A financial crisis is defined as any situation where one or more significant financial assets such as stocks, real estate, or deposits (and usually unexpectedly) loses a substantial amount of their nominal value. Ex: financial market crashes, Increase Borrowing by banks and investors

1. Fathima Naseeha
(AAT(PF), BM (Hons) Accounting, KIU)

2. Contents
 What is Financial Crisis
 Types of financial crisis
 Theories of financial crises
 Causes and consequence of financial crisis
 Case Studies related to Financial Crisis
 Golden key Case
 Lehman brothers case
 Financial Crisis and the Sri Lankan Economy
 Measures to control Financial crisis in Sri Lanka
 Conclusion

3. Financial crisis
• Financial crisis is any of a broad variety of situation in which some financial
assets suddenly loss a large part of their nominal value. Financial crisis
situation in which the supply of money is outpaced by the demand for
money.
• This means the liquidity is quickly evaporated because available money is
withdrawn from banks or financial institutions. Forcing banks either to sell
other investments to make up for the shortfall or collapse.
• In a Financial crisis, asset price see a steep decline value, business and
consumers are unable to pay their debts and financial institutes experience
liquidity shortages.

4. Types of financial crisis
 Banking crisis
A situation where a commercial bank suffers a sudden rush of withdrawals by depositors is
called a bank run. In such situations, banks cannot immediately fulfill the entire demand for
money by the general public, because the bank may have invested its money in a variety of
assets, gains of which may be realized during a long period of time. This may lead to a bank
panic or banking crisis.
 Currency crisis
An international financial crisis may occur when a country is suddenly forced to devalue its
currency because of a speculative attack. This may be referred to as a currency crisis or a
balance of payments crisis
 Stock market crashes
A stock market crash is a sudden dramatic decline of stock prices across a significant cross
section of a stock market, resulting in a significant loss of wealth

5.  Sovereign defaults
When a country fails to pay back its sovereign debt( repayment of countries
government debt), it is referred to as a sovereign default. A balance of
payment crisis along with a sovereign default can lead to a sudden stop in
capital inflows or a sudden increase in capital flight
 Bursting of the financial bubble
A bubble is a rapid escalation of assets prices followed by a contraction, often
created by a surge in asset price that is fundamentally unwarranted by the assets and
driven by exuberant market behavior. When no more investors are willing to buy at
the elevated price, a massive sell-off occurs, causing the bubble to deflate.

6. Theories of financial crises
 Irving Fisher & Milton Freidman Neoclassical Dichotomy
 John Maynard Keynes Model of monetary production
economy
 Hyman Minsky An Explicit Model of Financial
Crisis

7. Irving Fisher & Milton Freidman - Neoclassical Dichotomy
monetary sphere in the short- and medium-term can become a disturbing factor for the real
sphere. Irving Fisher and Milton Friedman, the icons of monetarist thinking in the 20th
century, made this point very strongly. In extreme cases developments in the monetary
sphere can lead to financial crises with far reaching repercussions for the real sphere.

8. John Maynard Keynes -Model of monetary production economy
money plays a key role and penetrates all spheres of the economy. Instabilities and
financial crises all develop within the framework of a monetary production economy.
Hyman Minsky -An Explicit Model of Financial Crisis

9. Causes and consequence of financial crisis
• Strategic complementarities in financial market
• Leverage
• Asset Liability Mismatch
• Uncertainty and herd behavior

10. Case Studies related to Financial Crisis
• Case Study of Golden Key
 Golden Key Credit Card Company fully owned subsidiary of Ceylinco Group
which had more than 300 subsidiaries. It is incorporated in June 03, 1977.
 Pioneered the Credit Card industry in Sri Lanka in the Early 1980s.
 Responsible for setting – up the initial Merchant Network utilized by all credit card
companies.

11. Golden Key collapsed in 2008, after revealing fraud worth Rs. 26 billion.
Accepting funds from the public at high interest rates from 12 percent to 30 percent
was the key reason for the collapse of the Golden Key Credit Card Company

12.  Loss of investor confidence and liquidity constraints
 Loss the performance of the finance sector
 Measures taken to safeguard Seylan Bank
 Change in the Ceylinco Saving Bank
 Increase the importance of corporate governance
Things of impact by Golden Key case

13. Reasons for the collapse of Golden Key case
 Mismanagement of Funds
Assets were much lower than the liabilities
Internal frauds by top management
 Maturity mismatch of asset & liabilities
Accepted deposits from customers- short term liabilities
High cost funds 20-30% on deposits
 Lack of risk management policy
High liquidity risk
Lack of monitoring and regulatory mechanism
 Lack of good corporate governance
No independent audit
Manipulation of financial statement

14. Lehman brothers case
Introduction of Lehman brother
• Lehman brother founded by German immigrant henry Lehman in
Montgomery,albama in 1844.in 1859 henry Lehman and his brother Emanuel and
Mayer founded Lehman brother.
• Lehman brother is a global financial service firm whole bankruptcy in 2008 was
largely caused by and accelerate the subprime mortgage crisis.
• It provided investment banking,trading,investment management, private
banking,brokerage,private equity and associated services.

15.  On September 15,2008 Lehman brother is filed for bankruptcy.
 With $639billion in assets and $619 billion in debt. Lehman's
bankruptcy filing was the largest on history.as its assets far
surpassed those of previous bankrupt giants such as WorldCom
and Enron.
 Lehman was the fourth largest US. Investment bank at the time of
its collap with 25000employees worldwide.
 Lehman’s demise also made it the largest victim of the US.
Subprime mortgage included financial crisis that swept through
global financial markets in 2008.

16. Reasons for the collapse of Lehman brother
• Asset – backed securities and collateral debt obligations.
• Lehman brother underwrote mortgage – backed securities more than any other firm
accumulating an 485 billion portfolio or four tims its shareholders equity.
• Leverage level up to 20 – 35 percent of their equity capital in order to invest on securitized
product using debt capital.
• Excessive risk taking.
• Passing the investment risks through unregulated credit default swap where they didn't
have any adequate capital behind them

17. Financial Crisis and the Sri Lankan economy
A declining growth rate
Increase in government debt
Increase in external debt
Unemployment rate
Import Export change
 Rupee under pressure for depreciation
Government Debt in Sri Lanka averaged
5523822.15 LKR Million from 1990 until 2019,
reaching an all-time high of 12271315 LKR
Million in the first quarter of 2019
External Debt in Sri Lanka averaged
45512.04 USD Million from 2012 until 2019,
reaching an all-time high of 54221.66 USD
Million in the first quarter of 2019
Unemployment Rate in Sri Lanka increased to
4.70 percent in the first quarter of 2019 from 4.60
percent in the fourth quarter of 2018. Youth
unemployment rate also increased to 21.90 % in
the fourth quarter of 2018 from 19.60 % in the
third quarter of 2018. It was 15.40% in 2015
previous Government had kept the value of the rupee
artificially at high levels by supplying dollars to the market
from the country’s inadequate foreign exchange reserves.
When the reserve levels which had been built by borrowing
and not by earning had fallen to a critically low level, the
country could no longer continue to feed the market’s
voracious demand for dollars. Exports, a means of earning
reserves, had been declining both in dollar terms and as a
share of the total GDP.

18. Measures to control Financial crisis in Sri Lanka.
• Prevent increasing and unsustainable deficits
• Interest rate should be slightly increase in order to maintain inflation at law levels
• Precautionary investment policy, especially for large projects, when such projects are
financed by the state budget.
• Better and careful monitoring over the internal financial system even if the system seems
healthy and not affected by contagion.
• Banking supervision methods such as the strict guidelines for maintains of non –
performing loans (NPL) were also helpful to maintain levels of loans as well as to reduce
the risk arising from delivery of credit.
• Issuance of directions to commercial banks by the CBSL for releasing of foreign
currencies for travel and other purposes depending on the purpose was another measure
to protect foreign currencies of the country. The requirement of producing documentary
evidence was helpful to regulate the movements of foreign exchange transactions.

19. Conclusion
• financial crises have taught many lessons to the regulators, governments, financial
institutions and to the general public at large. In spite of many lessons learnt from
the historical financial crises, financial crises have occurred repeatedly. We have
discussed about financial crisis, types of financial crisis, theories of financial crisis
and literature Reviews about financial crisis and effects of financial crisis in Sri
Lanka. The financial crisis characterizes the nature of a global systemic crisis in the
21st century. It has demonstrated that increasing linkages, technical innovation and
management changes have increased both the robustness and fragility of the global
financial network.