapse in July 1997 cost the region 10 billions of dollars and leads manyobservers to speculate about an impending ―lost decade‖ in Asia (Barton, 2007). In order tosolve this problem, the international organization – International Monetary Fund (IMF) provideda lot of assistance. However, the country’s financial market is still deteriorating and spread toHong Kong and US markets. The effected Asian countries try to take measures, as well aseconomic and financial reform to stabilize financial markets and financial system. In 1998, afterthe initial turmoil, some of the Asian countries’ financial markets began to stabilize. Thegovernment in the crisis countries has further their efforts to reform the economy and financialsystem. Finally, the financial crisis came to the end in 1999. East Asian Banking Systems emerged after the 1997/98 crisis. The emerging EastAsia has restructured significantly, foreign and domestic sources have injected capital, andbanking institutions have moved into investment banking-type activities and greater householdand real estate lending (Adams, 2008). In addition, authorities have strengthened thesupervisory and regulatory regimes under which banks operate and have been adapting themto changing conditions in financial markets and financial globalization (Adams, 2008). Based onthe Asian Development Bank (2008), the restructuring of regional banking systems hascentered around four main elements. There are closures, cleanups/write downs of distressedbank asserts, new capital injections from official and private sources, as well as forward-lookingfinancial sector master action plans. Structural reforms were given more prominence than intypical IMF programs. The details of these reforms were formulated in collaboration with theauthorities in each country, as well as the World Bank and Asian Development Bank (ADM)(International Monetary Fund, 2000). Based on IMF staff on June, 2000, ―Chiang Mai Initiative‖ among ASEAN membersand China, Korea, and Japan was announced by the ASEAN+3 finance ministers, covering inMay 2000 on the margin of the annual meeting of the board of governors of the ASIANDevelopment Bank (ADB). ―Chiang Mai Initiative‖ organized in order to recovery the temporaryfinancial difficulties and to enhanced regional cooperation with intention to cooperate in fourprincipal areas, such as monitoring capital flows, regional surveillance, swap networks, andtraining personnel (International Monetary Fund, 2000). After a remarkable ten years of transformation, Asia’s financial system become stableand more robust than it was in 1997. Sitting atop an enormous rising economic tide, it is poised 2
  • 3. to benefits from a host of factors, including the rise of China and India, the reemergence ofJapan, robust intraregional trade, enormous infrastructure-financing needs, and theopportunities presented by increasingly powerful Asian sources of capital (Barton, 2007). Asiaappears set to play an important role in the world’s financial system over the coming decade,which is a true third partner in the global triad, along with Europe and the United states (Barton,2007). This project proposes to study about the current global financial crisis and itsimplication on international financial institutions on Asian region. This project first will brieflytouch about the Asian financial crisis happened in the Asian region in 1997. Due to the initialimpact on the Asian region, the Asian developing countries are drawing on lessons of ten yearsago. The reform of Asian Banking Systems after the 1997/98 crisis has completely changed thefate of the Asian financial sector for the current global financial crisis. This project discusses theimplication of international financial institutions on Asian region by current global financial crisisin the separate directions with several Asian countries, there are East Asian – China, Japan,North & South Korea, and Hong Kong; South Asian – India and Pakistan; Western Asian –Israel, Saudi Arabia, and Turkey; as well as Southeast Asia – Indonesia, Malaysia, Philippines,Thailand, and Singapore.2.0 Objectives of the Study 1. To understanding the knowledge of current global financial crisis 2. To know how current global financial crisis implicated on international financial institutions in Asian Region 3. To identify the impact of current global financial crisis on international financial institutions in Asian Region 4. To analysis the Asian Region’s responses for the current global financial crisis3.0 Literature Reviews The global financial crisis affects every country in the world. The world is near thebottom of a global recession that is causing widespread business contraction, increases inunemployment, and shrinking government revenues (Nanto, 2009). The global effects were theconsequence of the high degree of economic and financial integration that is a centralcharacteristic of the 21st century economic and financial system (Truman, 2010). According toBerrone (2008), the 2008 financial crisis provides at least two important lessons regarding 3
  • 4. incentives. First, we still need to learn a lot about risks; Second, current pay practices haveoutraged public and government leaders. We know that International Financial Institutions (IFIs)will play their role in financing the suitable development. Of course, they will also have somelimitations in carrying out their plan or face some others problem when promoting orimplementing the policies. According to Kanbur (2002), when people talk of the InternationalFinancial Institutions (IFIs), they mean the two Bretton Woods institutions, the InternationalMonetary Fund and the World Bank. Any multilateral organization with financial operations isan IFI—for example, the regional multilateral banks, regional monetary authorities, someagencies of the United Nations Organization that disburse funding, etc (Kanbur, 2002).Mostsignificantly, the two largest and most important IFIs, the World Bank and the InternationalMonetary Fund (IMF), were created more than fifty years ago, in the aftermath of World War II,when one country, United States, towered over the rest financially, global exchange rates werefixed, international financial flows were tiny, trade was burdened with steep tariffs and quotas,private sector investment and lending in developing countries were negligible, and the principleof free-market capitalism was not widely accepted (Lugar, 2010).The International MonetaryFund (IMF) was created at the 1944 Bretton Woods Conference in New Hampshire to preventa return of the international financial chaos that preceded World War II with the mission to―foster global growth and economic stability‖, provide ―policy advice and financing to membersin economic difficulties‖, and work ―with developing nations to help them achievemacroeconomic stability and reduce poverty‖ (Lugar, 2010).Table 1 shows the total IMF creditoutstanding for all members from 1984-2009 which divided into two categories: (i) GRA:General Resources Account; (ii)PRGF-ESF: Poverty Reduction and Growth Facility and theExogenous Shocks Facility.Table 1: International Monetary Fund Disbursements. According to Lugar (2010), although the international financial institutions (IFIs) are runby their own managements, the member governments exercise policy direction and oversightresponsibility. A board of governors for each IFI, representing all member countries, meets 4
  • 5. once a year to make policy decisions, while boards of executive directors meet more frequentlyto approve projects and supervise operations of the institutions (Lugar, 2010). World Bank, on the other hand, was created as the result of the 1944 Bretton WoodsConference. World Bank currently focused on the achievement of the Millennium DevelopmentGoals, aims to ―fight poverty‖ and ― to help people help themselves and their environment byproviding resources, sharing knowledge, building capacity, and forging partnerships in thepublic and private sectors‖ (Lugar, 2010). Table 2 shows the World Bank operations. WorldBank divides its lending between the International Bank for Reconstruction and Development(IBRD) and International Development Association (IDA) (Lugar, 2010).Table 2: World Bank Operations. Next IFI would be more focus on Asian region: Asian Development Bank (AsDB) whichis founded in 1966. According to Lugar (2010), the Asian Development Fund (AsDF), theAsDB’s concessional facility, was created in 1972 to provide loans to Asia’s poorest countriesand is funded principally through periodic replenishments by donor nations. Table 3 shows theAsian Development Bank Group Loans which is divided into two categories: (i) AsDB; and (ii)AsDF. There are still lots of IFIs in the world.Table 3: Asian Development Bank Group Loans. 5
  • 6. To identify how global financial crisis happen, we must know what subprime mortgagecrisis is. What started as an asset bubble caused by an array of financial derivatives that, interalia, drove the sub-prime mortgage boom, exploded into a housing and banking crisis with acascading effect on consumer and investment demand (Abidin, &Rasiah, 2009). By oxforddictionary (n. d.), sub-prime is an adjective denoting or relating to credit or loan arrangementsfor borrowers with poor credit history, typically having unfavourable conditions such as highinterest rates. Poor people might have higher risk of unable to repay their loan. Therefore,banks come out with the subprime mortgage which consists of higher interest rate compare tothe conventional loan. Thus, banks benefit themselves by earning more interest rate. If theborrowers are unable to repay the loan, the bank will sell the houses with a higher value.Otherwise, the banks repackaged the subprime mortgages into an investment product—mortgage-backed securities and sell it to financial institutions. This is one of the main causes ofthe global financial crisis. Figure 1 shows the comparison of traditional model mortgage andsubprime model mortgage lending’s pattern.Figure 1: The comparison of traditional model and sub-prime model of mortgage lending. Banks keep on lowering the level of qualification to obtain the loan because their mainfocus is on the earning of high interest rate and the bank will not keep the mortgage but sell itto the bond markets. Figure 2 clearly show that the gap between income and loan becomebigger. In 1994, the income is about $73, 000 and loan is about $120, 000. By 2005, assubprime lending peaked, nearly the same median income could get a $183, 000 loans. Theamount of borrowing has increased one half while the income increases only about a thousand.The facilitation of applying loan caused the global financial crisis. 6
  • 7. Figure 2: Increasing percentage of income goes to housing. Thing always come with the side effects. These subprime mortgage crises are thenlead the global financial system into a low tide. Once a thing is demanded by lots of people, itsvalue will definitely increase. Same goes to the subprime mortgage crisis situation, everyonewants to buy a house since the mortgage loan is easy to apply. Financial institutions werelooking to generate more money and income. However, the household income did not increaseuntil they cannot afford to repay the loan or buy a new house. Thus, the house value decreaseand the real estate market begin to cold down as shown in Figure 3. Lots of the American hasto give up their homeownership. The situation of ―less people demand for the oversupplyhouses‖ leads to the decrease of house price in late 2006 and early 2007. We can say thatthere is lots of ―cash with no actual value‖ were being generated. Thus, crisis happened.Figure 3: The OFHEO House Price Index, Quarterly Changes at Annual Rates. 7
  • 8. Figure 4 below show The Subprime 25 which provides rank, lender and loan volumebetween 2005 and 2007, at the peak and collapse of the subprime market. According to Figure4, the top 25 lenders have accounted for $997, 538, 108, 000 of loans, which is nearly $1trillion, within 2 years time.Figure 4: The Subprime 25. The collapse of United States subprime mortgage market led to an internationalfinancial crisis. A little thing can now affect the economy as a whole and turning a globalfinancial crisis into global economic crisis very quickly. Besides that, the borrowers fail to repaythe loan. Numerous small banks and households still face huge problems in restoring their 8
  • 9. balance sheets, and unemployment has combined with subprime loans to keep homeforeclosures at a high rate (Nanto, 2009). Several countries have restored to borrowing fromthe International Monetary Fund as a last resort (Nanto, 2009). Nanto (2009) continue byproviding example that due to the impact of the financial crisis, several Central and EasternEuropean countries have already sought emergency lending from the IMF to help finance theirbalance of payment. IMF also announced certain amount lending to countries to help them instabilizing their economic. Entire banking system has less confidence in lending and their rapidloss caused a sharp decline in their stock price. In addition, mortgages also have been soldand resold and pooled together into securities, which mean that it is hard to find who the actualcurrent owner of the mortgage is. The crisis has exposed fundamental weaknesses in financialsystems worldwide, demonstrated how interconnected and interdependent economics aretoday, and has posed vexing policy dilemmas (Nanto, 2009).Figure 5: Asian Current Account Balances From Figure 5, we know that Asian current Account Balances are mostly healthy.According to Nanto (2009), Asia and the United States are deeply linked in many ways,including trade (primarily Asian exports to the United States), U.S. investments in the region,and financial linkages that entwine Asian banks, companies and governments with U.S.markets and financial institutions. As a result, even though Asian banks disclosed relatively low 9
  • 10. direct exposures to failed institutions and toxic assets in the United States and Europe, Asianeconomies were caught in a second phase of the crisis (Nanto, 2009). Asian economies didsuffer from these situations. According to Nanto (2009), with Western economies slowing andglobal investors short of cash and pulling back from any markets deemed risky, many Asianeconomies suffered sharp slowdowns or dipped into recession in the fourth quarter of 2008 orthe first quarter of 2009. Several Asian countries—including China, Japan, South Korea,Thailand, Malaysia, Taiwan and Singapore—implemented large fiscal stimulus programs thathave shown signs of stimulating domestic investment and consumption (Lugar, 2010). Forexample, Japan announced several stimulus packages that amounted to 5% of the nation’sGDP, while China implemented a package worth 12% of GDP (Lugar, 2010).4.0 Discussion and Findings4.1 TheWays the Current Global Financial Crisis ImplicationsInternational FinancialInstitutions in Asian RegionAfter the financial crisis in 1997 and had an exceptional growth. The world economy nowentered a period of instability and uncertainty again due to the US subprime mortgage crisis in2007. Following by the major US investment bank - Lehman Brothers went bankrupt onSeptember 15, 2008, the economy situation around the world failed into burst out stage. Thecurrent global financial and economic crises have important implications on internationalfinancial institutions in the countries of the South-East Asian Region.In the present situation,the Asian financial system by the financial crisis in the US is relatively limited. The main causeis Asian banks are mostly focused on traditional lending business, thus, a number of countriesdegree of internationalization of the banking business is relatively low if compare with theEuropean and American banks. Since Asian Banking Systems emerged after the 1997/98Asian financial crisis, Asian countries strengthen supervision of the financial industry helps toreduce the risks faced by financial institutions. According to Akyuz (2008), the way and extent the crisis will affect the economies inthe region is depends on the inter alia, on present vulnerabilities which are greatly shaped bythe manner in which the recent surge in capital flows has been managed. The crisis influencedAsian region in four areas of vulnerability associated with surges in capital inflows: (i) Currencyand maturity mismatched in private balance sheets; (ii) credit and asset bubbles and excessiveinvestment in property and other sectors; (iii) unsustainable currency appreciations andexternal deficits; and (iv) lack of self-insurance against a sudden reversal of capital flows, and 10
  • 11. excessive reliance on outside help and policy advice (Akyuz, 2008).According to Akyuz (2008),the crisis started out as a currency crisis with large devaluation of the domestic currencies, butquickly evolved into a financial crisis in which banks were unable to repay their foreign debts. Inturn, this lead to an economic crisis as domestic firms was starved of credit and went bankrupt:illiquidity turned quickly into insolvency (Akyuz, 2008). The US financial crisis affects the banking and financial markets in Asian region aredirectly related to the US sub-prime mortgage losses. From the disclosure of data by somefinancial institutions in Asia, the Asian banking industries involved in subprime-related lossesare relatively small, it is not will the banking and financial systems in Asia pose a systemicimpact. Next is because of a crisis of confidence. The US financial crisis will deal a blow toinvestor confidence and trigger capital outflows, decreased mobility, as well as shrunk the stockmarket. By the U.S. financial crisis, stock and currency markets in the region has a turbulentsituation. Before the recovery of investor confidence, the Asian financial markets may last for asevere shock. Third is affects the real economy through trade channels, thereby affecting thebanking and financial systems in Asia. The U.S. financial crisis reduced external demand andleads the Asian countries face an economic slowdown. This may further lead to the Asianbanking industrys loan quality deteriorated sharply, adversely affect the banks’ stability andoperation performance. The fourth cause the current global financial crisis affects financialinstitutions in Asian region is deterioration in external financing conditions. Since the US sub-prime crisis, some Asian emerging market countries to issue sovereign debt risk premium is asharp increase in financing conditions deteriorate, the external financing for these countriesand institutions have an adverse impact.4.2 The Impact of Current Global Financial Crisis on International Financial Institutionsin Asian RegionBased on the BIS Papers (2010), when the international financial crisis began in mid-2007, theinitial impact on the Asian region was limited in scale and severity. The government in Asiandeveloping countries has taken good macro policies, the enterprises have improved theirbalance sheets, and the banks have reduced the non-performing loans. Most of thefundamentals of the economy are stable and the large foreign exchanges reserves helpcushion the spread of the crisis. Therefore, the Asian region influenced by the current globalfinancial crisis is not that much seriously. However, together with the rest of the world,prospects for Asian region abruptly changed in mid-September 2008 following the bankruptcy 11
  • 12. of US investment bank Lehman Brothers (BIS, 2010). The region experienced large capitaloutflows and serious difficulties refinancing US dollar liabilities. Most Asia countries’ currenciesdepreciated. Figure 6 show the total financing of mortgage-backed securities from 2000 to2007 and Lehman Brothers was ranked the first.Figure 6: Total Financing of Mortgage-Backed Securities (2000-2007) As mentioned earlier, the impact of current global financial crisis on internationalfinancial institutions in Asian region will be discussed separately: East Asian, South Asian,West Asian, as well as Southeast Asia, and several of the countries in the Asian region will bechosen to discuss.East AsianThe current global financial crisis in the US most directly impacts the Japan and China financialinstitutions due to the US sub-prime mortgage. In Japan, the framework to deal with troubledfinancial institutions was not well-equipped. According to Wanandi (2008), there were six majorfinancial institutions in Japan (especially Mitsubishi UFJ, Mizuho Financial Group, SumitimoMitsui and Sumitomo Trust & Banking) are expected to book 40%fall in their combined netprofit for the last fiscal year due to the losses linked to the US sub-prime mortgage crisis. 12
  • 13. Wanandi (2008) continued that these loses have been estimated to the amount between 700and 800 billion yen. While in China, the sub-prime exposure of the Bank of China, ICBC, andthe China Construction Bank is reported in the order of $11 billion (Wanandi, 2008). Siddiqui(2009) argued that the Chinese financial sector has been mostly unscathed in the short run bythe global financial crisis because of the direct risk exposure is limited. When the financial crisisstarted in the US, the mainstream economist and international financial institutions claimed thatit would have marginal or no impact on the emerging economies of namely China and Indiabecause of the ―decoupling‖ effects and also because these economies have adopted marketreforms which had made these economies more efficient and competitive so that they couldwithstand such challenges (Siddiqui, 2009). During the current global financial crisis, Korea faced macro financial instability and theexports from and imports to Korea have rapidly decreased. The gross domestic product (GDP)growth rate of Korea shrank to -5.6% from the preceding quarter and became one of the lowestgrowth rates among Organization for Economic Cooperation and Development (OECD)countries (Kang, 2010). The Korean financial markets are suffering from massive financialdeleveraging by foreign investors as well. According to Kang (2010), there has two aspects ofthe financial vulnerability of the Korean banking sector are notable, the first one is the rapidincrease of short-term foreign debt beginning in 2006, and the other is the highly joined byhousehold debt that rose to 158% of disposable household income by the end of 2008. Theseaspects caused the Korean currency has sharply depreciated, became one of the highestdepreciation rates among major currencies, and is fluctuating against the US dollar (Kang,2010). Hong Kong operates a three-tier banking system which distinguishes between licensedbanks, restricted license banks (RLB) and deposit-taking companies (DTC). The banks have nolending or investment restrictions. Hong Kong’s banks entered the crisis in a healthy conditionwith returns on assets above 1.5%, sufficient capitalization, strong but prudently managed loangrowth and very low impairments (Mulhaupt, &Dyck, 2009). The global financial crisis hit HongKong’s banks in H2 2008 and heavily impacted on banks’ income statements. According toMulhaupt and Dyck (2009), pre-tax profits of the ten largest banks deteriorated in H2 2008,falling by almost 50% compared to H1 2008 (Please refer to the Figure 7). However, the netinterest income remained stable, the decline can largely be attributed to slumping fee andcommission incomes (included in other operating income) and higher impairment charges inlight of rising non-performing loans and a grim economic outlook (Mulhaupt, &Dyck, 2009).In 13
  • 14. addition, the interest margins had strong decline in September 2008 due to the failure ofLehman Brothers caused banks hoard their liquidity, with the HIBOR closely following rising USinterbank rates due to the HKD-USD peg (Mulhaupt, &Dyck, 2009). In order to solve thisproblems, the Monetary Authority (HKMA) responded by injecting liquidity into the bankingsystem through several operations. This brought the overnight HIBOR below 0.5% whilelending rates for prime borrowers remained almost unchanged at 5% (Mulhaupt, &Dyck,2009).Funding problems of banks combined with the increasingly bleak economic outlook ledbanks to reduce lending.Figure 7: Income and Profitability Deteriorating The World Bank has argued that East Asian economies have better prepared to fightfor the current global financial crisis because the countries have strong external paymentspositions and large international reserves, prudent fiscal and monetary policies, betterregulated banking systems, and profitable and competitive corporations (Wanandi, 2008).However, the World Bank has also pointed to the fact that East Asia should not be seen asbeing able to insulate itself from developments elsewhere. In fact, the region’s increasedintegration in the world’s trading and financial systems makes it sensitive to global economicconditions (Wanandi, 2008). The ―decoupling theory‖ that appears to be popular in somequarters in East Asia cannot be substantiated empirically and carries with it an inherent dangerof inducing a sense of complacency (Wanandi, 2008). 14
  • 15. South AsianPakistan’s economic situation has worsened because of large number of capital outflows dueto the US global financial crisis. The depreciated of Rupee value made the debt financing morecostly, while foreign exchange reserves have continued to reduce in size (Malik, Ullah, Azam, &Khan, 2009). The operating environment of the financial sector experienced significantdeterioration in 2007 and 2008, due to a confluence of factors emanating from both thedomestic and international economic and financial developments (Ali, 2009).Ali (2009)explained that the global financial crisis and the commodity price hike had a feedback impacton the financial sector through the real sector of the economy. With a thriving banking sector,increasingly resilient to a wide variety of shocks, increasing but still relatively less correlation ofdomestic financial markets with global financial developments, a proactive and vigilantregulatory environment, and most importantly, no direct exposure to securitized instruments,risks to financial stability were largely contained and well managed as the crisis unfolded andimpacted the financial sectors in advanced economies (Malik, Ullah, Azam, & Khan, 2009).Ali(2009) illustrated that Pakistan unscathed from a direct impact of the crisis, has been moreconcerned with issues relating to monetary stability due to rising inflation since before theadvent of the crisis. On the other hand, the direct effect of the sub-prime crisis on Indian financial sectorwas almost negligible because of limited exposure to complex derivatives and other prudentialpolicies put in place by the Reserve Bank (Mohan, 2009). Mohan (2009) continued that therelatively lower presence of foreign banks in the Indian banking sector also minimized the directimpact on the domestic economy. Strict regulation and conservative policies adopted by theReserve Bank of India are relatively insulated from the travails of their western counterparts(Malik, Ullah, Azam, & Khan, 2009).West AsianPrivate commercial banks owned by residents in Turkey drop in a large number between 2002and 2008, while the number of foreign banks originally founded in Turkey increased by analmost equal amount in the same period. According to Uygur (2010), during the recent crisis asof September 2009, there are as yet no banks transferred to the SDIF, no changes inownership, no liquidation and thus no fall in the number of banks. Banks in Turkey are relativelygood compare to the banks in other countries. This is because the banking sector wasrestructured in the crisis of 2000 to 2001 and well regulated and supervised. Besides that, at 15
  • 16. the time of the recent global financial crisis, ―there were no toxic financial instruments in banks’portfolios‖ and they extended only a limited amount of mortgage credits (Uygur, 2010). Based on Al-Hamidy (n.d.), there were no significant changes in the domesticinterbank market in Saudi Arabia due to ample SAR liquidity availability. The steps taken by theSaudi Government in the wake of the global financial crisis went a long way to restoring fullconfidence in Saudi banks, the banking system and the Saudi interbank market (Al-Hamidy,n.d.).Saudi banks continued to provide liquidity to each other and to international banks atcompetitive rates. Therefore, the interbank rates were low. In the global interbank market, therewas a shortage of dollar liquidity in 2008 and 2009 due to the global money market squeeze(Al-Hamidy, n.d.). Thus, SAMA injected dollar liquidity through foreign exchange swaps anddirect deposits with local banks and this were helpful in mitigating the impact of global eventson the local market. The current global financial crisis is reflected in Israel mainly by the fall in prices ofshares and corporate bonds. The rate of growth declined to 2.3% (annual rate) in the thirdquarter, and it is expected that the slowdown in Israel’s growth rate will continue to 1.5% in2009, as opposed to a more significant slowdown, or even a recession in the advancedeconomies (Fischer, 2008). However, because of the Bank of Israel’s interest rate policysupported financial stability and the ability of the economy to deal successfully with the effectsof the slowdown in growth and the Israel banking system is strong and stable compared withthose of the advanced economies (Fischer, 2008). Therefore, the Israel is relatively in thefavorable situation.Southeast AsiaThe global financial crisis is transmitted to Malaysia mainly through the financial and tradechannels (Wanandi, 2008). Same goes as other Asian countries, Malaysia suffered capitaloutflows since the second quarter of 2008.According to Goh and Lim (2010), portfolioinvestments are the most volatile and recorded the largest net outflow of RM84.4 billion in 2008,compared to a positive net inflow of RM18.4 billion in 2007 (Please refer to the Table 4).Malaysia was one of the countries affected by portfolio investment outflows in 2008 and this bigreversal of portfolio capital flows due to divestments by foreign financial institutions with theonset of the global financial crisis led to a decline in reserves in the second half of 2008 (Goh,& Lim, 2010). 16
  • 17. Table 4: Financial Account in the Malaysia Balance of Payments, 2007-2008 (RM Billion) The impact of the crisis on the Malaysian banking system was relatively modest asdomestic banks had negligible exposure to US sub-prime loan products (Goh, & Lim, 2010).Generally, the Malaysian banking system has a stronger position compared to the Asianfinancial crisis when entered the current global financial and economic crisis. It is because theMalaysian banking system have strengthened and built significant buffers during the ten yearsafter the Asian Financial crisis. At yearend 2008, the Malaysian banking system operates withina diversified financial system, with a developed capital market. According to Malik, Ullah, Azam,and Khan (2009), the total bonds outstanding accounted for 86% of Gross Domestic Productproviding an alternative funding for the economy in Malaysia and are evenly balanced betweenthe equity and bond markets and the banking sector. Thus, these diversifying credits riskconcentration away from the banking system, which in turn provides the banking system withadded capacity to withstand stress and shocks (Goh, & Lim, 2010). Philippine economy slowed down considerably in 2008, which same goes as otheremerging markets. Table 2 shows that GDP growth rate for the first three quarters of 2008 fellto 4.6%, compared to 7.5% in the same period in 2007 (Please refer to the Table 5). Accordingto Malik, Ullah, Azam, & Khan (2009), the deceleration in the Philippine economy was largelybrought about by a surge in inflation triggered by the sharp rise in food and fuel prices and to alesser extent the US recession, but not because of the current global financial crisis. ThePhilippine’s financial institutions largely reflected by a number of factors which mentionedearlier during the global financial crisis, there are: (i) the very limited direct exposure of theregion to sub-prime and other related securitized products; (ii) relatively strong bank balance 17
  • 18. sheets with a return to profitability – as impaired loans from the 1997/98 Asian financial crisishave been worked off; (iii) improvements in risk and liquidity management; (iv) strengthening ofsupervisory and regulatory systems; and (v) moves by banks into new and profitable domesticbusiness lines such as consumer lending (Yap, 2009). The move into consumer lending impliesan absence of the strong search for yield that led many banks and other financial institutions inindustrialized countries to take on too much leverage and risk (Malik, Ullah, Azam, & Khan,2009).Table 5: Key Indicators of the Philippines (in percent) The direct impact of the global financial crisis on the Thai banking system has beenvery small in terms of the decline in lending of foreign banks operating locally and cross-borderlending (Wanandi, 2008).This is because Thailand has very low reliance on foreign sources offunding as well as has low exposure to foreign assets. According to Malik, Ullah, Azam, andKhan (2009), foreign banks operating locally account for only 10% of the total assets of thebanking system, while foreign funding accounts for only 3.5% of the total liabilities of thebanking system. The authors continued that the stable domestic deposits form the core of theThai banking system’s funding source, at around 77% of total liabilities. Moreover, 95% of bankloans to households, corporations, and the government sector were in local currency, thus,mitigating any risk of currency mismatch. The lessons learned from the 1997 financial crisiscontributed to reducing Thailand’s vulnerability and exposure to contagion associated with theglobal financial crisis. 18
  • 19. The last three months of 2008 sent the strongest sense of crisis to the country, asworrying signs were spotted everywhere, from the financial market to the real sector of theIndonesia economy. Economic growth in the last quarter fell short of the previously estimated5.7%. It was much lower: 5.2% for the fourth quarter of 2008, with export growth dropping tothe lowest level since 1986 (1%) (Titiheruw, Soesastro, & Atje, 2009).According to the latestdata from Bank Indonesia, Foreign Direct Investment was still increasing in the quarter toDecember 2008, whereas portfolio investment had continued its declining trend since theprevious quarter. According to Titiheruw, Soesastro, and Atje (2009), the financial contagionmay have occurred swiftly as investors’ appetite for emerging market diminished. Indonesiawhich began to reply for development financing on debt securities and private sector financingafter the 1997-1998 crisis is now vulnerable to external shocks that result in disruption offoreign capital flows (Titiheruw, Soesastro, & Atje, 2009). Most foreign investments are shortterm and it is very easy to change course. While foreign direct investment (FDI) has increasedsince 2005, portfolio investment still takes up a great portion of foreign investment flows to thecountry (Titiheruw, Soesastro, & Atje, 2009). Most foreign capital flow went to governmentsecurities, reaching a peak in the second quarter of 2008. During the last three months of 2008,a massive sell-off of government bonds and Bank Indonesia certificates by foreign investors putthe capital and financial account of the balance of payments in deficit (Malik, Ullah, Azam, &Khan, 2009). There was increase in currency and deposit placements by private sectorsabroad. When the Lehman Brothers bankruptcy was announced, the foreign holdings ofgovernment securities reversed course abruptly in mid-September 2008. This trend appearedto stabilize in November 2008.4.3 The Asian Region’s Responses for the Current Global Financial CrisisDuring the height of the global financial free-fall in the third quarter of 2008, Asian membershave taken several responses to the global financial crisis. In order to protect Asian bankingsystems, some economies in the region such as Hong Kong, Malaysia, and Singapore haveemulated what the US and some European countries recently did (Wanandi, 2008). Forexample, guaranteed the repayment of customer deposits held with authorized institutions.Korea has unveiled a US$13 billion package to guarantee short-term foreign bank loans.Economies in Philippines and Singapore are considering easing the mark-to-market accountingrules so that declines in asset values (Wanandi, 2008).China, India, and Pakistan havereduced reserve requirements on deposits. The fewer resources countries such as Indonesia,Philippines, and Pakistan have started informal discussions with international financial 19
  • 20. institutions for precautionary financial packages to stabilize their economies, avoid balance ofpayments crises, or rescue financial institutions facing liquidity problems (Wanandi, 2008). In addition, economies in the Asian region quickly joined the world community in aglobally coordinated response through the upgraded G20 leaders’ summits in Washington DCin November 2008 and in London in April 2009 in order to try contain the potential spread ofcontagion, and the result showed that the Asian members of the G20 (the PRC, Japan,Republic of Korea (henceforth Korea), Indonesia, Australia, Turkey, and arguably Russia)made important contributions to the G20 leaders’ process at the Washington and Londonmeetings (Chin, 2012). To prevent the spread of financial crisis, the G20 leaders gave theirsupport to new lines of rapid financing, to be organized and disbursed by regional developmentbanks, to support developing and low-income countries to enact countercyclical policy (Chin,2012). Moreover, G20 leaders instructed the International Monetary Fund (IMF) to greatlyincrease its emergency lending capacity to support the Asian emerging economies anddeveloping countries in preventing financial contagion (Chin, 2012). Next, most Southeast Asia economies adopted specific macro-prudential or capital-control measures, especially in the regional financial centers (Shimada, & Yang, 2010). BankIndonesia introduced policy packages in June 2010 to manage liquidity, as well as toencourage banks to conduct more transactions in the secondary market (Shimada, & Yang,2010). This includes the implementation of a one-month minimum holding period for buyers ofBank Indonesia certificates in the primary and secondary markets. Besides that, Singaporealso has a loan-to-value limit for residential loan; in February 2010, it strengthened thismeasure by lowering the cap from 80% to 70% and by prohibiting ―interest-only‖ mortgages(Shimada, & Yang, 2010). In October 2010, Thailand introduced a 15% withholding tax oninterest payments and capital gains on bonds held by foreign investors (Shimada, & Yang,2010). On the other hand, ASEAN Finance Ministers agreed on the importance of maintainingsound fiscal and monetary policies to increase liquidity in the system without exacerbatinginflation and implementing policies that will sustain domestic demand as an important anchor ofgrowth. Besides that, they have discussed further measures towards deepening of the region’scapital markets, reinforcing financial services liberalization, capital account liberalization,cooperation in customs matters, and enhancing infrastructure financing (Wanandi, 2008). 20
  • 21. At the ASEAN+3 Finance Ministers’ Meeting in May 2009, the Ministers agreed toestablish the Credit Guarantee and Investment Facility (CGIF) to provide local currency-denominated bonds with a guarantee in order to promote bond (Shimada, & Yang, 2010). InApril 2010, the ASEAN Finance Ministers agreed to establish the ASEAN+3 MacroeconomicSurveillance Office (AMRO) – an independent regional surveillance unit to support thesuccessful implementation of CMIM. In addition, an ASEAN Regulatory Reform Dialogue(ARRD) formed in order to serve as a high-level channel for exchanging views on regulatoryreform issues toward enhancing intra-ASEAN trade and investment flows (Shimada, & Yang,2010).5.0 ConclusionAs a conclusion, the global financial crisis affects every single country in the world. Start fromU.S. subprime mortgage crisis until the global financial and economy crisis, no one couldescape from the effects. Different countries act in different ways to face, overcome and handlethe problems. Some experienced heavily losses and some experienced policy changes in theircountries. However, every step taken should bring the country a brighter tomorrow. The G-20 leaders deliver concrete policy actions as part of the mutual assessmentprocess supporting the G-20 goal of strong, sustained balanced global growth (Truman, 2010).Here, the Asian leaders would have the chances to contribute to the system and benefit Asiaas a whole by carrying out their responsibilities and commitment. According to Truman (2010),his recommendation is to strengthen the IMF and its role in the international economic andfinancial system. For example, the G-20 leaders should agree to double the IMF’s quotaresources to support the Fund’s enhanced emergency financing role (Truman, 2010). A partfrom that, IFIs should also redouble their efforts, including increasing resources for internalcontrols, to battle the invidious corruption that has thwarted so many development projects(Lugar, 2010). According to Lugar (2010), the international financial institution too often focuson issuing loans rather than on achieving concrete development results within a finite period oftime. IFIs should create more stable economic growth in their client countries. Asian region countries can also duplicate the way the other countries do to survivethemselves from the economy recession. As mentioned earlier, examples include guaranteedthe repayment of customer deposits held with authorized institutions, reduced reserverequirements on deposits, avoid balance of payments crises, etc. These can help in protectingthe Asian banking systems. Some countries do carry out workable steps. For example, 21
  • 22. Singapore has a loan-to-value limit for residential loan; Thailand introduced a 15% withholdingtax on interest payments and capital gains on bonds held by foreign investors, and so on.There are still ways and policies which can be carry out or apply to overcome the globalfinancial crisis negative impacts. We can handle the crisis as long as all of us work hand inhand toward the same target. 22