1. Group Li Na
Current Global Financial Crisis and Its Implication on International Financial Institutions:
The Case of Asian Region
Abstract
The global financial crisis started since July, 2007 in United Stated of American and has
affected some of the Financial Institutions around the world, including in Asian Region. This
project is purely focuses on the current global financial crisis and its implication on international
financial institutions in the case of Asian region. The main purpose of the investigated is to
analysis and explains about why and how the global financial crisis impacts the International
Financial Institutions in Asian region. In this project, the explanation of the impact for Asian
region will be separated according to the 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. First of all, the project will briefly discuss about
the financial system in Asian region before and after the Asian financial crisis in 1997, the
knowledge of the current global financial crisis, and international financial institutions in Asian
region. Then, the project will truly focus the reasons current global financial crisis implicated on
international financial institutions in Asian Region and identify the impact of current global
financial crisis for them. After that, the Asian Region’s responses for the current global financial
crisis will be analyzed. Finally, the project concludes with some limitations.
Keywords Global financial crisis, International financial institutions, Asian region
1.0 Introduction
Before the Asian financial crisis of 1997, the Southeast Asian country’s economy has ten years
consecutive of rapid growth. Accompanied by rapid economic growth, banking facilities in these
countries increase at a faster rate and their short-term external debt has reached to the
unprecedented levels. During that period, a most considerable part the countries invest in is
real estate. The rapid growth of investment in Asian Region cause the asset price explosion
and lead to the inflation happen, especially in Thailand and Malaysia. In addition, the lack
flexibility of exchange rate regime makes a lot of foreign debt overlook the exchange rate risk.
These help crises foreshadowed.
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2. The crisis first erupted from Thailand on March 1997. With the development of the
crisis, the Thai baht’s collapse in July 1997 cost the region 10 billions of dollars and leads many
observers to speculate about an impending ―lost decade‖ in Asia (Barton, 2007). In order to
solve this problem, the international organization – International Monetary Fund (IMF) provided
a lot of assistance. However, the country’s financial market is still deteriorating and spread to
Hong Kong and US markets. The effected Asian countries try to take measures, as well as
economic and financial reform to stabilize financial markets and financial system. In 1998, after
the initial turmoil, some of the Asian countries’ financial markets began to stabilize. The
government in the crisis countries has further their efforts to reform the economy and financial
system. Finally, the financial crisis came to the end in 1999.
East Asian Banking Systems emerged after the 1997/98 crisis. The emerging East
Asia has restructured significantly, foreign and domestic sources have injected capital, and
banking institutions have moved into investment banking-type activities and greater household
and real estate lending (Adams, 2008). In addition, authorities have strengthened the
supervisory and regulatory regimes under which banks operate and have been adapting them
to changing conditions in financial markets and financial globalization (Adams, 2008). Based on
the Asian Development Bank (2008), the restructuring of regional banking systems has
centered around four main elements. There are closures, cleanups/write downs of distressed
bank asserts, new capital injections from official and private sources, as well as forward-looking
financial sector master action plans. Structural reforms were given more prominence than in
typical IMF programs. The details of these reforms were formulated in collaboration with the
authorities 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 members
and China, Korea, and Japan was announced by the ASEAN+3 finance ministers, covering in
May 2000 on the margin of the annual meeting of the board of governors of the ASIAN
Development Bank (ADB). ―Chiang Mai Initiative‖ organized in order to recovery the temporary
financial difficulties and to enhanced regional cooperation with intention to cooperate in four
principal areas, such as monitoring capital flows, regional surveillance, swap networks, and
training personnel (International Monetary Fund, 2000).
After a remarkable ten years of transformation, Asia’s financial system become stable
and more robust than it was in 1997. Sitting atop an enormous rising economic tide, it is poised
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3. to benefits from a host of factors, including the rise of China and India, the reemergence of
Japan, robust intraregional trade, enormous infrastructure-financing needs, and the
opportunities presented by increasingly powerful Asian sources of capital (Barton, 2007). Asia
appears 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 its
implication on international financial institutions on Asian region. This project first will briefly
touch about the Asian financial crisis happened in the Asian region in 1997. Due to the initial
impact on the Asian region, the Asian developing countries are drawing on lessons of ten years
ago. The reform of Asian Banking Systems after the 1997/98 crisis has completely changed the
fate of the Asian financial sector for the current global financial crisis. This project discusses the
implication of international financial institutions on Asian region by current global financial crisis
in 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 crisis
3.0 Literature Reviews
The global financial crisis affects every country in the world. The world is near the
bottom of a global recession that is causing widespread business contraction, increases in
unemployment, and shrinking government revenues (Nanto, 2009). The global effects were the
consequence of the high degree of economic and financial integration that is a central
characteristic of the 21st century economic and financial system (Truman, 2010). According to
Berrone (2008), the 2008 financial crisis provides at least two important lessons regarding
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4. incentives. First, we still need to learn a lot about risks; Second, current pay practices have
outraged 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 some
limitations in carrying out their plan or face some others problem when promoting or
implementing the policies. According to Kanbur (2002), when people talk of the International
Financial Institutions (IFIs), they mean the two Bretton Woods institutions, the International
Monetary Fund and the World Bank. Any multilateral organization with financial operations is
an IFI—for example, the regional multilateral banks, regional monetary authorities, some
agencies of the United Nations Organization that disburse funding, etc (Kanbur, 2002).Most
significantly, the two largest and most important IFIs, the World Bank and the International
Monetary 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 were
fixed, 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 principle
of free-market capitalism was not widely accepted (Lugar, 2010).The International Monetary
Fund (IMF) was created at the 1944 Bretton Woods Conference in New Hampshire to prevent
a 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 members
in economic difficulties‖, and work ―with developing nations to help them achieve
macroeconomic stability and reduce poverty‖ (Lugar, 2010).Table 1 shows the total IMF credit
outstanding 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 the
Exogenous Shocks Facility.
Table 1: International Monetary Fund Disbursements.
According to Lugar (2010), although the international financial institutions (IFIs) are run
by their own managements, the member governments exercise policy direction and oversight
responsibility. A board of governors for each IFI, representing all member countries, meets
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5. once a year to make policy decisions, while boards of executive directors meet more frequently
to 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 Woods
Conference. World Bank currently focused on the achievement of the Millennium Development
Goals, aims to ―fight poverty‖ and ― to help people help themselves and their environment by
providing resources, sharing knowledge, building capacity, and forging partnerships in the
public and private sectors‖ (Lugar, 2010). Table 2 shows the World Bank operations. World
Bank 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) which
is founded in 1966. According to Lugar (2010), the Asian Development Fund (AsDF), the
AsDB’s concessional facility, was created in 1972 to provide loans to Asia’s poorest countries
and is funded principally through periodic replenishments by donor nations. Table 3 shows the
Asian 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.
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6. To identify how global financial crisis happen, we must know what subprime mortgage
crisis is. What started as an asset bubble caused by an array of financial derivatives that, inter
alia, drove the sub-prime mortgage boom, exploded into a housing and banking crisis with a
cascading effect on consumer and investment demand (Abidin, &Rasiah, 2009). By oxford
dictionary (n. d.), sub-prime is an adjective denoting or relating to credit or loan arrangements
for borrowers with poor credit history, typically having unfavourable conditions such as high
interest 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 to
the conventional loan. Thus, banks benefit themselves by earning more interest rate. If the
borrowers 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 of
the global financial crisis. Figure 1 shows the comparison of traditional model mortgage and
subprime 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 main
focus is on the earning of high interest rate and the bank will not keep the mortgage but sell it
to the bond markets. Figure 2 clearly show that the gap between income and loan become
bigger. In 1994, the income is about $73, 000 and loan is about $120, 000. By 2005, as
subprime lending peaked, nearly the same median income could get a $183, 000 loans. The
amount of borrowing has increased one half while the income increases only about a thousand.
The facilitation of applying loan caused the global financial crisis.
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7. Figure 2: Increasing percentage of income goes to housing.
Thing always come with the side effects. These subprime mortgage crises are then
lead the global financial system into a low tide. Once a thing is demanded by lots of people, its
value will definitely increase. Same goes to the subprime mortgage crisis situation, everyone
wants to buy a house since the mortgage loan is easy to apply. Financial institutions were
looking to generate more money and income. However, the household income did not increase
until they cannot afford to repay the loan or buy a new house. Thus, the house value decrease
and the real estate market begin to cold down as shown in Figure 3. Lots of the American has
to give up their homeownership. The situation of ―less people demand for the oversupply
houses‖ leads to the decrease of house price in late 2006 and early 2007. We can say that
there 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.
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8. Figure 4 below show The Subprime 25 which provides rank, lender and loan volume
between 2005 and 2007, at the peak and collapse of the subprime market. According to Figure
4, the top 25 lenders have accounted for $997, 538, 108, 000 of loans, which is nearly $1
trillion, within 2 years time.
Figure 4: The Subprime 25.
The collapse of United States subprime mortgage market led to an international
financial crisis. A little thing can now affect the economy as a whole and turning a global
financial crisis into global economic crisis very quickly. Besides that, the borrowers fail to repay
the loan. Numerous small banks and households still face huge problems in restoring their
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9. balance sheets, and unemployment has combined with subprime loans to keep home
foreclosures at a high rate (Nanto, 2009). Several countries have restored to borrowing from
the International Monetary Fund as a last resort (Nanto, 2009). Nanto (2009) continue by
providing example that due to the impact of the financial crisis, several Central and Eastern
European countries have already sought emergency lending from the IMF to help finance their
balance of payment. IMF also announced certain amount lending to countries to help them in
stabilizing their economic. Entire banking system has less confidence in lending and their rapid
loss caused a sharp decline in their stock price. In addition, mortgages also have been sold
and resold and pooled together into securities, which mean that it is hard to find who the actual
current owner of the mortgage is. The crisis has exposed fundamental weaknesses in financial
systems worldwide, demonstrated how interconnected and interdependent economics are
today, 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
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10. direct exposures to failed institutions and toxic assets in the United States and Europe, Asian
economies were caught in a second phase of the crisis (Nanto, 2009). Asian economies did
suffer from these situations. According to Nanto (2009), with Western economies slowing and
global investors short of cash and pulling back from any markets deemed risky, many Asian
economies suffered sharp slowdowns or dipped into recession in the fourth quarter of 2008 or
the first quarter of 2009. Several Asian countries—including China, Japan, South Korea,
Thailand, Malaysia, Taiwan and Singapore—implemented large fiscal stimulus programs that
have shown signs of stimulating domestic investment and consumption (Lugar, 2010). For
example, Japan announced several stimulus packages that amounted to 5% of the nation’s
GDP, while China implemented a package worth 12% of GDP (Lugar, 2010).
4.0 Discussion and Findings
4.1 TheWays the Current Global Financial Crisis ImplicationsInternational Financial
Institutions in Asian Region
After the financial crisis in 1997 and had an exceptional growth. The world economy now
entered a period of instability and uncertainty again due to the US subprime mortgage crisis in
2007. Following by the major US investment bank - Lehman Brothers went bankrupt on
September 15, 2008, the economy situation around the world failed into burst out stage. The
current global financial and economic crises have important implications on international
financial 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 cause
is Asian banks are mostly focused on traditional lending business, thus, a number of countries
degree of internationalization of the banking business is relatively low if compare with the
European and American banks. Since Asian Banking Systems emerged after the 1997/98
Asian financial crisis, Asian countries strengthen supervision of the financial industry helps to
reduce the risks faced by financial institutions.
According to Akyuz (2008), the way and extent the crisis will affect the economies in
the region is depends on the inter alia, on present vulnerabilities which are greatly shaped by
the manner in which the recent surge in capital flows has been managed. The crisis influenced
Asian region in four areas of vulnerability associated with surges in capital inflows: (i) Currency
and maturity mismatched in private balance sheets; (ii) credit and asset bubbles and excessive
investment in property and other sectors; (iii) unsustainable currency appreciations and
external deficits; and (iv) lack of self-insurance against a sudden reversal of capital flows, and
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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, but
quickly evolved into a financial crisis in which banks were unable to repay their foreign debts. In
turn, 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 are
directly related to the US sub-prime mortgage losses. From the disclosure of data by some
financial institutions in Asia, the Asian banking industries involved in subprime-related losses
are relatively small, it is not will the banking and financial systems in Asia pose a systemic
impact. Next is because of a crisis of confidence. The US financial crisis will deal a blow to
investor confidence and trigger capital outflows, decreased mobility, as well as shrunk the stock
market. By the U.S. financial crisis, stock and currency markets in the region has a turbulent
situation. Before the recovery of investor confidence, the Asian financial markets may last for a
severe shock. Third is affects the real economy through trade channels, thereby affecting the
banking and financial systems in Asia. The U.S. financial crisis reduced external demand and
leads the Asian countries face an economic slowdown. This may further lead to the Asian
banking industry's loan quality deteriorated sharply, adversely affect the banks’ stability and
operation performance. The fourth cause the current global financial crisis affects financial
institutions 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 a
sharp increase in financing conditions deteriorate, the external financing for these countries
and institutions have an adverse impact.
4.2 The Impact of Current Global Financial Crisis on International Financial Institutions
in Asian Region
Based on the BIS Papers (2010), when the international financial crisis began in mid-2007, the
initial impact on the Asian region was limited in scale and severity. The government in Asian
developing countries has taken good macro policies, the enterprises have improved their
balance sheets, and the banks have reduced the non-performing loans. Most of the
fundamentals of the economy are stable and the large foreign exchanges reserves help
cushion the spread of the crisis. Therefore, the Asian region influenced by the current global
financial 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
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12. of US investment bank Lehman Brothers (BIS, 2010). The region experienced large capital
outflows and serious difficulties refinancing US dollar liabilities. Most Asia countries’ currencies
depreciated. Figure 6 show the total financing of mortgage-backed securities from 2000 to
2007 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 international
financial 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 be
chosen to discuss.
East Asian
The current global financial crisis in the US most directly impacts the Japan and China financial
institutions due to the US sub-prime mortgage. In Japan, the framework to deal with troubled
financial institutions was not well-equipped. According to Wanandi (2008), there were six major
financial institutions in Japan (especially Mitsubishi UFJ, Mizuho Financial Group, Sumitimo
Mitsui and Sumitomo Trust & Banking) are expected to book 40%fall in their combined net
profit for the last fiscal year due to the losses linked to the US sub-prime mortgage crisis.
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13. Wanandi (2008) continued that these loses have been estimated to the amount between 700
and 800 billion yen. While in China, the sub-prime exposure of the Bank of China, ICBC, and
the 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 by
the global financial crisis because of the direct risk exposure is limited. When the financial crisis
started in the US, the mainstream economist and international financial institutions claimed that
it would have marginal or no impact on the emerging economies of namely China and India
because of the ―decoupling‖ effects and also because these economies have adopted market
reforms which had made these economies more efficient and competitive so that they could
withstand such challenges (Siddiqui, 2009).
During the current global financial crisis, Korea faced macro financial instability and the
exports 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 lowest
growth rates among Organization for Economic Cooperation and Development (OECD)
countries (Kang, 2010). The Korean financial markets are suffering from massive financial
deleveraging by foreign investors as well. According to Kang (2010), there has two aspects of
the financial vulnerability of the Korean banking sector are notable, the first one is the rapid
increase of short-term foreign debt beginning in 2006, and the other is the highly joined by
household debt that rose to 158% of disposable household income by the end of 2008. These
aspects caused the Korean currency has sharply depreciated, became one of the highest
depreciation rates among major currencies, and is fluctuating against the US dollar (Kang,
2010).
Hong Kong operates a three-tier banking system which distinguishes between licensed
banks, restricted license banks (RLB) and deposit-taking companies (DTC). The banks have no
lending or investment restrictions. Hong Kong’s banks entered the crisis in a healthy condition
with returns on assets above 1.5%, sufficient capitalization, strong but prudently managed loan
growth and very low impairments (Mulhaupt, &Dyck, 2009). The global financial crisis hit Hong
Kong’s banks in H2 2008 and heavily impacted on banks’ income statements. According to
Mulhaupt 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 net
interest income remained stable, the decline can largely be attributed to slumping fee and
commission incomes (included in other operating income) and higher impairment charges in
light of rising non-performing loans and a grim economic outlook (Mulhaupt, &Dyck, 2009).In
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14. addition, the interest margins had strong decline in September 2008 due to the failure of
Lehman Brothers caused banks hoard their liquidity, with the HIBOR closely following rising US
interbank rates due to the HKD-USD peg (Mulhaupt, &Dyck, 2009). In order to solve this
problems, the Monetary Authority (HKMA) responded by injecting liquidity into the banking
system through several operations. This brought the overnight HIBOR below 0.5% while
lending rates for prime borrowers remained almost unchanged at 5% (Mulhaupt, &Dyck,
2009).Funding problems of banks combined with the increasingly bleak economic outlook led
banks to reduce lending.
Figure 7: Income and Profitability Deteriorating
The World Bank has argued that East Asian economies have better prepared to fight
for the current global financial crisis because the countries have strong external payments
positions and large international reserves, prudent fiscal and monetary policies, better
regulated 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 as
being able to insulate itself from developments elsewhere. In fact, the region’s increased
integration in the world’s trading and financial systems makes it sensitive to global economic
conditions (Wanandi, 2008). The ―decoupling theory‖ that appears to be popular in some
quarters in East Asia cannot be substantiated empirically and carries with it an inherent danger
of inducing a sense of complacency (Wanandi, 2008).
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15. South Asian
Pakistan’s economic situation has worsened because of large number of capital outflows due
to the US global financial crisis. The depreciated of Rupee value made the debt financing more
costly, while foreign exchange reserves have continued to reduce in size (Malik, Ullah, Azam, &
Khan, 2009). The operating environment of the financial sector experienced significant
deterioration in 2007 and 2008, due to a confluence of factors emanating from both the
domestic and international economic and financial developments (Ali, 2009).Ali (2009)
explained that the global financial crisis and the commodity price hike had a feedback impact
on 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 of
domestic financial markets with global financial developments, a proactive and vigilant
regulatory environment, and most importantly, no direct exposure to securitized instruments,
risks to financial stability were largely contained and well managed as the crisis unfolded and
impacted 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 more
concerned with issues relating to monetary stability due to rising inflation since before the
advent of the crisis.
On the other hand, the direct effect of the sub-prime crisis on Indian financial sector
was almost negligible because of limited exposure to complex derivatives and other prudential
policies put in place by the Reserve Bank (Mohan, 2009). Mohan (2009) continued that the
relatively lower presence of foreign banks in the Indian banking sector also minimized the direct
impact on the domestic economy. Strict regulation and conservative policies adopted by the
Reserve Bank of India are relatively insulated from the travails of their western counterparts
(Malik, Ullah, Azam, & Khan, 2009).
West Asian
Private commercial banks owned by residents in Turkey drop in a large number between 2002
and 2008, while the number of foreign banks originally founded in Turkey increased by an
almost equal amount in the same period. According to Uygur (2010), during the recent crisis as
of September 2009, there are as yet no banks transferred to the SDIF, no changes in
ownership, no liquidation and thus no fall in the number of banks. Banks in Turkey are relatively
good compare to the banks in other countries. This is because the banking sector was
restructured in the crisis of 2000 to 2001 and well regulated and supervised. Besides that, at
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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 domestic
interbank market in Saudi Arabia due to ample SAR liquidity availability. The steps taken by the
Saudi Government in the wake of the global financial crisis went a long way to restoring full
confidence 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 at
competitive rates. Therefore, the interbank rates were low. In the global interbank market, there
was 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 and
direct deposits with local banks and this were helpful in mitigating the impact of global events
on the local market.
The current global financial crisis is reflected in Israel mainly by the fall in prices of
shares and corporate bonds. The rate of growth declined to 2.3% (annual rate) in the third
quarter, and it is expected that the slowdown in Israel’s growth rate will continue to 1.5% in
2009, as opposed to a more significant slowdown, or even a recession in the advanced
economies (Fischer, 2008). However, because of the Bank of Israel’s interest rate policy
supported financial stability and the ability of the economy to deal successfully with the effects
of the slowdown in growth and the Israel banking system is strong and stable compared with
those of the advanced economies (Fischer, 2008). Therefore, the Israel is relatively in the
favorable situation.
Southeast Asia
The global financial crisis is transmitted to Malaysia mainly through the financial and trade
channels (Wanandi, 2008). Same goes as other Asian countries, Malaysia suffered capital
outflows since the second quarter of 2008.According to Goh and Lim (2010), portfolio
investments 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 big
reversal of portfolio capital flows due to divestments by foreign financial institutions with the
onset of the global financial crisis led to a decline in reserves in the second half of 2008 (Goh,
& Lim, 2010).
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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 as
domestic 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 Asian
financial crisis when entered the current global financial and economic crisis. It is because the
Malaysian banking system have strengthened and built significant buffers during the ten years
after the Asian Financial crisis. At yearend 2008, the Malaysian banking system operates within
a 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 Product
providing an alternative funding for the economy in Malaysia and are evenly balanced between
the equity and bond markets and the banking sector. Thus, these diversifying credits risk
concentration away from the banking system, which in turn provides the banking system with
added capacity to withstand stress and shocks (Goh, & Lim, 2010).
Philippine economy slowed down considerably in 2008, which same goes as other
emerging markets. Table 2 shows that GDP growth rate for the first three quarters of 2008 fell
to 4.6%, compared to 7.5% in the same period in 2007 (Please refer to the Table 5). According
to Malik, Ullah, Azam, & Khan (2009), the deceleration in the Philippine economy was largely
brought about by a surge in inflation triggered by the sharp rise in food and fuel prices and to a
lesser extent the US recession, but not because of the current global financial crisis. The
Philippine’s financial institutions largely reflected by a number of factors which mentioned
earlier during the global financial crisis, there are: (i) the very limited direct exposure of the
region to sub-prime and other related securitized products; (ii) relatively strong bank balance
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18. sheets with a return to profitability – as impaired loans from the 1997/98 Asian financial crisis
have been worked off; (iii) improvements in risk and liquidity management; (iv) strengthening of
supervisory and regulatory systems; and (v) moves by banks into new and profitable domestic
business lines such as consumer lending (Yap, 2009). The move into consumer lending implies
an absence of the strong search for yield that led many banks and other financial institutions in
industrialized 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 been
very small in terms of the decline in lending of foreign banks operating locally and cross-border
lending (Wanandi, 2008).This is because Thailand has very low reliance on foreign sources of
funding as well as has low exposure to foreign assets. According to Malik, Ullah, Azam, and
Khan (2009), foreign banks operating locally account for only 10% of the total assets of the
banking system, while foreign funding accounts for only 3.5% of the total liabilities of the
banking system. The authors continued that the stable domestic deposits form the core of the
Thai banking system’s funding source, at around 77% of total liabilities. Moreover, 95% of bank
loans 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 crisis
contributed to reducing Thailand’s vulnerability and exposure to contagion associated with the
global financial crisis.
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19. The last three months of 2008 sent the strongest sense of crisis to the country, as
worrying signs were spotted everywhere, from the financial market to the real sector of the
Indonesia economy. Economic growth in the last quarter fell short of the previously estimated
5.7%. It was much lower: 5.2% for the fourth quarter of 2008, with export growth dropping to
the lowest level since 1986 (1%) (Titiheruw, Soesastro, & Atje, 2009).According to the latest
data from Bank Indonesia, Foreign Direct Investment was still increasing in the quarter to
December 2008, whereas portfolio investment had continued its declining trend since the
previous quarter. According to Titiheruw, Soesastro, and Atje (2009), the financial contagion
may have occurred swiftly as investors’ appetite for emerging market diminished. Indonesia
which began to reply for development financing on debt securities and private sector financing
after the 1997-1998 crisis is now vulnerable to external shocks that result in disruption of
foreign capital flows (Titiheruw, Soesastro, & Atje, 2009). Most foreign investments are short
term and it is very easy to change course. While foreign direct investment (FDI) has increased
since 2005, portfolio investment still takes up a great portion of foreign investment flows to the
country (Titiheruw, Soesastro, & Atje, 2009). Most foreign capital flow went to government
securities, 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 put
the 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 sectors
abroad. When the Lehman Brothers bankruptcy was announced, the foreign holdings of
government securities reversed course abruptly in mid-September 2008. This trend appeared
to stabilize in November 2008.
4.3 The Asian Region’s Responses for the Current Global Financial Crisis
During the height of the global financial free-fall in the third quarter of 2008, Asian members
have taken several responses to the global financial crisis. In order to protect Asian banking
systems, some economies in the region such as Hong Kong, Malaysia, and Singapore have
emulated what the US and some European countries recently did (Wanandi, 2008). For
example, 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 accounting
rules so that declines in asset values (Wanandi, 2008).China, India, and Pakistan have
reduced reserve requirements on deposits. The fewer resources countries such as Indonesia,
Philippines, and Pakistan have started informal discussions with international financial
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20. institutions for precautionary financial packages to stabilize their economies, avoid balance of
payments crises, or rescue financial institutions facing liquidity problems (Wanandi, 2008).
In addition, economies in the Asian region quickly joined the world community in a
globally coordinated response through the upgraded G20 leaders’ summits in Washington DC
in November 2008 and in London in April 2009 in order to try contain the potential spread of
contagion, 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 London
meetings (Chin, 2012). To prevent the spread of financial crisis, the G20 leaders gave their
support to new lines of rapid financing, to be organized and disbursed by regional development
banks, to support developing and low-income countries to enact countercyclical policy (Chin,
2012). Moreover, G20 leaders instructed the International Monetary Fund (IMF) to greatly
increase its emergency lending capacity to support the Asian emerging economies and
developing 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). Bank
Indonesia introduced policy packages in June 2010 to manage liquidity, as well as to
encourage 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 of
Bank Indonesia certificates in the primary and secondary markets. Besides that, Singapore
also has a loan-to-value limit for residential loan; in February 2010, it strengthened this
measure 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 on
interest 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 maintaining
sound fiscal and monetary policies to increase liquidity in the system without exacerbating
inflation and implementing policies that will sustain domestic demand as an important anchor of
growth. Besides that, they have discussed further measures towards deepening of the region’s
capital markets, reinforcing financial services liberalization, capital account liberalization,
cooperation in customs matters, and enhancing infrastructure financing (Wanandi, 2008).
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21. At the ASEAN+3 Finance Ministers’ Meeting in May 2009, the Ministers agreed to
establish the Credit Guarantee and Investment Facility (CGIF) to provide local currency-
denominated bonds with a guarantee in order to promote bond (Shimada, & Yang, 2010). In
April 2010, the ASEAN Finance Ministers agreed to establish the ASEAN+3 Macroeconomic
Surveillance Office (AMRO) – an independent regional surveillance unit to support the
successful 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 regulatory
reform issues toward enhancing intra-ASEAN trade and investment flows (Shimada, & Yang,
2010).
5.0 Conclusion
As a conclusion, the global financial crisis affects every single country in the world. Start from
U.S. subprime mortgage crisis until the global financial and economy crisis, no one could
escape from the effects. Different countries act in different ways to face, overcome and handle
the problems. Some experienced heavily losses and some experienced policy changes in their
countries. However, every step taken should bring the country a brighter tomorrow.
The G-20 leaders deliver concrete policy actions as part of the mutual assessment
process 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 Asia
as 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 and
financial system. For example, the G-20 leaders should agree to double the IMF’s quota
resources to support the Fund’s enhanced emergency financing role (Truman, 2010). A part
from that, IFIs should also redouble their efforts, including increasing resources for internal
controls, to battle the invidious corruption that has thwarted so many development projects
(Lugar, 2010). According to Lugar (2010), the international financial institution too often focus
on issuing loans rather than on achieving concrete development results within a finite period of
time. IFIs should create more stable economic growth in their client countries.
Asian region countries can also duplicate the way the other countries do to survive
themselves from the economy recession. As mentioned earlier, examples include guaranteed
the repayment of customer deposits held with authorized institutions, reduced reserve
requirements on deposits, avoid balance of payments crises, etc. These can help in protecting
the Asian banking systems. Some countries do carry out workable steps. For example,
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22. Singapore has a loan-to-value limit for residential loan; Thailand introduced a 15% withholding
tax 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 global
financial crisis negative impacts. We can handle the crisis as long as all of us work hand in
hand toward the same target.
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