This document provides a cover sheet and abstract for a dissertation comparing the impact of the global financial crisis on UK and Kenyan banks. Specifically, it analyzes Kenya Commercial Bank in Kenya and Northern Rock Bank in the UK. The dissertation was submitted in partial fulfillment of an MBA degree in finance. It includes declarations by the student and outlines the research objectives, which are to determine the difference in liquidity creation pre-crisis and the role of financial regulators in each country. The abstract indicates the dissertation will analyze five financial ratios and qualitative data on profitability and capital to compare the banks' performances during the crisis.
Introducing Japanese contemporary culture and society to a Yeungnam University group visiting Kansai University. On Day 1, traditional Japanese culture was introduced to the students from South Korea; this is Day 2, 15 January 2016. The author is a lecturer for the Kansai University Division of International Affairs, other universities, and the Japanese government international agency JICA.
The document discusses trust in banks across different countries, with a focus on Ukraine and Belarus. It finds that trust in banks varies significantly between countries, with Ukraine having particularly low levels of trust compared to other nations. Low trust can cause people to save money at home rather than depositing it in banks, which has implications for economic growth as it keeps deposits out of the banking system. The document examines some factors that can influence trust in banks, such as institutional quality, historical experiences, economic conditions, and regulation.
The paper examines the nature of the Bulgarian banking and currency crises in 1996-1997 and evaluates the causal link between them. The analysis shows that the banking crisis has resulted from slow structural reforms, inefficient prudential regulation and prolonged unsound lending practices. The probit model estimates illustrate that excessive credit, augmented interest rate spread and overvalued exchange rate exacerbated the banks' liquidity position. The currency crisis was a consequence of expansionary monetary policy, which led to irreversible depletion of international reserves and caused eventual collapse of the exchange rate. The probit estimations found real exchange rate, money multiplier, interest rate, current account balance, ratio of broad money to reserves and credit expansion to be the most relevant indicators of the balance-of-payment crisis. The causal link between the twin crises is explained through expansionary monetary policy that comes as a response to the banking crisis. It focuses on the inability of the central bank to sustain the exchange rate when it faces a run on its reserves.
Authored by: Preslava Kovatchevska
Published in 2000
Trekking markets & more with InvestrekkInves Trekk
The report presents a summary of the Indian market activity during the week ended 27 June 2021. It also provides some important insights about the global market trends and Indian Market outlook for the Week beginning 28 June 2021.
Quantitative easing policies have led to imbalances in the global economy and international monetary system. The policies upset credit mechanisms, caused confusion in the global financial order, and made national macroeconomic policies more complex. As the global economy shifts, these imbalances are exacerbated, including between supply and demand, the real and virtual economies, and the distribution of wealth between debtor and creditor nations. Quantitative easing may also contribute to increased risks of disorderly capital flows, currency mismatches, and monetary policy imbalances between developed and emerging economies. Overall, these imbalances threaten economic stability and could lead to a new global economic crisis.
Yu Yongding, Chinese Academy of Social Sciences: "The risks with excessive mo...Global Utmaning
A presentation held by Professor Yu Yongding, Chinese Academy of Social Sciences and former member of the Policy Committee of the People´s Bank of China, at the high level seminar "Towards a sustainable financial system", hosted by the Stockholm based think tank Global Challenge in cooperation with London School of Economics and Swedish House of Finance on September 12th 2013.
Thiet ke Bao cao thuong nien - Vietcapital 2008Viết Nội Dung
The annual report summarizes Viet Capital Fund's performance in 2008, a difficult year for the fund and markets. The fund lost 57% in value compared to a 66% loss for the market index. While the fund outperformed the market, its net asset value fell to VND 418 billion by year-end. The fund increased its cash position from 22% to 44% over the year as it focused on capital preservation during the market turmoil. Top holdings were reduced in industries like real estate that were hit hard by the economic downturn. Going forward, the fund will emphasize quality companies and maintain a risk-aware strategy while seeking recovery opportunities.
U.S. Health Insurance Exchanges — Moving ForwardEmily Jackson
This document provides an economic forecast and analysis of global economic conditions. It discusses how the global recovery is now 3 years old but celebrations are muted as growth has been slow. Growth is forecast to be 3.1% in 2012 and 3.6% in 2013. The deepening recession in the eurozone is a key factor slowing growth as debt strains continue in many countries. Recent EU agreements provide support but long-term solutions are still uncertain. Slowdowns in Europe are moderating growth in North America and Asia through reduced exports. China, India, and Brazil are taking steps to boost growth through interest rate cuts and fiscal measures. The US has potential for relative outperformance but growth is also slowing there.
Introducing Japanese contemporary culture and society to a Yeungnam University group visiting Kansai University. On Day 1, traditional Japanese culture was introduced to the students from South Korea; this is Day 2, 15 January 2016. The author is a lecturer for the Kansai University Division of International Affairs, other universities, and the Japanese government international agency JICA.
The document discusses trust in banks across different countries, with a focus on Ukraine and Belarus. It finds that trust in banks varies significantly between countries, with Ukraine having particularly low levels of trust compared to other nations. Low trust can cause people to save money at home rather than depositing it in banks, which has implications for economic growth as it keeps deposits out of the banking system. The document examines some factors that can influence trust in banks, such as institutional quality, historical experiences, economic conditions, and regulation.
The paper examines the nature of the Bulgarian banking and currency crises in 1996-1997 and evaluates the causal link between them. The analysis shows that the banking crisis has resulted from slow structural reforms, inefficient prudential regulation and prolonged unsound lending practices. The probit model estimates illustrate that excessive credit, augmented interest rate spread and overvalued exchange rate exacerbated the banks' liquidity position. The currency crisis was a consequence of expansionary monetary policy, which led to irreversible depletion of international reserves and caused eventual collapse of the exchange rate. The probit estimations found real exchange rate, money multiplier, interest rate, current account balance, ratio of broad money to reserves and credit expansion to be the most relevant indicators of the balance-of-payment crisis. The causal link between the twin crises is explained through expansionary monetary policy that comes as a response to the banking crisis. It focuses on the inability of the central bank to sustain the exchange rate when it faces a run on its reserves.
Authored by: Preslava Kovatchevska
Published in 2000
Trekking markets & more with InvestrekkInves Trekk
The report presents a summary of the Indian market activity during the week ended 27 June 2021. It also provides some important insights about the global market trends and Indian Market outlook for the Week beginning 28 June 2021.
Quantitative easing policies have led to imbalances in the global economy and international monetary system. The policies upset credit mechanisms, caused confusion in the global financial order, and made national macroeconomic policies more complex. As the global economy shifts, these imbalances are exacerbated, including between supply and demand, the real and virtual economies, and the distribution of wealth between debtor and creditor nations. Quantitative easing may also contribute to increased risks of disorderly capital flows, currency mismatches, and monetary policy imbalances between developed and emerging economies. Overall, these imbalances threaten economic stability and could lead to a new global economic crisis.
Yu Yongding, Chinese Academy of Social Sciences: "The risks with excessive mo...Global Utmaning
A presentation held by Professor Yu Yongding, Chinese Academy of Social Sciences and former member of the Policy Committee of the People´s Bank of China, at the high level seminar "Towards a sustainable financial system", hosted by the Stockholm based think tank Global Challenge in cooperation with London School of Economics and Swedish House of Finance on September 12th 2013.
Thiet ke Bao cao thuong nien - Vietcapital 2008Viết Nội Dung
The annual report summarizes Viet Capital Fund's performance in 2008, a difficult year for the fund and markets. The fund lost 57% in value compared to a 66% loss for the market index. While the fund outperformed the market, its net asset value fell to VND 418 billion by year-end. The fund increased its cash position from 22% to 44% over the year as it focused on capital preservation during the market turmoil. Top holdings were reduced in industries like real estate that were hit hard by the economic downturn. Going forward, the fund will emphasize quality companies and maintain a risk-aware strategy while seeking recovery opportunities.
U.S. Health Insurance Exchanges — Moving ForwardEmily Jackson
This document provides an economic forecast and analysis of global economic conditions. It discusses how the global recovery is now 3 years old but celebrations are muted as growth has been slow. Growth is forecast to be 3.1% in 2012 and 3.6% in 2013. The deepening recession in the eurozone is a key factor slowing growth as debt strains continue in many countries. Recent EU agreements provide support but long-term solutions are still uncertain. Slowdowns in Europe are moderating growth in North America and Asia through reduced exports. China, India, and Brazil are taking steps to boost growth through interest rate cuts and fiscal measures. The US has potential for relative outperformance but growth is also slowing there.
At the beginning of 1990s the Soviet successor states started to transform their financial sectors to meet the needs of the emerging market economies.
Following a decade of transition, results differ. Although the Baltic States were able to build quite successful financial systems, in the CIS countries financial systems remain a major obstacle to economic growth. The hyperinflations of the early 1990s, the financial scandals that followed the collapse of monobank systems, and subsequent incomplete progress in constructing non-bank financial institutions and effective regulatory structures have had adverse consequences. These include weak bank balances sheets, high real interest rates, and poor access to capital for small enterprises and start ups. With a few exceptions, nontransparent regulation, inadequate disclosure frameworks, and weak protection of shareholders rights continue to limit investor participation in CIS financial markets. The absence of effective threepillar pension systems further limits the demand for domestic debt and equities.
Fortunately, there are signs of improvement. Bank lending and deposits are growing in many CIS economies, the proportion of bad debt in bank credit portfolio is falling, and lending and deposit interest rate spreads are diminishing. The solid economic growth recorded since 1999 in many CIS countries is helping memories of the 1998 financial crisis to fade, and stock exchanges in some CIS countries are currently at or near record levels. Financial systems in CIS economies may be moving toward the successful frameworks put in place in the new EU member states. However, because they have not benefited from the extensive foreign direct investment that recapitalised banks in Central Europe, financial stability in many CIS countries remains open to question.
Authored by: Elena Golodniuk
Published in 2005
The document discusses the nature of bank deposits in Canada. It provides details about the Canadian banking environment and the different types of banking institutions. It explains that bank deposits refer to money placed in a bank for safekeeping and includes accounts like savings, checking, and money market accounts. The document also discusses Canadian monetary policy and how the Bank of Canada uses tools like open market operations and interest rates to indirectly control the money supply and influence economic activity and inflation. However, monetary policy has limitations and trade-offs in achieving different economic goals simultaneously.
2008 05 white presentation at 39th konstanz seminar konstanz 7 may 2008 [mode...William White
1) The search for efficiency in real economies, financial markets, and monetary policy led to greater productivity but also rising imbalances as efficiencies encouraged overreach.
2) While inflation was reduced during the "Great Moderation", credit growth and asset prices like housing rose rapidly, creating imbalances between sectors.
3) The current financial turmoil has deep roots in these imbalances and has serious implications for the financial system and broader economy.
The document discusses whether interest rate increases in 2021 could cause gold prices to plunge. It notes that real interest rates have a strong negative correlation with gold prices. While real rates could normalize somewhat as the economy recovers, there is also potential for inflation to rise due to money supply growth and pent-up demand, which could keep real rates low and support gold prices. The document concludes that several factors, including inflation expectations, money supply growth, and a dovish Fed, make higher inflation and continued gold price support more likely in 2021 than a 2013-style plunge.
This document summarizes the risks facing the modern global economic system. It outlines several macroeconomic risks such as uneven global growth and emerging market vulnerabilities. It also discusses risks from changes in monetary policy like the tapering of quantitative easing. Several negative internal factors are mentioned like the sovereign debt crisis in Europe and the property bubble in China. However, some positive internal factors may help like improved risk management and regulation. The document examines the potential effects of these risks, like reversals of capital flows to emerging markets and rising emerging market risk premiums. Charts show trends in government and private debt levels that could exacerbate problems. The conclusion discusses the possibility of high yield bond defaults and liquidity crises without reforms and coordination between institutions.
The arguments for fiscal as well as monetary rules in a monetary union aiming at low inflation, the main weaknesses in the Stability and Growth Pact, and proposals for its reform are reviewed. Our own proposal for reforming the SGP is put forward: a requirement for eurozone Member States to enact entrenched legislation which would forbid budgets that led to public debt exceeding a certain proportion of GDP. Countries which failed to enact such provisions or which rescinded them could not remain in the eurozone. This would solve the key “enforcibility problem” that the SGP faces, without centralizing fiscal power in the European Commission. However, effective reform proposals are unlikely to be politically acceptable, and the SGP is likely to continue to be a dead letter. This suggests that the EMU was implemented prematurely.
Authored by: Jacek Rostowski
Published in 2004
The Global Manufacturing Recession Tightens Its GripEdward Hugh
The document discusses the state of global manufacturing in August 2012. The key points are:
1) Manufacturing conditions deteriorated further in major economies like Japan, China, and the United States in August, tightening the grip of the ongoing global manufacturing recession.
2) Conditions also continued to weaken in Europe, the epicenter of the crisis, though slightly less than in July. Core European countries and Italy continued being affected.
3) There were few bright spots globally, with slow growth in places like Ireland, Indonesia, and Russia, but weakness elsewhere including India, Turkey, and Brazil.
4) More quantitative easing is likely in the US and Japan to boost growth amid weak data
The document discusses the debate around whether the world is experiencing secular stagnation, characterized by persistently weak growth despite low interest rates. It outlines arguments on both sides of the debate. Supporters of secular stagnation see recent declines in yields as evidence of an underlying trend of weak investment returns that prevent central banks from stimulating economies effectively through monetary policy. However, others argue recent weakness is primarily due to balance sheet adjustments following the financial crisis, which have occurred at different paces across countries. The recovery will be gradual as private sector balance sheets repair and banks increase lending. The path of the world economy depends on factors like the pace of balance sheet repair in the eurozone and potential new financial system restructurings in China.
The Japanese yen has strengthened against the U.S. dollar over the last 20 years due to historic trends. The yen continues to strengthen due to Japan's large trade surplus, low domestic interest rates, and high demand from foreign investors seeking assets outside of the U.S. and Europe. Foreign demand for Japanese assets is driven by factors like foreign reserve diversification and Japan's stable monetary policy compared to other nations. This increased demand and decreased supply of yen on world markets causes the yen exchange rate to rise.
Treasuries reaction to the global headwinds has been one that is reminiscent of other bouts of turbulence, as emerging markets outflows are channeled to haven assets such as the 10-year and 30-year treasuries.
Thiet ke Bao cao thuong nien -Vietcapital (vchf 2008)Viết Nội Dung
- The Viet Capital Healthcare Fund (VCHF) ended its first year of operations in 2008 with a net asset value of 511 billion VND, a 4% increase from its initial value despite a difficult market environment.
- During 2008, the VCHF invested over 30% of its assets in top pharmaceutical and hospital companies while protecting capital as markets declined sharply.
- Through prudent investment strategies, the VCHF was able to deliver positive returns while the Vietnam stock market and pharmaceutical index declined over 50% in 2008.
The Japanese Yen has strengthened against the US dollar due to net capital inflows into Japan. This is driven by Japan's large trade surplus, low returns on investments elsewhere, expectations of low US interest rates, and diversification away from the dollar and euro. Historically, fluctuations in the Yen are normal and the long-term trend has been strengthening against the dollar. The strong Yen poses challenges for Japan's export-driven economy.
Guy Haselmann provides commentary on his transition to OpenDoor Trading and his views on U.S. Treasuries. He believes technical factors have dominated Treasury markets in recent years more than fundamentals. The bifurcation between on-the-run and off-the-run Treasuries is damaging price discovery. He expects long-dated Treasuries to hit new low yields sooner than expected due to factors like central bank bond buying programs and capital flows into positive-yielding U.S. debt. Haselmann also shares his views that the U.K. will remain in the EU after the upcoming referendum and that political fear may be trying to prevent setting a precedent for exiting the EU.
Higher and more permanent inflation is positive for gold as an investment. The document discusses how gold is a proven long-term hedge against inflation. Recent high inflation numbers in the US could mean inflation remains higher for longer than expected. This environment of higher inflation and low interest rates supported by the dovish Federal Reserve is beneficial for gold prices. The recent cryptocurrency crash may also drive some investors to see gold as a more stable store of value compared to digital currencies.
The document summarizes the Central Bank of Turkey's (CBRT) monetary policy approach since 2010. [1] It has used an interest rate corridor and required reserve ratios to preserve price stability while safeguarding financial stability. [2] Between 2010-2011, during capital inflows, it widened the interest rate corridor and increased reserve requirements to control credit growth and the lira's appreciation; between 2011-2012, during outflows, it reversed these measures to alleviate volatility. [3] Going forward, the CBRT will continue to ensure monetary policy flexibility and predictability in light of changing global conditions to support sustainable growth with price stability.
The Japanese yen has strengthened against the US dollar over the past 20 years. This is due to net capital inflows into Japan from its trade surplus, low returns on investments elsewhere, expectations of US monetary policy, and diversification away from the dollar and euro. While a stronger currency hurts exports, Japan's trade surplus currently reinforces yen strength. In the long run, a stronger yen could lower both exports and imports.
What should investors do to protect against an imminent raise in interest rat...David Osio
The Federal Reserve has indicated it plans to raise interest rates for the first time in over 9 years as a preventative measure rather than in reaction to current economic conditions. This will affect emerging market debt securities denominated in US dollars the most. The document recommends reducing credit and duration risk in bond portfolios by focusing on maturities between 18-24 months and reallocating to longer-term securities at higher rates once hikes begin. It also suggests investing in consumer staples, healthcare, financials stocks and hedge funds for their ability to capture opportunities arising from rate hikes.
After A Soft Landing, China is Taking Off AgainQNB Group
The Chinese economy experienced a soft landing in 2012-2013 rather than the hard landing that was feared, and is now taking off again according to QNB Group. Recent economic indicators show stronger growth ahead, with GDP growth projected to be between 8.0-8.5% in 2014. China has succeeded in transforming its economy toward greater domestic consumption. Additionally, recent reforms announced aim to increase the role of free markets and encourage private investment, which will support long-term growth despite implementation challenges. Overall, QNB believes China is ready for accelerated growth in 2014 as its economy continues transforming from export-oriented to consumer-based.
This document discusses money, inflation, and their relationship. It defines money as an asset used to purchase goods and services that serves as a medium of exchange, unit of account, and store of value. The document outlines different monetary aggregates (M0, M1, M2) and explains how too much money growth can lead to inflation according to the quantity theory of money. While money and inflation are linked in the long run, the relationship breaks down in the short run, allowing monetary policy to influence output.
This document discusses the outlook for gold in 2021. It notes that gold performed well in 2020, driven by high risk, low interest rates, and positive momentum. In 2021, gold is expected to continue benefiting from the low interest rate environment and serve as an effective hedge against risks like inflation and market corrections. The economic recovery is anticipated to boost demand, though consumer demand may remain subdued in some regions. Central bank demand for gold is also expected to remain strong.
This document provides a comparative analysis of selected banks for the first quarter of 2010. It examines peer group review data from March 31, 2010 focusing on key financial highlights and metrics for the selected banks. In summary, the document analyzes and compares financial performance indicators for multiple banks using first quarter 2010 data.
At the beginning of 1990s the Soviet successor states started to transform their financial sectors to meet the needs of the emerging market economies.
Following a decade of transition, results differ. Although the Baltic States were able to build quite successful financial systems, in the CIS countries financial systems remain a major obstacle to economic growth. The hyperinflations of the early 1990s, the financial scandals that followed the collapse of monobank systems, and subsequent incomplete progress in constructing non-bank financial institutions and effective regulatory structures have had adverse consequences. These include weak bank balances sheets, high real interest rates, and poor access to capital for small enterprises and start ups. With a few exceptions, nontransparent regulation, inadequate disclosure frameworks, and weak protection of shareholders rights continue to limit investor participation in CIS financial markets. The absence of effective threepillar pension systems further limits the demand for domestic debt and equities.
Fortunately, there are signs of improvement. Bank lending and deposits are growing in many CIS economies, the proportion of bad debt in bank credit portfolio is falling, and lending and deposit interest rate spreads are diminishing. The solid economic growth recorded since 1999 in many CIS countries is helping memories of the 1998 financial crisis to fade, and stock exchanges in some CIS countries are currently at or near record levels. Financial systems in CIS economies may be moving toward the successful frameworks put in place in the new EU member states. However, because they have not benefited from the extensive foreign direct investment that recapitalised banks in Central Europe, financial stability in many CIS countries remains open to question.
Authored by: Elena Golodniuk
Published in 2005
The document discusses the nature of bank deposits in Canada. It provides details about the Canadian banking environment and the different types of banking institutions. It explains that bank deposits refer to money placed in a bank for safekeeping and includes accounts like savings, checking, and money market accounts. The document also discusses Canadian monetary policy and how the Bank of Canada uses tools like open market operations and interest rates to indirectly control the money supply and influence economic activity and inflation. However, monetary policy has limitations and trade-offs in achieving different economic goals simultaneously.
2008 05 white presentation at 39th konstanz seminar konstanz 7 may 2008 [mode...William White
1) The search for efficiency in real economies, financial markets, and monetary policy led to greater productivity but also rising imbalances as efficiencies encouraged overreach.
2) While inflation was reduced during the "Great Moderation", credit growth and asset prices like housing rose rapidly, creating imbalances between sectors.
3) The current financial turmoil has deep roots in these imbalances and has serious implications for the financial system and broader economy.
The document discusses whether interest rate increases in 2021 could cause gold prices to plunge. It notes that real interest rates have a strong negative correlation with gold prices. While real rates could normalize somewhat as the economy recovers, there is also potential for inflation to rise due to money supply growth and pent-up demand, which could keep real rates low and support gold prices. The document concludes that several factors, including inflation expectations, money supply growth, and a dovish Fed, make higher inflation and continued gold price support more likely in 2021 than a 2013-style plunge.
This document summarizes the risks facing the modern global economic system. It outlines several macroeconomic risks such as uneven global growth and emerging market vulnerabilities. It also discusses risks from changes in monetary policy like the tapering of quantitative easing. Several negative internal factors are mentioned like the sovereign debt crisis in Europe and the property bubble in China. However, some positive internal factors may help like improved risk management and regulation. The document examines the potential effects of these risks, like reversals of capital flows to emerging markets and rising emerging market risk premiums. Charts show trends in government and private debt levels that could exacerbate problems. The conclusion discusses the possibility of high yield bond defaults and liquidity crises without reforms and coordination between institutions.
The arguments for fiscal as well as monetary rules in a monetary union aiming at low inflation, the main weaknesses in the Stability and Growth Pact, and proposals for its reform are reviewed. Our own proposal for reforming the SGP is put forward: a requirement for eurozone Member States to enact entrenched legislation which would forbid budgets that led to public debt exceeding a certain proportion of GDP. Countries which failed to enact such provisions or which rescinded them could not remain in the eurozone. This would solve the key “enforcibility problem” that the SGP faces, without centralizing fiscal power in the European Commission. However, effective reform proposals are unlikely to be politically acceptable, and the SGP is likely to continue to be a dead letter. This suggests that the EMU was implemented prematurely.
Authored by: Jacek Rostowski
Published in 2004
The Global Manufacturing Recession Tightens Its GripEdward Hugh
The document discusses the state of global manufacturing in August 2012. The key points are:
1) Manufacturing conditions deteriorated further in major economies like Japan, China, and the United States in August, tightening the grip of the ongoing global manufacturing recession.
2) Conditions also continued to weaken in Europe, the epicenter of the crisis, though slightly less than in July. Core European countries and Italy continued being affected.
3) There were few bright spots globally, with slow growth in places like Ireland, Indonesia, and Russia, but weakness elsewhere including India, Turkey, and Brazil.
4) More quantitative easing is likely in the US and Japan to boost growth amid weak data
The document discusses the debate around whether the world is experiencing secular stagnation, characterized by persistently weak growth despite low interest rates. It outlines arguments on both sides of the debate. Supporters of secular stagnation see recent declines in yields as evidence of an underlying trend of weak investment returns that prevent central banks from stimulating economies effectively through monetary policy. However, others argue recent weakness is primarily due to balance sheet adjustments following the financial crisis, which have occurred at different paces across countries. The recovery will be gradual as private sector balance sheets repair and banks increase lending. The path of the world economy depends on factors like the pace of balance sheet repair in the eurozone and potential new financial system restructurings in China.
The Japanese yen has strengthened against the U.S. dollar over the last 20 years due to historic trends. The yen continues to strengthen due to Japan's large trade surplus, low domestic interest rates, and high demand from foreign investors seeking assets outside of the U.S. and Europe. Foreign demand for Japanese assets is driven by factors like foreign reserve diversification and Japan's stable monetary policy compared to other nations. This increased demand and decreased supply of yen on world markets causes the yen exchange rate to rise.
Treasuries reaction to the global headwinds has been one that is reminiscent of other bouts of turbulence, as emerging markets outflows are channeled to haven assets such as the 10-year and 30-year treasuries.
Thiet ke Bao cao thuong nien -Vietcapital (vchf 2008)Viết Nội Dung
- The Viet Capital Healthcare Fund (VCHF) ended its first year of operations in 2008 with a net asset value of 511 billion VND, a 4% increase from its initial value despite a difficult market environment.
- During 2008, the VCHF invested over 30% of its assets in top pharmaceutical and hospital companies while protecting capital as markets declined sharply.
- Through prudent investment strategies, the VCHF was able to deliver positive returns while the Vietnam stock market and pharmaceutical index declined over 50% in 2008.
The Japanese Yen has strengthened against the US dollar due to net capital inflows into Japan. This is driven by Japan's large trade surplus, low returns on investments elsewhere, expectations of low US interest rates, and diversification away from the dollar and euro. Historically, fluctuations in the Yen are normal and the long-term trend has been strengthening against the dollar. The strong Yen poses challenges for Japan's export-driven economy.
Guy Haselmann provides commentary on his transition to OpenDoor Trading and his views on U.S. Treasuries. He believes technical factors have dominated Treasury markets in recent years more than fundamentals. The bifurcation between on-the-run and off-the-run Treasuries is damaging price discovery. He expects long-dated Treasuries to hit new low yields sooner than expected due to factors like central bank bond buying programs and capital flows into positive-yielding U.S. debt. Haselmann also shares his views that the U.K. will remain in the EU after the upcoming referendum and that political fear may be trying to prevent setting a precedent for exiting the EU.
Higher and more permanent inflation is positive for gold as an investment. The document discusses how gold is a proven long-term hedge against inflation. Recent high inflation numbers in the US could mean inflation remains higher for longer than expected. This environment of higher inflation and low interest rates supported by the dovish Federal Reserve is beneficial for gold prices. The recent cryptocurrency crash may also drive some investors to see gold as a more stable store of value compared to digital currencies.
The document summarizes the Central Bank of Turkey's (CBRT) monetary policy approach since 2010. [1] It has used an interest rate corridor and required reserve ratios to preserve price stability while safeguarding financial stability. [2] Between 2010-2011, during capital inflows, it widened the interest rate corridor and increased reserve requirements to control credit growth and the lira's appreciation; between 2011-2012, during outflows, it reversed these measures to alleviate volatility. [3] Going forward, the CBRT will continue to ensure monetary policy flexibility and predictability in light of changing global conditions to support sustainable growth with price stability.
The Japanese yen has strengthened against the US dollar over the past 20 years. This is due to net capital inflows into Japan from its trade surplus, low returns on investments elsewhere, expectations of US monetary policy, and diversification away from the dollar and euro. While a stronger currency hurts exports, Japan's trade surplus currently reinforces yen strength. In the long run, a stronger yen could lower both exports and imports.
What should investors do to protect against an imminent raise in interest rat...David Osio
The Federal Reserve has indicated it plans to raise interest rates for the first time in over 9 years as a preventative measure rather than in reaction to current economic conditions. This will affect emerging market debt securities denominated in US dollars the most. The document recommends reducing credit and duration risk in bond portfolios by focusing on maturities between 18-24 months and reallocating to longer-term securities at higher rates once hikes begin. It also suggests investing in consumer staples, healthcare, financials stocks and hedge funds for their ability to capture opportunities arising from rate hikes.
After A Soft Landing, China is Taking Off AgainQNB Group
The Chinese economy experienced a soft landing in 2012-2013 rather than the hard landing that was feared, and is now taking off again according to QNB Group. Recent economic indicators show stronger growth ahead, with GDP growth projected to be between 8.0-8.5% in 2014. China has succeeded in transforming its economy toward greater domestic consumption. Additionally, recent reforms announced aim to increase the role of free markets and encourage private investment, which will support long-term growth despite implementation challenges. Overall, QNB believes China is ready for accelerated growth in 2014 as its economy continues transforming from export-oriented to consumer-based.
This document discusses money, inflation, and their relationship. It defines money as an asset used to purchase goods and services that serves as a medium of exchange, unit of account, and store of value. The document outlines different monetary aggregates (M0, M1, M2) and explains how too much money growth can lead to inflation according to the quantity theory of money. While money and inflation are linked in the long run, the relationship breaks down in the short run, allowing monetary policy to influence output.
This document discusses the outlook for gold in 2021. It notes that gold performed well in 2020, driven by high risk, low interest rates, and positive momentum. In 2021, gold is expected to continue benefiting from the low interest rate environment and serve as an effective hedge against risks like inflation and market corrections. The economic recovery is anticipated to boost demand, though consumer demand may remain subdued in some regions. Central bank demand for gold is also expected to remain strong.
This document provides a comparative analysis of selected banks for the first quarter of 2010. It examines peer group review data from March 31, 2010 focusing on key financial highlights and metrics for the selected banks. In summary, the document analyzes and compares financial performance indicators for multiple banks using first quarter 2010 data.
“A COMPARATIVE STUDY BETWEEN PRIVATE SECTOR BANKS AND PUBLIC SECTOR BANKS WIT...Deepanjan Das
The document discusses the history and evolution of banking in India. It describes how banks started in India in the late 18th century and were nationalized in 1949. It outlines the three phases of banking in India - the early phase, nationalization phase, and reforms phase from 1991 onward. It provides details about the Reserve Bank of India and its functions as the central bank. [END SUMMARY]
Comparative Analysis of Non Performing Assets of Public Sector, Private Secto...Gaurav Godwani
This document is a project report submitted in partial fulfillment of a Bachelor of Commerce degree. It provides an introduction to non-performing assets (NPAs) in the Indian banking system. It defines NPAs and discusses how assets are classified as standard, sub-standard, doubtful or loss based on the number of days past due and likelihood of recovery. The types, reasons, impacts and early symptoms of NPAs are also examined. The document then outlines the procedures for NPA identification and resolution in India, before discussing the objectives, methodology and overall findings of the research project.
A comparative analysis of public and private sector banks in indiaAlexander Decker
This document discusses a study comparing customer satisfaction levels between public and private sector banks in India. It provides background on the banking industry and importance of customer satisfaction. The study was conducted through a survey of 160 bank customers in Chandigarh city. Statistical tests were used to analyze differences in customer perceptions of service quality between public and private banks. The results showed that private sector banks placed more emphasis on relationship building and had better infrastructure, leading to higher levels of customer satisfaction compared to public sector banks.
This document is a project report on comparing the non-performing assets of private and public sector banks in India. It includes an introduction describing the growth of NPAs in Indian banks and outlines the objectives of the study. The methodology section notes that descriptive and comparative research methods will be used, analyzing secondary data from selected private and public sector banks. The report appears to analyze trends in NPAs, attempt to identify reasons for high NPAs, and evaluate steps taken to manage and reduce NPAs.
This document provides background information and context for a study examining the determinants of banking crises in Nigeria. It begins with an introduction that discusses the important role of banks in economic growth and development. However, it notes that banking nowadays faces many challenges that can lead to crises.
The document then reviews literature on past banking crises in Nigeria. It discusses factors that previous studies have identified as contributing to crises, such as lack of transparency, capital inadequacy, and non-performing loans. It also outlines the objectives, research questions, and hypotheses that will guide the current study.
Finally, the document provides operational definitions of key terms and concludes Chapter 1 by discussing the significance, scope, and limitations
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2. GLOBAL FINANCIAL CRISIS: COMPARATIVE
ANALYSIS OF THE DIFFERENCES IN THE IMPACT
ON UK AND KENYAN BANKS
BY
JOANNE ANYANGO OGOYA
Presented as part of the requirement for the award of MBA Degree
in Finance
within the Postgraduate Programme at
University Of Gloucestershire
February, 2011
3. DECLARATIONS.
This Dissertation is a product of my own work and is not the result of anything done in
collaboration.
Student Signature ________________________________
Date___________________________________________
I agree that this Dissertation may be available for reference and photocopying, at the
discretion of the University.
Student Signature_________________________________
Date___________________________________________
JOANNE ANYANGO OGOYA.
4. ABSTRACT.
This research compares the effects of the 2007-2009 global financial crisis on Kenyan
and UK banks; in particular Kenya Commercial Bank (KCB), Kenya and Northern Rock Bank,
UK. These two countries were chosen because of their diverse difference in financing decisions
prior to the crisis as well as the differences in the way banks in Kenya and UK are regulated and
supervised. Kenya Commercial Bank was chosen on the Kenyan side because during the
period of the crisis the bank was expanding rapidly; opening branches in the East African
region. On the other side, Northern Rock on the UK side suffered massive losses as the
banking crisis progressed and was nationalised as a result. A comparative analysis as to why
this glaring difference was seen is therefore done.
The analysis was done on five financial ratios where correlation and regression
statistical tools were employed to develop strengths of relationships with liquidity and data on
profitability and adequate capital analysed qualitatively.
This research had two objectives. For the first objective it was identified that the over
indulgence of the Northern Rock in subprime mortgage lending (loans) as a means of liquidity
creation led to depleting of the same leading to a credit crunch while KCB which had no such
exposure performed better. For the second objective it was concluded that better banking
regulation and supervision in terms of adherence to capital reserve requirements could have
prevented the banking crisis from being as severe as it was.
5. ACKNOWLEDGEMENT.
First and foremost I would like to express my heartfelt gratitude to my supervisor- Mr. Ernest
Kapaya whose ceaseless support and most appreciated guidance through email and
supervisory sessions from the beginning of this research right through to the end has enabled
me to achieve my overall study objectives at University Of Gloucestershire (UoG). I would not
have done it without you.
My regards goes to the entire teaching fraternity and other members of the London School of
Commerce group (LSC) for their continued support, encouragement and directives during my
class work. All your efforts cannot go unnoticed.
It is with the deepest of gratitude and without any reservation that I acknowledge my beloved
Mother –Pamela Adhiambo Gogo. Your incessant prayers, continuous financial support and
words of encouragement throughout my studies in the UK, gave me strength to achieve my
academic goals and I owe this success to you. I will not forget my two sisters Ida and Daisy
Ogoya who fervently put me in their prayers. To my late Father- Dennis Omollo Ogoya, your
desire to see me excel academically I cannot forget; your spirit continually inspired me. May you
rest in eternal peace. My Family, you are my pillar of strength.
I cannot mention you all, but to all my friends both in the UK and Kenya I express my special
thanks for your support, encouragements and for making my experience in the UK a truly
international one. Special mention; Noreen Nipher and Jude T.Onyango (Kenya) and Zenny
Tran Trang, Jacqueline Hagila and Nilesh Parab (UK)
Last but indeed not the least; I would like to thank my Heavenly Father, GOD ALMIGHTY, who
has been my source of strength in the course of my studies. To Him I am grateful for the gift of
perfect health, spiritual guidance and inner peace during this period of my study at University of
Gloucestershire. To Him be the glory, to Him be the honour and to Him be the power.
6. CHAPTER ONE.
INTRODUCTION.
My research is on the analysis of how differently the UK and Kenyan banks were
affected by the global financial crisis and why this was so and a theoretical analysis on the role
of financial regulators in the banking crisis in both countries. The analysis is carried out on the
Northern Rock Bank, UK and the Kenya Commercial Bank, Kenya.
1.1 BACKGROUND OF THE STUDY.
The global financial crisis has fuelled many an argument among financial
econometricians and especially concerning the banking system in many parts of the developed
world. The crisis which began in the US in the summer of 2007 as a result of over-
aggressiveness in mortgage lending by banks, saw banks termed as ‘too big to fail’ either
liquidated, acquired or merged with other institutions to restore stability in the banking system.
The US and UK governments have handed out bail outs to several banks in an attempt to
regain customer confidence in the system and avoid bank runs. An example closer home would
be the Northern Rock bank currently on full-scale nationalisation after several bailouts in 2008
and failed attempts by the UK government to find a buyer in the private sector.
The effects of the 2007-2009 global financial crisis, as a result of the banking crisis, are
still being felt across the world particularly in developed nations such the UK and the US. Many
economic sectors have shown steady albeit slow improvements since mid 2009 when a light at
the end of the economic revival tunnel surfaced in economies of the world. This however cannot
be said of the banking industry. At the centre of the financial crisis, the banking sectors in many
parts of the world are still struggling to bounce back threatening to create yet another economy
crash. A case in point would be –at the time of doing this research-the threat of collapse of the
EU as a result of the failing banking industry requiring bailouts from the European Central Bank,
in Greece and Ireland with a high possibility of the trend spreading to Spain and Italy.
A question many people are asking is where were the regulators when their very rules
were being broken? Financial regulators sat back and watched as banks over-indulged
themselves in the process of securitisation becoming even more and more leveraged. The
illusion that all was ok because of the build up of assets value in the banks’ balance sheets,
which in fact could not be liquidated at short notice, was overlooked by the very regulators who
set the rules on capital reserve requirements. However efficient a market is, it is very difficult to
predict securities prices but caution by the policy makers should have been exercised early
enough to stop the contagion effect.
7. This research however does not investigate the effects thereof of the banking crisis but
introduces, for comparison purposes, a part of the world that went almost untouched by the
crisis: Africa. It is noted with great interest that in most parts of Africa, if not all, banks (owned
locally) carried on business as usual almost oblivious of the financial crisis. It is not to be
assumed that banks operating in Africa went completely unscathed by the global financial crisis
that was fuelled by the subprime mortgage crisis in the USA in 2007. African banking sector in
more ways than one have significant dependence on developed economies which include but
are not limited to, offshore investments, deposits held with banks abroad and long-term
borrowing from banks abroad.
This research seeks to therefore investigate how differently the banks in Africa- and for
clarity and precision Kenyan Banks were affected by the global financial crisis as compared to
the Banks based in UK and why this is so, in terms of banking regulations and supervision.
1.2 STATEMENT OF THE PROBLEM.
Just like in the past financial crises, the 2007-2009 financial crisis created a need for
liquidity across business and other economic entities-more relevant to this research-
commercial banks. The exposure of commercial banks to asset-backed securities saw them
struggle to meet day-to-day need for funds for operations and investments as their prices shot
up at the height of the boom. These toxic assets made their way into the banks’ balance sheet
creating an illusion that all was well while in the real sense the highly illiquid mortgage-based
securities made banks more leveraged than would normally be acceptable.
UK banks who had heavily invested in the toxic, highly illiquid securities originating from
the US housing market, found themselves with unbalanced capital structures. When funding of
day-to- day business activities became tight and interbank lending and borrowing not an option
since interest rates soared, banks such as the Northern Rock in UK sought government bailouts
to avoid probable collapses.
It is argued that even banks that had minimal or non-existent exposure to the asset
based securities felt the pinch of the crisis due to the panic and lack of confidence by depositors
and investors as a result of perceived reduction in asset quality: a situation that caused bank
runs further worsening banks’ liquidity problems.
On the contrary as UK banks were deteriorating, the Kenyan Banking industry was
experiencing tremendous growth comparative to global markets. As opposed to banks in other
8. parts of Africa such as in Nigeria and South Africa, Kenya’s trading in foreign markets was (is )
low and as such is trading in foreign securities.
The problem the UK banks faced however cannot be solely attributed to the over-
indulgence in the mortgage-based securities but in fact the enforcement and reviews of banking
regulations that were not adhered to by financial regulators as soon as signs of liquidity trouble
reared its head in many a financial institutions.
The difference therein lies in the different capital structures adopted by the banks up to
the run up to the 2007 housing boom as we shall see in the following chapters. However, the
reason why the difference was so glaring in my view would be because of lack of strict
adherence or review, for that matter, of regulatory structures by financial regulators in the UK
and sharp and timely reviews of foreign asset investments by the Central Bank of Kenya.
1.3 PURPOSE OF THE STUDY.
Having worked for the Kenya Commercial Bank in the period October 2008 to
November 2009, I noticed with growing curiosity that while the banking industry in the
developed nations were struggling to keep afloat, Kenya’s own was experiencing robust
expansion activities within a steady growing economy. Kenya Commercial bank for example
was at the time spreading its branches across Kenyan borders as well as within by opening
many new branches; a trend witnessed by other Kenyan-owned banks as well such as Co-
operative Bank of Kenya and Equity Bank of Kenya.
The last one year that I have been in the UK has enabled me to see the other side of
the coin: distressed banking sector. It is for the above reason that I have decided to carry out a
comparative research on UK and Kenyan Banks to analyse how differently the financial crisis
affected then them and why.
1.4 SIGNIFICANCE OF THE STUDY.
The banking system is a very core and crucial component of the economy and the
stability of the financial sector hugely rest on the stability of the banks. This research discusses
and analyses the difference in the effects of the crisis on Kenyan and UK banks and points out
the importance of sound banking regulations not only on paper but in practice as well.
This research and the conclusions therein, is therefore important for the generation of
further comparative research on the subject of sound capital structure policies, the disparity
9. which exists among banks in different economies of the world in terms of business financing
and the importance of adherence to banking regulations.
1.5 RESEARCH OBJECTIVES.
The broad aim of this research is to examine how differently banks in Kenya and UK
were affected by the global financial crisis and the main reason, according to the researcher,
why this was so. To achieve this goal, the following objectives are addressed throughout the
research:
I. Determine the difference in liquidity creation by Kenyan and UK banks just before the
crisis and the contribution of the liquidity creation on the banks’ fragility.
II. Determine the role played, if any, by the financial regulators in the banking crisis both in
the UK and Kenya with regards to changing capital reserve requirements
The research seeks to explore the difference between participating banks in terms of
capital structure and bank regulation and therefore data sought to come to a conclusion will
majorly be derived from the financial statements of the participating banks within the period
2006 to 2009 plus specific references to data held by the Central banks of the two countries- UK
and Kenya- on the regulation policies and adherence.
1.6 SCOPE OF THE STUDY.
This research is a comparative research that looks to compare and analyse how
different the banks in UK and Kenya were affected by the global financial crisis and banking
regulatory and supervisory. For the purpose of achieving this goal, Kenya commercial Bank of
Kenya is chosen from the Kenyan side. This is because the bank is locally owned and saw
tremendous growth and performance during the crisis as compared by other Kenyan locally-
owned banks. From UK, I have chosen to analyse the nationalised Northern Rock bank which
saw UK witness its first bank run in over a century and was presumably hardest hit by the crisis
in the UK. These two choices will be able to give results that are comparable and therefore
accurate conclusions.
10. 1.7 LAYOUT OF THE STUDY.
So as to achieve the objectives set out above this research is laid out as follows.
Chapter one above gives the introduction the background of the study, statement of the
problem, purpose of the study, significance, research objectives and scope of the study.
Chapter two then follows with a general discussion on the banking crisis beginning with a
discussion on the global financial crisis followed by its development into the banking crisis
where Kenyan and UK banks are looked at separately. The chapter ends with a discussion on
banking regulation and capitalism in both countries.
Chapter three then defines the methodology used in this research and tools adopted for the
analysis of data collected in order to meet objectives set.
In Chapter four, data collected is presented and analysed. Discussions on each objective are
then given.
Following the data analysis, conclusions and recommendations come in chapter five.
Finally, chapter Six is a reflection of the researchers experience while carrying out this research.
11. CHAPTER TWO
LITERATURE REVIEW.
2.1 THEORETICAL BACKGROUND.
2.1.1 Origins of the Global Financial Crisis.
To understand the real causes of the recent global financial crisis, a trip back into the
past is inevitable. It is believed that or rather seen to be a trend that with every lending boom, a
financial crisis always follows. This trend is explained by the fact that in recent time-post-war
period- financial systems and especially those of developed economies have seen tremendous
growth in leveraging, encouraged by policy makers who did not move to deleverage the
financial systems. This phenomenon drove Schularick and Taylor (2009) to ask the question,
‘are financial crisis “credit booms” gone wrong?’ (pg 17) In their analysis of leverage cycles and
financial crisis 1870-2008, they concluded that indeed the phenomenon is not a new one and
that credit booms are propagators of financial crisis.
The 2007-2009 global financial crisis was not any different in that it followed a boom in
the housing market. In the late 1990’s and into the millennium, as the tech-bubble burst the US
government, in a bid to restore investor confidence in the housing market, reduced interest
rates considerably which reached a low of 1% in 2004 (Nevsvetailova, 2010: pg 26). The US
government was not wrong at least at that time. The move attracted a huge number of investors
into the market and a wave of mortgage refinancing.
It is at this point that questions should have been raised on the fast growth of the
housing market amid a not so great an economy. When the US housing market was
experiencing sharp drops in the interest rates allowing the number of mortgages taken to sky-
rocket, the rest of the economy and particularly employment had been on a downward tread. As
early as 2002, speculations from economists had started doing the rounds on the strength of
such a boom at such a time. According to Bernasek (2002), it was a weird scenario that as the
economy slumped the property market zoomed with house sales reaching all-time records and
she asserts that that is ‘not exactly what you’d expect when around two million people were
losing their jobs.’
12. However it might have been too early to look closely at the matter then as the US
government was hopeful that inflation would stay low keeping interest rates also subdued. That
was not the case.
Bernasek (2002) documents how in the eyes of economists including Levy and Schiller
the housing bubble would play out: ‘As interest rates rise, housing becomes less affordable and
demand slows, prices can’t be sustained and may even fall...leading to more homes on the
market.’ A scenario that played out as the housing boom came to its peak in 2007. But what
really happened in between the lines that caused a US-housing market problem to spill onto the
rest of the economies of the world?
The following paragraphs give a chronology of events that has led to a financial crisis
whose severity can only be compared to the great depression of 1929.
2.1.2 Subprime crisis in America.
In an attempt to do away with usury protection, the US government lowered interest
rates which in turn encouraged the rise of subprime mortgages; mortgages lent to borrowers
whose credit quality were below the threshold required for prime home loans (Allen, 2009: pg
114; Kamil et al, 2010).
The chart 1 below shows the rise and fall of the interest rates in the US within the
period January 2002 and August 2007. This period covers the housing boom period where
interest reached a low of 1% in 2004 and the increasing interest rate period up to the time when
it is documented that the housing boom bubble had burst- summer of 2007.
13. Chart 1: US Benchmark Interest Rates.
Source: Tradingeconomics.com
The subprime market was not a strange activity of the Wall street- as it had began albeit
minimised in the mid-90s – but it was strengthened by the US government just as the tech-
bubble burst.
It is every nation’s goal to have its citizens own homes. Homeownership portrays a
nation’s ability to contribute to building a healthier society: a sense of participation. (Shiller;
2008 pg 5) However, a nation can be too concerned with building the economy, relishing the
tremendous growth and forget to take a critical look at risks involved and how to avoid a
downfall. The US subprime market fell into the trap. By over-promoting homeownership, the US
government allowed a majority of people who would have never dreamt of owning a home in
America, because of its association with the well off, to suddenly be able to get a mortgage and
even go back for refinancing. Over the period up to the summer of 2007 homeownership in the
US increased by a good 3.2 per cent as many Americans scrambled to be part of the US dream
of owning a home.
As interest rates went down and mortgage seekers increased, the US housing market
became ripe for more and more investors to build new homes as it was envisioned the house
prices would continue to rise for a long time to come. As credit ratings relaxed and regulators
turned a blind eye, mortgage lenders also saw this as an opportunity to gain from the boom by
aggressively lending housing loans to all and sundry.
14. The process of lending home mortgages to people who would normally not be able to
afford a mortgage continued to a peak in 2007 and the US government decided it was time to
raise the interest rates to be able to compete more effectively with the rest of the world and
especially China whose economy was growing at a high rate. At this point in time, due to the
increased consumer confidence in the housing market, borrowers had taken more refinancing
on top of their original ones enlarging their loan portfolios that as they would learn later worth
more than their homes. As interest rates went up, mortgage rates went up to higher levels as
the initial teaser period ended and that is when subprime borrowers began defaulting on their
loans. (Shiller 2008) House prices nose dived and confused borrowers were left with mortgage
repayments higher than their now worthless homes which they could no longer service due to
the constraints on their monthly salaries. As a result, there was a rapid increase in mortgage
defaults as borrowers could no longer keep up with the monthly repayment obligations and
especially, as earlier mentioned, among the subprime mortgages. Foreclosures rate also went
up sharply leaving lenders with no way to regain their losses. ( Kamil et al 2010)
Needless to say, consumer confidence in the housing market went down considerably
due to the sudden increase in the interest rates. The number of mortgages taken went down
and lenders efforts to resell homes from the foreclosures bore no fruit. Supply increased sharply
in the market given that over 70% of the mortgages were subprime. This in turn drove down
house prices and lenders, therefore, were left with credit inadequacies which ultimately led to
the much talked about credit crunch of the century.
2.2 THE BANKING CRISIS.
2.2.1 Liquidity: Lack Of it in the Banking Crisis
Up until towards the end of the 1960s commercial banks in most of the developed world
held more than 25 per cent of their assets as liquid assets. These mainly comprised of treasury
bills and government bonds that could easily be sold and were less likely affected by huge price
fluctuations. However in recent times there has been a declining trend where banks have taken
to holding of illiquid assets. Furthermore, the liability structure of banks has changed from the
traditional depositor funding to overdependence in short-term credit market and the wholesale
market funding which are more susceptible to volatility of the price changes in the stock market
and as such stability of the banks in terms of liquidity can no longer be guaranteed.
The banking sector holds a very important position in any economy and its soundness
is critical for the soundness of any financial market and the financial service sector as a whole.
Traditionally, the banks’ major role is the provision of liquidity by playing an intermediary role:
15. taking in deposits from people with no immediate use for cash (savers) and lending the funds in
the form of loans to those in immediate need (borrowers).
To carry out this basic function effectively, banks need to hold large balances that are
typically made up of liquid assets so as they are able to provide liquidity as it is demanded. As
argued by Washyap et al (2002), ‘if deposits withdrawals and commitment takedowns are
imperfectly correlated the two activities (i.e. deposit taking and lending) can share the costs of
the liquid-assets stock pile.’ By maintaining large balances of liquid assets, banks can at short
notice provide liquidity when demanded by savers who would want to withdraw their cash. The
balances should be able to cover-up for the differences that might occur between a bank’s
lending commitment such as bad debts caused by loan repayment defaults and, say, bank runs.
When a bank fails in this primary duty, when it can no longer provide liquidity and therefore fail
to finance its own obligations and investments then it is as good as insolvent. When more than
one large bank in an economy or economies for that matter, fail in the provision of liquidity on
demand, the whole financial system breaks down as the banking system is the fabric that holds
the economy together.
Such is what happened in the 2007-2009 global financial crisis that emanated from the
subprime crisis in the US. The banks active participation in risky illiquid mortgage based assets
took a turn for the worst when the housing bubble burst and a large chunk of these toxic assets
rested in many of the banks’ balance sheets leading to constrains in the flow of cash. A credit
crunch followed and as it is, grew in to a global banking crisis. The financial crisis was as a
result inevitable as the banking system was compromised as noted by Pararbasio as cited by
Waweru and Kalani (2009) that ‘the best warning signs of a financial crisis are proxies for the
vulnerability of the banking and corporate sectors.’
The 2007 – 2009 financial crisis has similar characteristics with past crises in that there
was a need for liquidity across all sectors of the economy; what is commonly known as credit
crunch or a liquidity crisis. (Nesvetailova, (2010) and Mara (2010))
This financial crisis was however different from the rest as it was centred in the banking
system. Other sectors including businesses and the corporate sectors were also significantly
affected but the banks arguably suffered massive credit losses in comparison to the other
sectors.
2.2.2 Role of Securitization in the Banking Crisis.
16. Mathews and Tlemsani (2010) compare the build-up to the subprime crisis to the
biblical Tower of Babel which historically collapsed at its highest point to mere rubbles. They
attribute the failure of the subprime lending practice primarily to a process they refer to as
“layering”- commonly known as securitization.
Used as a diversification strategy in spreading risk to minimise damages caused in the
case of a fall out, securitisation can be defined as a process of bundling up mortgages by
financial institutions and selling them to third parties as securities.
Securitization is not a new phenomenon. Financial institutions including investment and
commercial banks have been employing securitization in their business activities as early as the
early 90’s. The process that is securitization was coined purposefully to help institutions raise
funds at reduced financing costs having diversified the risks that are involved such that in case
of a financial shock, a bigger combination of investors would absorb the risks rather than just
one. (Muradoglu:2010). According to Schwarcz (1994), ‘the goal of securitization, therefore, is
to obtain low cost capital market funding by separating all or a portion of an originator’s
receivables from the risks associated with the originator.’ In other words risk is supposedly
shifted from the originator’s balance sheet to the security vehicles that traded in the debt-related
securities including commercial mortgages securities, residential mortgage securities and
securities made out of credit loans.
In the last two decades prior to the banking crisis, securitization was supposed to be a
simple process. What then really happened that has caused econometricians to identify the very
process that not so long ago presented welcome benefits to the financial system, as the key
player of the banking crisis?
In their comparison of the Islamic process of securitization to how the rest of the world
goes about the process, Kamil et al (2010) argue that what really happened in the 2008 banking
crisis was a case of risk shifting as opposed to how securitization originally was supposed to do:
risk sharing. In their comprehensive analysis they claim that risk sharing in securitization, as it is
done in the Islam world, is supposed to absorb any systemic risks that threaten, at least to a
manageable level, contrary to the explode that was the banking crisis in the developed
economies.
The preliminary steps involved in the securitization process include, as was earlier
mentioned, bundling up mortgages into a pool which would later be divided into different
tranches of mortgage based securities (MBOs) of different levels of risks and sold to investors
through shadow banks.
17. In the recent banking crisis banks over-indulged themselves in the process of
securitization which majorly included the risky mortgage-based assets from subprime
mortgages. Over 70 per cent of the mortgages awarded in the US were subprime and over 60
per cent of these were in turn securitized (Muradoglu: 2010). The process did not stop at the
first layer of bundling. Further repackaging took place, divided into another layer of tranches and
sold again as repackaged securities. To fund these purchases, more funds were borrowed from
the money markets to further gain from this lucrative business and the layer of leveraged
portfolios grew higher and higher and even more and more risky as these were origins of
subprime mortgages.
Banks created Special Purpose Vehicles (SPVs) and transferred the repackaged and
newly divided portfolios to these off- balance vehicles. As a result they shifted risk from their
own balance sheets and in turn appearing as assets in their own.
The complicated process continued, investors becoming more and more leveraged and
these risky securities becoming even more hidden and difficult to trace: the more reason why,
as the subprime bubble burst, it was difficult for asset valuation to be done by the banks and all
those involved.
When interest rates went up and massive number of borrowers started to default, prices
of houses started going down and the asset based securities’ value dived, as consumers had
lost confidence in the housing market and retrospect the financial markets. These toxic and now
highly undervalued asset-based securities had by then found their way into the banks’ balance
sheets and since funding by investors were borrowed from the money-markets that were now
due for payment, these assets needed to be sold to meet the short-term obligations. But due to
the uncertainty surrounding these assets and the fact that they were difficult to trace, the only
option for the bankers was to undervalue them. As a result banks began facing liquidity
shortages. This is what happened to compromised investments banks such as the now-defunct
Bear Stearns whose hedge funds had over-indulged themselves in mortgage-related securities.
(Zandi 2009: pg 22). Cash flow had become a problem and thus the credit crunch-the banking
crisis began to sting.
2.3 THE GLOBAL SPREAD OF THE BANKING CRISIS.
What started as a problem for the US soon found its way into the global market and
especially in developed markets such as the UK and major cities in Europe such as Germany.
Though the events that followed the fall of the subprime market in the US took the unsuspecting
world by storm, it was by no means a surprising turn of events.
18. With tremendous technological advances into the decade prior to the financial crisis,
globalisation had already taken root leading to a highly integrated international structure of
financial services as well as the world markets. (Muradoglu, 2010). Such integration come in the
form of international trade, foreign exchange and the inter-correlation of banking systems that
allowed capital to flow freely internationally. Banks in turn became too interconnected with
transaction costs across borders becoming cheaper and cheaper making it easier for banks to
sell their products across the globe. The concept of international banking began in the 1970’s
but was heightened with the growth in competition between firms as well as technology
advances.
The years within which the housing boom in the US flourished saw many banks in
countries in the developed world, especially, take advantage of the opportunity to gain from
cheap raising of capital. A large inflow of capital into the US was particularly seen from
countries in Europe who by and large were the most affected by the credit crunch.
Banks such as Northern Rock(currently nationalised by the UK government); BNP
Paribas in France and IKB, WestLB, bayernLB and SachenLB(Failed banks) InGermany,
invested a large fraction of their capital in the US subprime market. Their over-indulgence in the
securitisation innovation saw their capital reserves, as required by respective Central Banks,
grow thinner and thinner making them more and more vulnerable to sudden shocks as was
witnessed in the crisis.
As has been witnessed in previous financial crises, a common characteristic of financial
crises according to Allen (2009) is a large financial capital net inflow from around the globe that
tends to drive up housing and equity prices. In a boom, the increase in capital inflows and thus
prices is acceptable- consumer rationality- but it should be treated cautiously by people in the
know such as econometricians and regulators as an indicator of a crisis. And indeed the
housing bubble burst, housing stock prices took a plunge and within a few days, there was a dry
up in the market and liquidity. The banks outside US that were involved could not get funding
from home leave alone the US market to which they had turned to in the first place. Interbank
lending also hit the roof as many banks tried to do away with their pile of toxic assets from their
balance sheets and saw no profitability in lending to their trading partners who were also facing
the same problem, at the risk of not being able to get their money back.
In as much as the problem started in the housing market in the US, structured finance
allowed for the spread of exposure to the world’s banking system. (Mason 2009). The inter-
dependences of the global financial system allowed the crisis to spread across nations in a
matter of days, the freeze of interbank lending occurred overnight and as a result the banks with
the ‘weakest immune system’ suffered the most. (Mason 2009)
19. The global financial crisis hit Europe’s banking system the hardest due to its extensive
economic ties with the US. That is not to say that the rest of the world went completely
unblemished. The banking crisis also affected banks in emerging markets such as China though
the effects were not as profound as it has been in the Western world.
The effects of the crisis on African banks, on the other hand, were almost negligible.
Africa was mainly hit by the economic crisis through financial channels-foreign exchange,
remittances, etc- and trade. The lack of international confidence at the height of the crisis
greatly affected capital flows to emerging markets in Africa and elsewhere which paralysed
global trade.
Growing African countries such as South Africa, Nigeria, Algeria, Egypt and Kenya
experienced economic growth albeit slow during that period with banks owned locally not
directly affected by the credit crunch. Nyangito (2009) and Shanta Devarajan as cited by
Mwenga (2010) attribute this difference to the fact that loans originated by the African banks are
usually retained in balance sheets, African interbank market is relatively small and the ‘market
for securitised or derivative instruments is either small or non-existent.’ Generally, most banks, if
not all, owned locally in Africa were not exposed to the toxic debt that sent turmoil in the
banking systems of the western world.
2.4 UK BANKS AND THE GLOBAL FINANCIAL CRISIS.
The UK banks actively participated in the subprime mortgage lending and indeed
invested heavily in the US. In very many sectors as noted by Business Monitor International
Limited (2008) ‘the US is UK’s biggest export market making the UK very reliant on the
economic prosperity of the US.’ In the banking sector for example, UK home banks own very
large shares of the banks in US such that when the US banking system fell it pulled down the
banking system in the UK. The Business Monitor International Ltd (2008) agrees that the
economy in the UK heavily rests on its financial service industry; another reason why banks
took a deep plunge under the pressure of reducing credit liquidity.
UK’s capital and trade markets are highly integrated with these markets in the US and
the financial links as a result of similar banking systems created an avenue for the banking
crisis to spread to UK. That is as Luo (2009) notes, due to such financial links; a shake-up in
one market ultimately transmits to a shake-up in the other linked market. These financial links
between financial institutions and markets and those in the US was the first spark of the crisis in
UK.
20. The banking crisis took a grip of the UK from March 2008- around the time when the
markets had dried up. Why were the UK banks hit very hard by the crisis?
Most UK banks had over-indulged themselves in the securitization of mortgages
including subprime mortgages. In the process, banks such as the Northern Rock, Halifax bank
of Scotland and Royal Bank of Scotland amassed huge quantities of illiquid assets in their
balance sheets by bundling up loans and selling to shadow banks-financed by the banks
themselves- as bonds and securities. It is estimated that HBOS, RBS and Lloyds securitised
mortgages worth £55b, £36b and £23b respectively. To make matters worse, they used short-
term wholesale borrowing to finance these long-term liabilities (King 2008). This in itself reduced
capital reserved by banks and increased the level of leverage that the banks were operating on-
loans and investments made by the big banks were over 50 times the capital they held against
them (Peston 2011).
Chart 2 below shows the composition of major UK banks’ assets for the years 2001 to
2008. From the graph it is noted that loans to other customers has always taken up a bigger
proportion of the total assets. However, beginning 2004 UK banks took on to the stock market
as is indicated in the increasing securities proportion.
Chart 2: Major UK Banks’ Asset. (£ Billions)
21. Source: Bank of England, 2008 Publication.
In the wake of the crisis, which deepened with the failure of the Lehman’s Brothers in
the US, defaults on mortgages on mortgages begun to rise and house prices fell sharply.
Investor confidence dwindled as the asset-based securities were valued lowly. At this point, the
value of assets in banks’ balance sheets drastically fell while the liabilities remained high.
Thinning capital as a result of high leverage coupled with massive losses left several banks on
the brink of insolvency.
40 per cent of UK’s new home loans depended heavily on the international credit
markets which, as the crisis bit, were closing (Cable 2010: pg 39). Due to the uncertainty in the
financial system regarding the value of assets, the markets took a turn for the worst. The stock
market tumbled and the asset-based securities’ prices fell to greater lows. The markets were no
longer a refuge for banks to seek funding. The banks in an attempt to restore liquidity were
selling their assets whose value had gone down and thus the banks could not raise enough to
meet capital reserve requirements. Interbank lending no longer became an option as lending
costs between banks went up in a frantic move to raise capital. The effect was that banks stock
prices went down and in the words of Mervin King (2008), ‘Capital was squeezed.’
The first bank to be hit hard in the UK was the Northern Rock. The failure and
subsequently the nationalisation of one of the biggest housing finance bank in UK brought home
the reality that things were not right with UK’s banking system.
22. What followed these developments was a wave of banks failures in UK. Bradford &
Bringley could no longer stand and was nationalised. HBOS was saved from that eventuality
after Lloyds TSB on request from the government, launched a $22 billion takeover (Cable 2010:
pg 43 and Sakbani 2010). And even Barclays bank was given a handout by the UK government
to sustain business, although it wasn’t as affected like the other banks mentioned above.
2.4.1 The Extent of the Damage.
The banking system made huge losses during the financial crisis to the extent that it
almost collapsed the entire financial system- the greatest crisis ever witnessed since the great
depression of 1929. As has been mentioned in the previous paragraphs, some of the UK’s
banks suffered massive losses which led them to either being bailed out by the Bank Of
England, bought by other banks or being nationalised.
Losses in the banking system during the crisis can be calculated by determining
depreciation and market value loss as is defined in economy. (Sinn 2010: pg. 165) This is so
because during the crisis assets had to be devalued and since in the complicated process of
securitisation, assets were difficult to trace and therefore it became an impossible task to
identify the toxic, illiquid assets in the banks’ balance sheets from the rest of the safe sheets.
Banks as a result had to downgrade assets held almost uniformly which led to big losses.
The UK invested a lot in US financial products which directly caused the losses incurred
thereof. It is estimated that realised a loss of 6.5 per cent of the GDP which took over £9 trillion
of shareholders funds from the government to save from total failure. Big banks such as HBOS,
RBS, HSBC and Barclays accounted for the major depreciation losses in UK as is seen in the
pie chart below as of 1 February 2010- a total of 91.3 per cent of UKs losses.
Chart 3: Depreciation Losses of British Banks and Insurance companies as at
1st February 2010.
23. Source: Sinn (2010 p.g 170)- Casino Capitalism: Bloomberg List.
2.5 KENYAN BANKS AND THE GLOBAL FINANCIAL CRISIS.
Directly or indirectly, banks across the globe were affected by the global financial crisis.
Banking systems in many countries such as Iceland and Greece have had to be bailed out or
are on the brink of collapse. Countries whose major banks over-participated in mortgage-based
securities investment which originated from the US subprime lending, are still struggling with the
effects of the crisis: lack of liquidity.
The banking sector in Kenya never witnessed any collapse or major bailouts by the
Central bank of Kenya. In contrast banks such as Kenya Commercial Bank expanded their
branch networks in the East African region including Sudan, Rwanda, Uganda and Burundi.
During a crisis it is expected that companies downsize both in human capital and operation
locations to reduce costs and build on capital to absorb shocks.
2.5.1 Secondary Impact on Kenyan Banks.
Kenyan banks have however been insulated from the adverse effects that has rocked
the financial system of the world. This is partly because international banking by Kenya local
banks is not as developed as it is in the major economies. Also as it has been argued, Kenyan
banks depend mostly on domestic lending and deposits and there is trace presence of asset-
based securities and derivatives in their portfolio. This has in effect protected them from foreign
Royal bank of
scotland,28.40%
HSBC, 27.70%
Barclays Bank,
19.30%
HBOS, 15.90%
Lloyds TSB, 1.90%
Northern Rock,
1.80%
Alliance&
Leicester, 1.40%
Rest, 3.60%
Royal bank of scotland
HSBC
Barclays Bank
HBOS
Lloyds TSB
Northern Rock
Alliance & Leicester
Rest
24. finance. This is not to say that banking sector was completely unaffected. As much the first
round of the effects did not hit the Kenyan banking sector, secondary effects such as deposits
from banks abroad hit the market as is seen in the table I below.
Table I: Deposits and Balances From abroad, Jun 2008-Dec 2009
BALANCES (KSH)
Jun-08 82,441,058
Sep-08 63,226’531
Dec-08 79,356,770
Mar-09 51,435,062
Jun-09 58,159,719
Sep-09 46,759,647
Dec-09 31,664,374
Source: CBK Financial Statements and Disclosures.
Below are some of the reasons why Kenya’s banking sector was not affected by the
crisis as much.
2.5.2 Kenyan Banks’ Ownership Structure.
Kenya’s financial sector comprises of 44 financial institutions of which 43 of them are
licensed commercial banks and 1 mortgage finance company. Out of the 44 institutions 13 are
foreign owned (centralbank.go.ke) including Barclays and Standard Chartered bank who have a
very strong presence in Kenya evident from the fact that over the years Standard Chartered
bank has continuously won the global banking award for its work in Africa. Locally owned
dominant Banks in Kenya include, Kenya Commercial Bank, Cooperative bank of Kenya, Equity
bank and nationalised National Bank of Kenya.
Foreign banks in Kenya account for 29 per cent of all banks (calculated from above
figures) and therefore comprise a substantial percentage of all commercial banks’ core capital
(around 40 per cent). The presence of foreign banks in any country is a crucial source of
‘financial vulnerability’. This is because in a crisis their host banks abroad may limit or withdraw
all together funds, even to the point of closure, to be able to cover losses in their home
countries. (Mwenga 2010)
Barclays bank closed several banks in Kenya during the period 2007-2009 many of
which were those situated in the rural parts of the country. This has been attributed by the
British Financial Service Authority to the fact that Kenya was experiencing a downward trend in
25. the number of loan defaults and not due liquidity problems as a direct result of the banking
crisis.
2.5.3 Exposure to New Financial Instruments and Investments in Securities.
Banks in the western world indulged in excessive subprime lending in a bid to increase
profitability. The success of this led the banks to come up with new financial instruments such
as securities and the highly profitable derivatives to even earn more. This opened them up to
the risk of sudden share price falls and weakened the financial stability. Kenyan Banking system
however is mainly comprised of loans reserves at CBK and government bonds: as seen in table
II below. (Kibaara 2008; Mwenga 2010 and Nyangito 2009). Also the Kenyan market hardly has
any derivatives trading. The process that is securitisation has remained underdeveloped.
Prior to the crisis, however, the Kenyan financial markets regulators, Capital Markets
Authority (CMA), had indeed unveiled draft rules governing the creation and sale of asset-
backed securities, but the rules were never formalized. It is therefore expected that in the near
future Kenya is likely to see emergence of mortgage-backed bonds especially now that it is
experiencing a high growth in the real estate sector.
Table II: Composition of Commercial banks assets, 2001-2008 (%)
2001 2002 2003 2004 2005 2006 2007 2008
Loans/total
assets
50.6 48.8 47.7 51.2 52.2 51.5 51.4 53.8
GoK
securities/total
assets
21.8 22.7 27.6 20.7 19.8 20.5 19.8 15.6
Cash and
balances with
CBK/total
assets
8.7 8.4 7.0 7.6 7.5 7.3 8.0 7.7
other 18.9 21.5 17.7 20.5 20.5 20.7 20.8 22.9
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Oloo(2008; 2009)
It is noted that as the global financial crisis grew worse, the Kenyan market was
experiencing domestic problems of its own which included a rise on bad debts and the post-
election violence that rocked the country in 2007/2008. The violence had major negative
26. impacts on the economy of the country as the uncertainty of the political stability brought down
business, banking notwithstanding. This taken into consideration, it would not be easy to
separate the effects of the global crisis on banks from those of the post- election violence.
However given the period of research is between 2007 and 2009 the few months of the violence
might make very little difference for the comparisons.
2.6 EFFECT OF THE CRISIS ON PROFITABILITY: KENYA AND UK BANKS.
Tables III and IV below show profit before tax (PBT) realised by six UK banks and five
Kenyan banks between the years 2005 and 2009.
Table III: UK-Profit Before Tax (PBT) milGBP
BANK/YEAR 2005 2006 2007 2008 2009
1.Northern
Rock
446 557 -232 -1,424 -258
2.HBOS 4,808 5,706 5,474 -10,825 -12,376
3.Lloyds TSB 3,854 4,282 4,089 825 -4,378
4.RBS 7,936 9,186 9,900 -40,836 -2,595
5.HSBC 3,731 3,796 4,063 4,366 4,014
6.Barclays 5,311 7,197 7,107 6,035 4,559
Source: ORBIS database.
Table IV: Kenya-Profit before Tax (PBT) milKSHS.
BANK/YEAR 2005 2006 2007 2008 2009
1.Barclays 5,427 6,475 7,079 8,019 9,002
2.KCB 1,948 3,167 4,226 6,013 6,300
3.National
Bank o Kenya
859 934 1,610 1,798 2,159
4.Co-
operative
Bank of
Kenya
714 1,256 2,319 3,359 3,736
5.Standard
Chartered
Bank
3,513 3,810 4,910 4,720 6,729
Source: ORBIS database.
27. The UK’s six banks show a general decline in profitability between the years 2005-
2009, with massive losses registered beginning 2007- around the time when the credit crunch
began. Although profitability began to stabilise in some of the banks –RBS, Northern Rock and
HBOS- it was mainly due to the fact that the UK government intervened in terms of fund
injections and nationalisation to help in operations as was with Northern rock which was
nationalised in February 2008 and HBOS which was bought by Lloyds TSB in the same year. In
2008 and 2009 however all the banks registered declined profitability with all but HSBC and
Barclays realising losses. (See table III)
On the contrary an increasing trend in profitability was seen in five of the strongest
banks in Kenya. Even Barclays- Kenya whose headquarters is in UK was thriving amidst the
crisis.
2.7 BANKING REGULATION AND CAPITALISM.
Banking regulation has been a contentious issue for central bankers since the 1970s
when international banking became very popular and regulators feared that at the rate at which
capital was flowing across nations, a crisis was loaming. It was at this juncture that a group of
high profile central bankers from the major economies- commonly known as the Basel
committee- was set up in 1974 to ensure that banks became safer. This group was to come up
with a set of rules on the structure of the banks operating internationally and focused on capital
required to be maintained by the banks on investment and loans made. The Basel committee
has long since undergone changes and thus been named differently: Basel I (1974), Basel II
(2004) and most recently, Basel III.
To sustain depositors’ confidence and therefore avoid bank runs, banks are required to
hold sufficient amount of capital that in case of bad loans, they are able to absorb losses and
thus protect depositors. Capital rules are therefore designed to place large buffers in the
banking system to deal with shocks. (Turner 2011). The higher the capital adequacy ratio, the
lower the chance is of a bank being exposed to risk of going bust.
28. On the side of financial regulators, their main role is to prevent any sort of a crisis or
stop further the effects thus caused. By bailing banks out, central banks restore depositors’
confidence avoiding bank runs that might force banks to file for bankruptcy. Turner (2010) and
Docherty (2008) identify areas with which regulation on banks can impose restrictions on as,
among others, composition of bank assets and capital requirements. Restriction on the
composition of bank assets include measuring the amount of risk taken by banks in their
investments to safe guard depositors and shareholders against losses as a result of extreme
risk taking by banks.
With respect to the current financial crisis, banking regulation involves limiting risk-
taking by imposing restrictions on banks in line with capital available. (Docherty 2008)
Depending on the amount of risk banks take, it is the duty of banking regulators to ensure that
the banks have sufficient capital reserved for when they experience financing difficulties. The
main difficulties banks may face arise from exposure to massive loan defaults. This is normally
covered by bad loans provision to which is written off as expenses. However as was with US
subprime crisis, default levels in crises reach heights that these provisions cannot cover and
force banks to dig into their capital which if not enough may cause the banks to collapse.
The Basel committee believe that increasing the amount of capital held by banks and
especially those operating internationally would go a long way in minimising crises as the banks
will be able to absorb shocks more conveniently. Basel I as agreed in 1988 required that banks
maintain a Tier 1 ratio of 8 per cent measured against total-weighted risk on assets held. The
flaw to this requirement was that assets were awarded the same amount of risk irrespective of
the financial position of the investors to these assets. With new and sophisticated banking
systems and innovations, such as securitisation, banks began taking on more and higher risks
in their investment endeavours. It then became the concern of the committee that the standards
on the capital requirements were not sufficient enough to cover the amount of risks taken by
banks. To revamp Basel I, the committee decided in 2000 to make capital changes.
Basel II requirements which were to be implemented in January 2008, took into
consideration the level of risks in assets as opposed to the blanket treatment of risks in Basel I.
These changes were made particularly to cater for credit risks and came in light of complexity of
the international financial system. The 1988 accord considered ‘out of fashion’ could no longer
hold water. (Sheenagh 2004). When the crisis began in the summer of 2007 most banks were
still operating on the Tier I ratio and especially countries in emerging economies where most
banks had not even heard of the requirement changes. According to a Basel II implementation
survey by the Central bank of Kenya, for example, shows that out of the 31 institutions 18 which
was the majority, had medium level Basel II awareness. (see chart 4 below.)
29. Chart 4: Kenya’s Basel II Awareness, Dec 2008
Source: centralbank.go.ke
This level of awareness raised concerns by Central bank of Kenya as it indicated that
many banks were not following regulations and that more needed to be done to reverse this
trend. By the time this survey was done in Kenya however, the banking crisis was already fully
fledged in UK and USA following the collapse of Lehmans brothers in the US and
nationalisation of Northern Rock in UK. A large proportion of financial institutions in Kenya
however pulled through the crisis while still operating with the 1988 Basel accord.
Different countries have different regulating structures and policies. For the purpose of
this research, the main concern will be on Kenyan and UK which are looked at separately
begging with regulatory structure, a look at how capital reserve requirements and the role of
financial regulators in the banking crisis in UK
2.7.1 REGULATION IN UK.
Regulatory Structure.
Before 1997, banking supervision in UK was done by the Bank of England. However
due to the Treasury’s concerns on the secrecy of the bank following BCCI’s closure and
Johnson Matthey Bank’s failure, an independent regulatory body was formed: The Financial
Service Authority (FSA) (Davies and Green 2008, pg. 176)
FSA’s duty is to regulate the financial industry in UK which includes banks. The body is
expected to make rules and have investigatory and enforcement powers over financial
institutions. Within these functions, the FSA is mandated to set standards that institutions
30. should meet, failure to which action is taken against them (fsa.gov). A thing many agree they
failed to do when very big banks were lending carelessly, throwing caution to the wind.
The bank of England is not entirely out of the picture. A critical role of the bank is to
identify threats to the financial system and mitigate them for the sake of financial stability.
(bankofengland.co.uk). It is also functions as t the lender of last resort.
In addition to the above two bodies in what is called the “tripartite arrangement” The
Treasury is responsible for the international structure of regulation and it provides support to
financial institutions in need of it.
Are the Financial Regulators to Blame for UK’s Deepening Banking Crisis?
Since the crisis began, the question on whether financial regulators played a role in
deepening the banking crisis has received a lot of attention. Minimal evidence has been given to
relate how supervision and regulation affect bank performance. Abdennour and Khediri (2010)
assert that there is no specific model on financial regulation that would determine whether
banks perform better or not. True, however, neither are they supposed to wait for the system to
collapse for them to assert authority or as seen in the recent crisis watch as banks operate
carelessly.
Banks that were termed as “too big to fail” were confident that the government would
not let them fail and as such took enormous amounts of risks in their lending practices. As the
crisis deepened governments were forced to fork out huge amounts to banks to avoid collapses.
In the UK, a total of £9billion of tax payers’ money was used by the government to bail out
banks. Most notably was the Northern rock case where the bank of England continually made
attempts to stabilise the bank. Finally it had to be nationalised.
Banking regulators as mentioned above are supposed to ensure that banks’ practices
are sound to avoid any crises. This is done by ensuring capital reserves meet the required
standards. During the boom, under the very eyes of UK’s Financial Service Authority banks
became more and more leveraged as they borrowed more and more from the money markets to
sustain the process of securitisation. Prudent lending was thrown out of the window. Northern
rock for example, in a bid to grow its business rapidly, gave out mortgages in the form of loans
of 25 per cent more than the worth of the house assuring customers that since property prices
were fast rising, their homes would be worth more than the loans (Cable 2010)
Supervisory visits normally done by the FSA ideally should have noticed such
anormalities. It has however been argued that since business was good and the economy was
31. booming, there was a laxity on regulators to intervene and break this chain of events. Nobody
was therefore bold enough to be the whistle blower.
Too Big to Fail?
The banking systems in developed worlds have allowed reckless behaviour by banks
termed as “too big to fail”. Weaknesses in bank supervision and regulation allowed such banks,
irrespective of their performance to inflate balance sheets carelessly.
The size and the interconnection between these banks are very sensitive to the
economy in that if indeed allowed to fail, a collapse of the entire financial system is inevitable.
For instance some of these banks have loans and investments greater than Britain’s GDP-
more than £1.5 trillion for Barclays, HSBC and RBS. (Peston 2011). So if one of them is to go
down massive losses, including job losses and gain from tax by government, thus witnessed
would automatically bring down the economy. This however should not be an excuse for these
banks to be reckless or even for the regulators to allow such to happen. Impartial supervision
and regulation was not observed during the boom period.
2.7.2 REGULATION IN KENYA.
Regulatory Structure.
Central bank of Kenya through its Bank supervision Department (BSD) is mandated to
oversee proper functioning of the financial system in Kenya in terms of liquidity, solvency and
general stability. Under banking, Central bank of Kenya ensures that banks in line with the
banking act comply with the statutory and prudential requirements.
In addition to the above, the Basel committee on banking supervision, through the central
bank of Kenya look into matters that help in enhancing banking supervisory quality and also
importantly work with Kenya’s supervisory body to ensure that standards in capital adequacy
are understood and implemented properly.
Central Bank of Kenya has always been Kenya’s banking regulatory body, always
acting in accordance to the banking Act.
Capital Reserve Requirement.
Just like in the rest of the world economies, Kenya’s banking system follows International
capital adequacy requirements set out by the Basel committee which are adjusted to meet
specific country requirements.
32. Prudential guidelines set out by the banking Act set the following minimum capital
requirements for banking institutions:
Minimum core capital of Ksh. 250m
Minimum 8% gearing ratio (core capital/total deposits liabilities)
Minimum 12% Total capital/Total risk-weighted assets(TRWA)
Source: CBK Prudential guidelines.
As it were, the problems that banks greatly affected by the crisis centred on their lack of
enough capital reserve to absorb shocks of the massive losses they incurred. On the contrary,
Kenyan banks during the crisis met and even had excess amounts and ratios of capital
required.
The table below show 7 of the most dominant banks (3 foreign owned and 4 local
banks) having met and surpassed the above requirements.
Table V: Capital Held by 7 Commercial Banks in Kenya, 2006-2008
BANK Core Capital (Ksh. M) Core Capital/ Total
deposit liabilities (%)
Total Capital/TRWA (&)
2006 2007 2008 2006 2007 2008 2006 2007 2008
Barclays
bank of
Kenya
12375 17019 19980 13.19 15.6 15.8 12.12 13.03 18.75
Citi Bank 5651 7112 8898 22.31 24.02 28.53 26.6 27.14 26.0
Cooperative
Bank of
Kenya
4361 5882 12613 9.05 10.74 19.15 14.56 14.51 23.48
Equity Bank 2201 13666 14272 13.47 43.34 28.35 13.85 58.92 40.77
Kenya
Commercial
Bank
9169 10046 16127 11.88 10.64 12.78 15.75 13.61 15.45
National
bank of
Kenya
3368 4442 5672 11.41 12.79 16.55 11.88 38.67 39.91
33. Standard
Chartered
Bank of
Kenya
8367 8967 9332 12.9 12.14 12.13 18.88 16.71 16.2
Source: Oloo (2008, 2009)
In 2004 as the Basel committee reviewed and increased capital adequacy requirements
to make banks safer and to avoid a repeat of failures such as witnessed in the 2007-2009 global
financial crisis, the Finance Act of Kenya 2008 increased the minimum core capital for banks to
Ksh. 1 billion which banks had to meet by year 2012.
CHAPTER THREE.
RESEARCH METHODOLOGY
34. 3.1 Introduction
There are different approaches adopted by researchers in order to achieve or realize their
objectives. Research methodology not only refers to the methods used but includes patterns
and the nature of the research. Research methodology enlightens the reader on how the
researcher intends to conduct the research and analyse data collected while always referring to
the research question. Therefore this chapter is organised as follows: Research methods,
research approaches, research design, research strategy, data collection, data analysis and
finally limitations of the study.
3.2 Research Method.
Research method can be quantitative or qualitative. While quantitative method
focuses on sampling scientifically and uses numerical data analysis, qualitative method deals
with getting information from texts, is a little less scientific and the analysis is non-statistical.
According to Rao and Woolcock (2003, pg 165) quantitative research method, ‘permit
generalizations to be made about larger populations on the basis of much smaller
(representative) samples.’ On the other hand qualitative method is mainly used in cases where
carrying out a quantitative survey is difficult.
The table below outlines the major differences between quantitative and qualitative
research methods.
Table VI: Differences between Quantitative and Qualitative Research Methods.
QUANTITATIVE QUALITATIVE
Numerical data representation. Data representation is in any form.
Generalisation from the data is a possibility. Generalisation is not usually possible from the
data
Research question can be answered using
statistical analysis.
Research questions can be answered through
explanations and descriptions and by
gathering opinions, beliefs and experiences.
Data collection tools e.g. questionnaires and
surveys are usually used.
Usually, no data collection tools are used.
Source: Mathew and Ross (2010 pg 142)
3.2.1 Method for this Study.
35. This research study utilises the use of both quantitative and qualitative methods-
mixed method. This research has two objectives. The first objective which is to analyse the
degree of involvement in the asset-based securities of Kenyan and UK Banks and to measure
the impacts thereof will involve the use of numerical data whose analysis will be done
statistically.
The remaining objective on the role played by banking regulators in the financial crisis
in both countries and the capital reserve requirements changes will be looked at qualitatively.
Opinions, descriptions, beliefs and explanations on the subject are gathered from secondary
data.
3.3 Research Approaches.
Research approach refers to how the research goes about to come up with a
conclusion. Depending on whether the theory of the research project is explicit or not, research
approaches can be divided into two; Deductive and inductive approaches.
3.3.1 Deductive Approach: According to Saunders et al (2009) deductive approach is
where a theory and/or hypotheses are developed and the researcher designs a strategy which
in turn test the hypotheses developed. Deductive approach would normally entail collection of
quantitative data though collection of qualitative data is not entirely eliminated. This approach
allows for concepts and facts to be analysed quantitatively and a large sample size is usually
important for the purpose of generalised conclusions.
3.3.2 Inductive Approach: Inductive approach on the other side entails collection of
data first, carrying out the analysis and develop the theory as a result. Qualitative data collection
is used in this approach and since conclusions intended are not normally generalised, a small
sample is suffice.
3.3.3 Approach of This Study: The aim of this research is to examine and explain the
differences in the effects of the global financial crisis on Kenyan and UK banks. The research
suggests that the main reason for these differences is level of involvement in the securitisation
of asset-based securities and banking regulations in both countries.
The approach that will therefore be used for this research is the deductive approach.
This is because a theory has already been made and a strategy already designed where the
research seeks to do a comparison. Data collected will be mainly quantitative data from balance
sheets of the two participating banks to allow for comparisons to be made. However qualitative
data will also be used for the purpose of explaining the role of financial regulators in the crisis.
36. 3.4 Research Design
Research design can be categorised into four major types. They include the following:
3.4.1 Experimental Design: Normally used in scientific kind of research.
3.4.2 Longitudinal Design: This design underpins research that look at changes over
time using the same sample chosen for the research.
3.4.3 Case study Design: Involves the use of a single case where the study is done in
great detail in accordance with the research question.
3.4.4 Cross-sectional Design.
Cross-sectional design is concerned with research that seeks to compare two sets of
data. In most cases the data gathered for this type of design is quantifiable and measured using
statistical tests. (Mathews and Ross: 2010; pg 122)
According to Mathew and Ross (2010: pg 121) the following are three characteristics of a cross-
sectional design study:
Two or more cases are involved;
Use of comparable cases or groups;
Data collected is for one particular time;
3.4.5 Design of This Study.
The design for this study is Cross- sectional Design. The research seeks to analyse
the impact of the global financial crisis on banks in Kenya and the UK and look at banking
regulations in both countries. The participating banks are Kenya Commercial bank, Kenya and
Northern Rock, UK. These two banks were chosen because each of them is owned locally
(Kenya and UK respectively) and therefore are comparable since they do not have the
complication of international operations.
The data collected for the purpose of this research is for the period of the crisis, that is
between the years 2006 and 2009. This is because within this period is where the crisis
worsened and the capital reserve of banks in UK thinned out. On the contrary this is the period
where banks in Kenya were experiencing growth and were expanding.
3.5 Research Strategy.
37. Research strategy is considered to be a variation of research design and can be
defined as a ‘research plan.’(Mathew and Ross: 2010, pg 130). Research strategies are
categorised into four;
3.5.1 Evaluation Strategy: This strategy is used in researches where an assessment
of the value created by a change in situation, policies or practices is done and the impact of
those changes determined.
3.5.2 Ethnography Strategy: Used when a researcher becomes part of the research.
That is the research allows him/her to participate both as a researcher and a participant. It
usually takes several years to complete the research.
3.5.3 Grounded Theory Strategy: According to Mathew and Ross (2010, pg 136),
grounded theory is ‘a systematic research method which generates theory from data.’ This is
opposed to most researches where a theory is developed and data then collected to test the
theory.
3.5.4 Comparative Strategy: Like the name suggests, it is used for comparison study;
for example comparing two or more groups, countries or even cultures. In comparative
research, the researcher seeks not only to identify the differences and similarities but also to
examine in depth the reasons behind these differences in context.
3.5.5 Strategy of this Study: This study adopts the comparative research strategy.
The research seeks to compare how differently the Kenyan and UK banks were affected by the
global financial crisis by looking at the different capital structure adopted by the banks in Kenya
and UK during the period and the regulatory differences.
3.6 Data Collection
There are two ways with which data can be collected in a research. That is Primary and
Secondary data collection.
Primary data collection refers to the use of data that has been developed by the
researcher for that specific research. Data may be collected using tools such as questionnaire,
interviews, focus groups or conducting surveys.
Secondary data collection on the other hand refers to the use of data that has already
been developed by other researchers. Such data may be derived from text books, other
dissertations and theses, government publications, the internet and newspapers.
38. Due to the sensitivity of this research, only Secondary data will be used. The main
data collection point is the ORBIS database that will be used to get financial statements of both
the Northern Rock and Kenya Commercial Bank and also obtain the financial ratios that are
relevant to carry out analysis. Also, publications by the Central bank of Kenya, Bank of England
and Financial Service Authority-UK will be used in the analysis of banking regulations.
3.7 Data Analysis.
In his analysis in his paper ‘The global financial crisis and adjustment to shocks in
Kenya, Tanzania and Uganda’, Masha (2009), asserts that the structure of the balance sheet
shows how resilient a company can be to shocks. This therefore entails the use of balance
sheet characteristics to evaluate the performance of the participating banks just before and
during the crisis. In the same way this study will look at the balance sheet characteristics to
calculate ratios that will then be used to analyse the effects of the financial crisis on Kenya
commercial bank and the Northern rock.
For the first objective we carry out correlation and regression analysis to determine the
strength of the relationship between deposit, loans, equity and Tier 1 ratios with the liquidity
ratio and also to identify the determinants of liquidity based on the ratios mentioned above. A
comparison analysis is therefore carried out and presented with the use of tables and charts.
For the second objective on banking regulation, data is collected from the two banks’
balance sheet in the form of ratios-profitability and Tier 1, data is presented with the use of
charts and tables and analysed qualitatively.
3.8 Limitation of the Study.
The aim of this study is to investigate and compare the Kenyan and UK banks. To be
able to carry out this research, various characteristics from the balance sheets and income
statements during this period are needed for critical analysis. To accurately analyse the
phenomenon, the degree of the exposure of banks to the subprime loans would be more
appropriate as it is the core ingredient of the difference in the impact of the global financial crisis
on commercial banks. However such data is not available online or any print media to the
public. As this study is purely based on secondary data, other alternatives are sought. Thus for
the purpose of this study, Tier 1 ratios among other ratios such as liquidity ratios will be used for
the comparative analysis.
Another limitation for this research is the lack of sufficient data on the Kenyan banking
industry. The method used to collect data is the use of secondary data available on the internet
39. and in print. A lot of studies done on the Kenyan market on the subject are yet to be published
and therefore access has proved to be difficult. It would have been appropriate to travel to
Kenya for the data but the period to carry out this research was extremely limited and travelling
would cause a backlog of my work.
CHAPTER FOUR.
DATA ANALYSIS AND DISCUSSIONS.
4.1 Introduction.
This chapter presents results of statistical tests carried out on the data collected with
regards to objective I and also the results on objective II are presented graphically. These
results are in turn analysed and a discussion on each objective is also given.
4.2 Objective I: Determine the contribution of the lack of liquidity on banks fragility: comparing
Kenyan and UK banks.
This section seeks to compare the liquidity of Kenya Commercial bank and that of
Northern Rock over the period 2004 and 2009 with emphasis being on the period 2006 and
2009- period just before the crisis to end of crisis. To be able to carry out a correlation and
regression analyses the following balance sheet characteristics (in the form of five ratios) are
used.
Liquidity Ratio: Defined as liquid assets to total assets. It is expected that the higher
the ratio, the better the bank is able to deal with difficulties in financing.
Deposit Ratio: Defined as deposit to total assets ratio. In this study however we use
the value for customer and short-term lending for the deposit value-This is what is
provided in the ORBIS data base. Banks with more deposits are expected to be more
stable than banks that depend on the money markets considering the volatility nature of
the money markets.
Loans Ratio: Defined as Loans to Total assets. A bank whose loan ratio is high is
considered to have fewer securities in its portfolio and it is therefore expected that they
would suffer less from reducing security prices which would put their regulatory capital
at risk.
40. Tier 1 Ratio: Defined as Tier 1 capital to Total risk-weighted assets.
Equity Ratio: Defined as Total equity to Total assets.
The above two ratios are capital ratios. It is expected that banks with enough or higher
capital are able to absorb shocks more than those with relatively lower capital as they are more
able to self-inject with capital during crises.
The following table shows the values of the above ratios for both the Kenya Commercial
Bank and the Northern rock which are used for correlation and regression analyses.
Table VII: KCB and Northern Rock Analysis Ratios.
N BANK YEAR/RATIO LIQUIDITY TIER
1
DEPOSITS LOANS EQUITY
1. KCB 2005 34.96 18.4 82.38 46.37 11.85
2. 2006 34.88 15.7 84.09 48.93 11.26
3. 2007 30.26 15.4 83.18 53.35 9.8
4. 2008 33.28 15.5 86.39 48.91 11.03
5. 2009 17.17 14.8 86.77 61.77 11.69
6. NORTHERN
ROCK
2005 6.22 7.7 30.48 84.73 1.91
7. 2006 6.51 8.5 28.71 85.93 3.18
8. 2007 1.36 7.7 37.3 90.41 2.47
9. 2008 12.19 -0.4 39.23 69.69 0.61
10. 2009 14.04 1.9 30.45 73.5 1.21
4.2.1 Correlation Results and Analysis.
Using the excel spreadsheet; a correlation analysis is done on the ratios to determine
the strength of the relationship between the variables. This particular analysis is done to
determine the relationship between liquidity and the rest of the ratios and the results are
displayed in the table below.
Results
Variables Correlation Coefficient To Liquidity
1. Tier 1 ratio 0.734474
41. 2. Deposit Ratio 0.867351
3. Loan Ratio -0.97881
4. Equity Ratio 0.8415
Number of Observations: 10.
Confidence level: 95%.
From the Pearson’s table (Attached in the appendix) data with 10 observations shows a
relationship with >95% probability if the correlation coefficient between variables is 0.63 or
greater; the higher the correlation coefficient, the stronger the relationship. All the above
variables show correlation coefficients in relation to liquidity higher than 0.63.
Tier 1, Deposit and Equity have positive coefficient values which means that the three
ratios have a direct relationship with liquidity. On the other hand the negative coefficient value of
the loan ratio implies that it has an inverse relationship with liquidity.
From the table, it is noted also that Loan ratio has a stronger relationship followed by
Deposit, Equity and finally Tier 1 ratio.
4.2.2 Regression Results and Analysis.
Taking liquidity ratio as the dependent variable and tier 1, loan, deposit and equity
ratios as the independent variables, a regression analysis is done to determine the
determinants of liquidity. The data in table ( ) is used.
Results.
RATIO P-VALUE
1. Tier 1 0.060441
2. Deposit 0.396526
3. Loan 0.000229
4. Equity 0.376168
In regression analysis, at 95% confidence level, a p-value of 0.05 or less shows a
significant relationship between the dependent and independent variables. The table above
shows that only the loan ratio-with p-value 0.000229- as a determinant of liquidity. The rest
ratios are not significant in determining liquidity.
4.2.3 DISCUSSION.
42. The correlation results above show that all the four ratios have a relationship with
liquidity albeit at different strengths. At the top of the list is the loans with a correlation coefficient
of -0.97881 which implies that liquidity is very sensitive to slight changes in the value of loans
given. Inversely related this relationship proposes that an increase in amount of loan awarded
translates to a decrease in the liquidity of the bank and vice versa.
As is expected deposits have a great influence on liquidity as it is always in cash and
therefore very liquid. However it is highly dependent on the customer needs and wants. Banks
are not in control of when the customer wants to withdraw the cash and how much they would
take at one particular time. In the case of a bank run for example, the lack of consumer
confidence drives customers to withdraw all their money and at the same time. At that juncture
the banks cannot depend on deposits as a means of providing liquidity. This was the scenario
with Northern Rock when it experienced a bank run in September 2007-where £1 billion was
withdrawn from high street branches- right after it had announced that refinancing from the
interbank market was not possible and that the bank of England had given it financial support.
On the other hand, being a traditional bank, Kenya Commercial Bank depends on
deposits for its liquidity provision as is seen on table VII from the year 2005 to 2009 the deposits
ratio remained well above 80 per cent of the total assets contrary to Northern rock whose ratio
barely reached half of that.
Equity is subject to sudden changes in security prices. When the markets are doing
good and securities selling, liquidity is not a problem. However when prices go down to levels
below original prices it becomes difficult to raise cash for operations wholly on securities.
Tier 1 capital provides a cushion for when a bank runs into financing difficulties. It has
influence at the time of difficulty and not necessarily when things are running smoothly. More on
Tier 1 is analysed with regards to banking regulation as it is a regulatory ratio.
All the above ratios have strong relationships with liquidity. To ascertain whether
liquidity is dependent on the ratios a regression analysis was done and the outcome was that
liquidity is highly dependent on loans. Contrary to what is expected, the results show that
deposit is not a determinant of liquidity. The reason for this unexpected difference that the data
for this analysis is for the period prior and during the banking crisis; a crisis largely caused by a
lack of liquidity.
4.2.4 Loans and Liquidity.
From table VII above two charts showing the differences in loans and liquidity between
KCB and Northern Rock are drawn below.
43. Chart 5: KCB and Northern Rock Liquidity Difference.
Chart 6: KCB and Northern Rock Loans Difference.
0
5
10
15
20
25
30
35
40
2005 2006 2007 2008 2009
Liquidityratio(%)
Year
KCB
NORTHERN ROCK
0
10
20
30
40
50
60
70
80
90
100
2005 2006 2007 2008 2009
LoansRatio(%)
Year
KCB
NORTHERN ROCK
44. As the correlation results suggest we see that an increase in the amount of loan given
(see chart 6) translates to low liquidity (See chart 5).
4.2.5 DISCUSSION.
KCB and Northern Rock prior to the crisis had very diverse strategies for liquidity
creation. KCB sticking to traditional banking systems, created liquidity by increasing its liability
base in terms of focusing on increasing bank account deposits. Between 2005 and 2009 KCB
consistently maintained more than 80 per cent deposits of total assets. (See table VII). And as
reviewed in the literature KCB maintained loans granted in its balance sheets as opposed to
bundling them for securitisation purposes.
Prior to the crisis as was detailed in the literature review banks in the developed
markets depended on the mortgage market and in particular in the subprime loans to create
liquidity at low costs. Northern Rock which was previously a moderate growing bank saw this as
an opportunity to grow. As a result it engaged in over-aggressiveness mortgage (loan) lending
which before 2007 was booming business given that house prices were rising at a high rate.
For this particular study, it is not possible to get data from banks on how much of the
loans given out were mortgages because such data is not available publicly. However literature
has it that 60 per cent of mortgages given out by Northern Rock were subprime loans. With this
kind of relationship it is safe to say that close to that percentage of all loans granted in 2006 for
example were subprime.
The drop in liquidity from 6.51 per cent in 2006 to 1.36 per cent in 2007(See table VII) in
the case of Northern Rock can be explained by the fact that in the summer of 2007, as the
bubble burst, there was an alarming number of mortgage repayment defaults, homes were
being repossessed in an attempt to resell and raise liquidity. However house prices were going
doing and to make matters worse, the mortgages had been securitised over and over again
which made it difficult to value mortgage based securities and as a result all asset based
securities were devalued; the stock market crashed. Raising liquidity to sustain business
became a daunting task for Northern Rock made worse by the fact that borrowing from the
interbank market was no longer viable. Reduced consumer confidence on its survival saw
Northern Rock experience a severe bank run within days of the start of the crisis. Liquidity
completely froze for Northern Rock and its nationalisation in February 2008 was the only option.
KCB also had an increase in loans granted between 2006 and 2007 (See table VII)
(4.42 per cent) which as expected saw liquidity drop from 34.88 per cent in 2006 to 30.26 per
cent in 2007. As was with Northern Rock, it cannot be said which percentage of these were
mortgages. Even if a big percentage of this were mortgages, KCB had no exposure to the toxic
45. assets. In addition to that securitisation and the derivatives market are not yet developed in
Kenya. KCB as was with other most Kenyan banks retained loans in its balance sheet. KCB
was thus stable with 30.26 per cent of liquid assets to fund it business.
4.3 Objective II: Determine the role played, if any, by the financial regulators in the banking
crisis both in the UK and Kenya with regards to changing capital reserve requirements.
It has been established that the causes of the global financial crisis in general and the
banking crisis in particular are varied. Banks became over-leveraged as a result of over-
indulgence in the asset-based securities, the stock market fell as consumer confidence fell and
with that, the availability of liquidity disappeared overnight.
So much blame has been put on the banks for not taking precaution measures to
ensure that their balance sheets are in check. They have been blamed for their exaggerated
desire to make huge returns on investments, thereby taking on more risks, less preventive
measures and without as much concern to customers who put so much trust in the banks as
custodians of their money. However all these cracks within the banking system were taking
place as those put in charge of supervisory and regulatory duties watched.
This section of data analysis seeks to answer the question, what role if any did the
financial regulators play in the banking crisis both in UK and Kenya? To answer this question,
the analysis gives briefly the responsibilities of the relevant regulatory bodies both in UK and
Kenya, looks at two measures of regulatory failure which include poor profitability and
inadequate capital.
4.3.1 Regulatory Bodies.
We have established in chapter two that UK’s banking regulation and supervision is
done by three bodies each with their specific functions in what is called the “Tripartite
arrangements” These bodies include:
I. Bank of England: Main function being to maintain financial stability while at the same
still it is still the lender of last resort.
II. Financial Service Authority (FSA): The main body for supervision and regulation to
whom any financial firm calls on first when in difficulties.
III. The Treasury: In addition to providing official operation support in time of need, the
treasury is primarily concerned with the international structure of regulation.
On the other hand Kenya’s banking regulation and supervision rests on only one body
which is the Central bank of Kenya (CBK). The bank, through the Bank Supervision
Department (BSD), carries out all the regulation and supervision including maintaining the
46. soundness and safety of the banks in Kenya and ensuring that standards and policies with
regards to international best practice for bank supervision and regulation are followed to the
latter. The bank is still the lender of last resort and has the mandate in pursuant to the
provisions in the banking act, to penalise banks that do not adhere to standards required.
4.3.2 What Measures Failure of Regulation?
The soundness and stability of the banking system rests on proper regulation and
supervision by the relevant bodies. Measurements of regulatory failure include the
vulnerability of the banking system in terms of Poor profitability and inadequate capital. It is
also the responsibility of the financial regulators to ensure that consumer confidence in
banks is maintained to avoid bank runs.
Poor Profitabilty.
Continuous decline in profitability and massive losses in major banks shows extreme
vulnerability in the banking system. Regulators’-Bank of England for UK and Central Bank
of Kenya for Kenya- duty is to ensure that performance of banks do not record continuous
losses. It may not be easy or even possible to determine what level of profitability each
bank should register but prudent supervision should be able to pick out underlying problems
when losses or very low profits are made relative to peer banks.
Table below show profit before tax (PBT) realised by Northern Rock and Kenya
Commercial bank (KCB) between the years 2005 and 2009, with percentage
increase/decrease inserted. Profit before tax is used because of the differences in corporate
tax in both countries.
Table VIII: Profit before Tax (PBT)
BANK/YEAR 2005 2006 2007 2008 2009
1.Northern
Rock
(MilGBP)
446 557
24.89%
-232
(144.65%)
-1,424
(513.79%)
-258
81.88%
2. KCB
(milKSH.)
1,948 3,167
62.57%
4,226
33.44%
6,013
42.28%
6,300
4.77%
Source: ORBIS database.
The above table is represented by the bar graphs below which give a clear picture of
the trend of profitability in the two banks.
Chart 7: KCB’s Profitability.
47. Chart 8: Northern Rock’s profitability.
The Northern Rock’s graph shows a general decline in profitability between the years
2005-2009, with massive losses registered in 2007- around the time when the credit crunch
began and 2008 when it became apparent that the bank could not stand alone. In 2007, the
bank realised a 144.65% drop in and a further 513.79% drop in 2008. Although profitability went
up considerably in 2009 (81.88%), it was mainly due to the fact that the UK government
intervened in terms of fund injections and nationalisation to help in operations as was with
Northern rock which was nationalised in February 2008.
0
1000
2000
3000
4000
5000
6000
7000
2005 2006 2007 2008 2009
PBT(milKsh)
YEAR
-1600
-1400
-1200
-1000
-800
-600
-400
-200
0
200
400
600
2005 2006 2007 2008 2009
PBT(milGbp)
YEAR
48. On the other hand, as shown in the KCB’s graph there was a constant rise in
profitability between the years 2005-2009. The year 2007-2008, within which the banking crisis
bit hard on Northern Rock’s profitability, we see the complete opposite with KCB. There was
however a reducing profit increase rate between the years 2008 and 2009- only 4.77%
compared to the increase in the previous period (42.28%).
Much as continuous low profitability in the banking system shows a failure in regulatory,
it would not be conclusive since different banks use different accounting standards in calculating
profits.
Inadequate Capital.
Capital reserve requirements form the core agenda in the Basel committee. Its
supervision is this very vital to the health of the economy and particularly the financial sector.
Capital reserve as was explained earlier is important for when banks run into financing
difficulties. It acts as a cushion to fall back on.
During the banking crisis the amount of capital banks held became of great concern
both to the community at large, the regulatory and supervisory bodies as well as the world
governments. Tier 1 capital (core capital) is an important balance sheet characteristic that is
used to measure whether banks are meeting the requirements set by the Basel committee. It
set the tier 1 ratio at 8 per cent as a minimum. At the time of the crisis banks were still under the
Basel 1 but had to adjust their capital to meet Basel II requirements by January 2008. The rate
(8 per cent) still remained the same but Basel II requirements were adjusted to cater for greater
risk as opposed to fixed risk-weighted measurements in Basel I.
Chart 9 below shows the difference in the trend in the Tier 1 ratio for both Northern
Rock and KCB between 2005 and 2009.
49. Chart 9: KCB’s and Northern Rock’s Tier 1 Difference
It is interesting to note that for all the five years analysed KCB met and indeed
surpassed the 8 per cent tier 1 ratio required by regulation with an average of 15.96 per cent. In
the event that KCB had exposure to the toxic assets and experienced liquidity problems in the
crisis, then the capital reserved would have been sufficient to restore liquidity to the banks
operations or only a little handout from the Central bank of Kenya would have been enough to
restore balance.
Northern Rock on the other hand barely met these requirements in the five years. With
an average of 5.08 per cent over the period, the only time the requirement was met was in 2006
-2
0
2
4
6
8
10
12
14
16
18
20
2005 2006 2007 2008 2009
18.4
15.7 15.4 15.5
14.8
7.7
8.5
7.7
-0.4
1.9
Tier1ratio%
Year
KCB
NORTHERN ROCK
50. at 8.5 per cent. This percentage would have been in all respect been sufficient enough to
absorb any shocks as was envisaged by the Basel committee. However Northern Rock’s over-
aggressiveness in mortgage lending and losses made thereof were too much for it to sustain.
4.3.3 DISCUSSION.
Indeed there are many other ways with which regulatory failures can be monitored,
which include but not limited to liquidity (discussed earlier), excessive inflation of balance sheets
by banks and indeed excessive leverage. The above two indicators chosen by this study- poor
profitability and inadequate capital- are just two basic balance sheet measurements that may
signal a vulnerability in the banking system.
Profitability is indeed the most straightforward mode of measuring whether a bank is
worth the while or not. A bank making continuous losses or having decreasing profits year after
year automatically calls for the “watchful eyes of supervision”. Normally this assessment is
made before and indeed during the occurrence of any crisis.
Northern Rock’s profitability was not really a problem before the crisis. In comparison to
other major UK banks- a group to which it belonged- it was doing pretty well. In 2006 its profits
grew 24.89 per cent as compared to in 2005 (see table VIII). Increasing profitability for Northern
Rock prior to the crisis was highly expected having won an award for best securitisation deal in
2005. Northern Rock’s management took a turn from traditional methods of raising funds
including deposit taking and fully engaged in securitisation which cost less and earned massive
profits. As long as the markets remained healthy, at the height of the boom, the laying upon
layering of mortgage-based securities was a profitable process.
However these profits were anticipated rather than actually made. Thus as the crisis
began to unfold, defaults on mortgages rose to levels not catered for in bad loans provisions
and the interest returns on the loans repayments anticipated could no longer be registered for
profitability. On the other hand security prices also went down below levels expected as the
stock market also crashed. As a result profits slumped 144.65 per cent in 2007 and a further
513.79 per cent in 2008. (See table VIII).
Regulation at corporate level include banks taking the initiative of ensuring that
standards applied in the accountancy process are relevant and realistic to the times. Proper
auditing of accounts and especially during credit booms are necessary to avoid banks from
over-stating profits arising from over-speculation of the economy in general and the financial
markets in particular.
51. Quite contended with the massive profits Northern Rock was making prior to the crisis,
the FSA-UK over-looked the amount of capital reserve the bank was operating on; most
importantly the Tier 1 capital. Most importantly because when liquidity runs out a bank will
always turn back on capital which if not sufficient looks to central banks as lenders of last resort
usually at a cost.
For the five years this study looks at, Northern Rock only reached the required 8 per
cent Tier 1 ratio in 2006. UK’s Financial Services Authority’s responsibility, among others, is to
ensure that banks have sufficient capital not only to safe guard liquidity but also to maintain
consumer confidence. In 2005 for example Northern Rock was operating on a Tier 1 ratio of 7.7
per cent lower than the 8 per cent required and 8.5 per cent in 2006 just 0.5 per cent higher.
The FSA in the face of this should have required that this ratio was a lot higher given to the level
of the bank’s involvement in the risky asset-based securities.
CHAPTER FIVE.
CONCLUSION AND RECOMMENDATIONS.
5.1 Introduction.
52. The aim of this research was to make a comparative analysis on Kenyan and UK banks
with respect to the recent global financial crisis and to a large extent shade light on why banks
in the two countries were affected differently. To carry out the research, data analysis on
balance sheet characteristics of the Northern Rock, UK and Kenya Commercial Bank, Kenya
were carried out in order to make generalisations on the subject matter. The subject of the
effects of the crisis on banks is very wide and the causes and reasons are as varied as they
come. For the purpose of this research however, two objectives were identified; the question on
liquidity and its creation on the fragility of the banks and the question on the roles of financial
regulators with regards to capital reserve requirements on the banking crisis.
This chapter therefore seeks to make conclusions on the research by answering
research questions developed findings of the data analysis and relate this answers to the
literature already reviewed.
Below the conclusions made, recommendations for further research on the subject of
the effects of the global financial crisis on banks are made.
5.2 Objective I: The first objective of this study focused on liquidity creation and its contribution
to banks’ fragility both in Kenya and UK. The question this objective sought to answer was how
differently do Kenyan and UK banks go about creating liquidity and in the light of the banking
crisis how this creation affected the banks.
From the literature review, it has been established that the 2007-2009 global financial
crisis was no different from previous crises in that it resulted from the lack of liquidity; in other
words credit crunch. To establish the strength of the relationship between the factors that would
normally affect liquidity and liquidity and determinants of the factors of liquidity, correlation and
regression analysis on five relevant ratios (Tier 1, deposit, loan, equity and liquidity itself) were
carried out on Northern Rock and Kenya Commercial Bank.
From the correlation analysis, it is established that all the four ratios had strong
relationships with liquidity with the loans ratio having the strongest. Regression analysis done
however established that of all the four ratios only loans emerged as the determinant of liquidity.
As mentioned earlier this is contrary to what was expected that deposits, under normal
circumstances would have a major influence on liquidity. Loans also had a major effect on
liquidity during the crisis period. However it is not just the amount of loans the banks gave out
but their treatment thereof in the process of securitisation.
As is seen in the literature review the roots of the global financial crisis came from the
subprime loans originating from the US, made worse by the fact that these loans were bundled