31/12/2013 08:10 AST
It has been more than five years since the global financial crisis was first felt, with the sudden collapse of Lehman Brothers, which led to a subsequent domino effect of major corporations failing and a colossal banking crisis being set off that impacted, and continues to impact, the global economy. As is to be expected, the reactions to these crises were many, leading to a whole host of regulatory changes in the way of doing banking business, an overall aversion to risk, an aversion to borrow, and a fear of investments. This resulted in developed markets being plagued for extended periods by the malaise of ‘Deleverage, Deflation, and Debt,’ while emerging markets saw a slowdown in growth and extreme volatility in markets.
The diagnostics showed that institutions were decimated owing to ‘Leverage, Concentration, or Funding,’ together with a degradation of ethics of bankers. Globally growth suffered, which is always needed to create a positive sentiment and building confidence, which leads to investments and a surge in much needed employment. Volatility leads to lack of market predictability, making businesses unprofitable and impacting the long-term sustainability of economies. While growth slowed down, populations continued to grow and the number of people in employable age brackets has surged by massive proportions. Since, the individual is the critical link between macro and the micro elements of any economy, it is imperative to address these financial and economic issues or else larger social issues emerge owing to a lack of jobs and unemployment, leading to eventual political instability.
Markets hate instability or lack of clear direction and policy focus, which leads to risk aversion, and the cycle of deleverage and disinvestment becomes more prominent. In such situations, governments need to step in and play a dual role. The first immediate role is one of a regulator to fix the much needed regulatory environment to protect investors, consumers, and fiscal actions to create policies to provide fillip for growth. On the fiscal side, governments step up investment initiatives and new projects to fill the investment void left behind by private investors in such situations. In light of this, the recent global financial crises has redefined the way banking, business and regulations need to coexist, as there is a need for drastic changes to be introduced — including stringent regulations on bank capital, liquidity and corporate structure — which have globally led to a reduced supply of bank loans and incentives to secure assets.
Five years later, while interim growth has been paid as a price, the banking industry is a lot stronger than it was. While the focus of regulators in developed markets has been to repair markets and restore growth, the focus of regulators in emerging markets is to protect their markets from developed market dependence and by being proactive in avoiding mistakes made by their Western counterparts.
For more on this
Click Here
Khaleej Times
Please wait...
