Financial Crisis Period

Economic Crisis

Defined as,‘Long-term setback in the Economy

caused by Financial Crisis’

Results in – Reduced Investments Decline in Trade Unemployment Inflation/ Deflation Intervention on Interest Rates Lower/ Negative GDP growth Drop in Market Liquidity

Financial Crisis

Defined as,‘Unexpected sudden drop in the

values of Financial Assets’

Results in – Loss of confidence on the financial sector Heavy withdrawal/ sell-off of financial assets Failure of Financial Institutions Economic recession or depression

Causes of Financial Crisis

Poor forecasting on the Future Economic Outcomes Looking for profits, more profits, more and more profits Maturity gaps between Assets and Liabilities Window dressing of Financial Statements Loopholes in Accounting and Regulatory systems Weaknesses in Taxation system Disregarding Corporate Governance Contagion effect

Types of Financial Crisis

Banking crisis Currency crisisBOP crisis

Foreign debt crisisDomestic public debt crisisSpeculative bubbles

Financial Crisis 1997(Asian Financial Crisis)

CausesCrisis began with the decision of the Government of Thailand to freely float ‘Baht’, its domestic currency.

Effects Setback on all economic units in Thailand Loss of confidence on the region and its impact on neighbor countries Contagion effect on the Western countries

RemediesIntervention of WB and IMF to pump money to stabilize the currencies

Financial Crisis 2007(The Great Recession)

CausesCrisis began after Federal Reserve slashed down rates, which led the economy excess liquid.

Effects Increased investment in Real Estate sector Subprime Mortgages Mortgage backed securities Default rates increased with maturity of the market and increased interest rate Several financial institutions became insolvent Remedies

Intervention of several Central banks with remedial actions Stabilization of Inter-bank market by adjusting the policy rates Capital injection into financial institutions Enactment of National Economic Stabilization Act of 2008

Financial Crisis 2015CausesCrisis began with continuous rise in asset bubbles in the Real Estate sector and Stock market.

Effects Bubble burst in Chinese stock market on ‘Black Monday’ Huge losses in international stock market Contagion effects on other stock markets

Remedies Temporary limits on stock market listings and trade State support to increase stock purchase Influenced stockholder behaviors in the market

Conclusion

In today’s globalised economy, frequency of turmoil has increased.

We can never predict accurately on Financial Crisis ahead. However, we have the lessons learnt from past.

Corporate governance, regulations and contingency planning could reduce the risk of financial crisis ahead to some extent.

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