Financial crisis

1. FINANCIAL CRISIS, CAUSES AND REFORMS

2. HAMDARD UNIVERSITY OF MANAGEMENT SCIENCES
PRESENTED TO :
IRFAN SIDDIQUI
PRESENTED BY :
NOMAN HASSAN
RIZWAN ALI
YASEEN AMIN

3. FINANCIAL CRISIS
Financial Crises Comprises of …
– Banking Crises
– Economic Crises
– Capital Market Bubbles
– Currency Crises

4. FINANCIAL CRISIS

5. FINANCIAL CRISIS
• Economic Crises
– An economic crisis can
take the form of a
recession or a
depression.
– Economic Crisis will
most likely experience
a falling GDP, a drying
up of liquidity and
rising/falling prices
due to inflation /
deflation

6. FINANCIAL CRISIS
• Capital Market
Bubbles/Crashes
– Market Price of stocks
are higher than
present value of
future Cash flows.
– A dramatic decline of
stock prices in a
market. Crashes are
driven by panic as
much as by underlying
economic factors

7. FINANCIAL CRISIS
• Currency Crisis
–A currency crisis
occurs when the value
of a currency changes
quickly, undermining
its ability to serve as a
Medium of exchange
or a Store of value.

8. FINANCIAL CRISIS
Stock Market Crisis Bank Crisis
• 1910: Shanghai rubber stock market crisis • 1980: Latin American debt crisis; beginning
in Mexico
• 1929: Wall Street Crash
• 1989-91: United State Saving & Loan Crisis
•1980: Japanese property bubble
Economic Crisis Currency Crisis
• 2001-2: Argentine economic crisis •1992-3: Speculative attacks on currencies in
[breakdown of banking system] the European Exchange Rate Mechanism
• 1994-5 Economic Crisis in Mexico,
speculative attack and default on Mexico
Debts

9. CAUSES OF FINANCIAL CRISIS
1. Strategic Complementarities
in Financial Markets
– Successful investment requires
each investor in financial market
to guess what other investors
will do
– John Keynes compared Financial
markets to a “Beauty Contest
Game”
– Mr. George Soros an Analyst ,
has called this need to guess the
intentions of other “Reflexivity”

10. CAUSES OF FINANCIAL CRISIS
2. Leverage
• It means borrowing to
finance investments, is
frequently cited as a
contributor to financial
crises
• Leverage magnifies the
potential returns from
investment, but also
creates a risk of
bankruptcy

12. CAUSES OF FINANCIAL CRISIS
3. Asset – Liabilities mismatch
– This is another factor believed to contribute to
financial crises, a situation in which the risks
associated with an institute‘s debt and assets is
not appropriately aligned.
– It is also seen as one of the reason bank runs
occur. Such as, bear Stearns failed in 2007-08
because it was unable to renew the short term
debt it used to finance Long term investment .

13. CAUSES OF FINANCIAL CRISIS
4. Contagion
– Financial crises may spread from one institution to
another, as when a bank run spreads from a few
banks to many others, or from 1 country to
another, as when currency crises, sovereign
defaults, or stock market crashes spread across
countries

14. FINANCIAL BAIL OUT PACKAGE

15. FINANCIAL BAIL OUT PACKAGE
2. Restructuring the Financial System
–Liberalization of interest rates
–Reduction of controls on credit
–Encouraging the development of secondary
market for government securities
–Allowing free entry of private banks

16. FINANCIAL BAIL OUT PACKAGE
3. Sound Corporate Governance stabilize &
strengthen good capital markets
Benefit of Corporate Governance:
» Protect Shareholder rights
» Robust growth of corporate sectors
» Enables corporations to realize Corporate objectives
» Demonstrate to the wider public about the business

17. FINANCIAL BAIL OUT PACKAGE
4. Legal infrastructure must be made
– Bank secrecy laws should be
improved
– Financial supervision & Bankruptcy
– Deposit insurance scheme is
needed