This research described the effects and devastation of the epidemic on the global economy, focusing on analysing the impacts on the international financial banking system.
INDIVIDUAL ASSESSMENT SEMESTER 1, 2020 Will COVID 19 pandemic trigger another global banking crisis? A lesson from previous global financial crisis Student’s name …………… Student’s ID ……………… Course ……………… Group number ………………… Lecturer’s name ……………… , 2020 Contents CHAPTER ONE: INTRODUCTION 1.1 INTRODUCTION From the beginning of 2020 to the present time, the Covid - 19 catastrophe is taking place globally and particularly seriously in many countries, causing negative impacts on the global economic and social situation A World Bank study had forecasted that income per capita just was expected to fall by 3.6%, while at the same time pushing millions into poverty and unemployment in 2020 Furthermore, the global economic value would witness a severe deterioration of 5.2% due to the quick and heavy shock of the COVID-19 disaster; and measures of nations and common economic sectors closing their economies to prevent the spread of the COVID-19 disaster (Worldbank, 2020) In June alone, the world financial markets suffered a huge loss of up to Rs 56.22 trillion (ETBFSI, 2020) The psychology of economic sectors is seriously affected when the revenue source plummets, especially in service, tourism and aviation industries Nations that the disaster had been most seriously and burdensome associated with international trading activities, tourism, export – import and global financing chains may be hardest hit Although the level of impacts would vary among nations and regions, all developing and emerging economies got hurt; furthermore, those injuries were even more severe due to external shocks and no sign of stopping Therefore, the operation of commercial banking systems is one of the most seriously affected areas There had been many opinions that this can be considered as a new economic recession since the 2008 crisis stemming from the real estate industry This research was conducted to consider whether this disaster may raise another global financial crisis or not based on the previous financial crises 1.2 AIMS AND OBJECTIVES OF THE RESEARCH - This research described the effects and devastation of the epidemic on the global economy, focusing on analysing the impacts on the international financial banking system - The research also fully analysed the prospects for the recovery of the international banking market in general, and the development opportunities from that recovery - The study also investigated the depth and breadth of the global recession storm impacting on the global financial system The new global economic downturn was the first since 1870 that originated from a pandemic; leading national policymakers had to consider implementing additional powerful interventions, rather than letting the economy recover itself after the recession through bailout packages and fiscal policies - The study assessed the long-term effects of the recession on the prospects for long-term economic development, a serious decline in human resources and the fissure of trade and supply links by focusing on three factor groups: black swan, macroeconomic and banking factors - Finally, the study offers solutions to promote the recovery and development of the global economy based on the strength of the international banking system; including scientific and technological advances in digital connectivity, e-financial service packages, as well as recommendations for appropriate business policies and decisions 1.3 METHODOLOGY AND DATA The main methodologies were conducted based on both qualitative research while data resources were from economic reports and research papers from reliable sources Qualitative research: via case studies and practical observations that financial institutions and countries performed policies to prevent an increase in economic disaster; simultaneously analysing the developments and situations that financial institutions have applied to recover from previous economic recessions 1.4 STRUCTURAL SUMMARY OF THE DISSERTATION The research included five chapters While the first chapter had introduced the aims – objectives, methodology and data resources of the research The second chapter focused on previous research documents assessing the impacts of the disaster to the global economies and international banking sectors; and the ways to respond to the disaster; then summary findings and critical review of those research documents The third chapter made a description of methodology (qualitative method) and data resources of the research From those methodology and data, the research carried out analysis of economic indicators and qualitative data in the next chapter The final chapter summarizes the findings and recommendations of this research, also pointing to the limitations and suggestions for the further research CHAPTER TWO: LITERATURE REVIEW 2.1 INTRODUCTION The objective of this chapter is to synthesize theoretical reviews related to the effects that the Covid-19 pandemic has caused to the banking industry in general through research articles, reports, etc In addition, the author also tended to analyse and evaluate the content of previous studies on this issue, thereby forming a framework and theoretical foundation to analyze the impact of Covid-19 to the banking crisis in a specific context of Bloomberg In this chapter, there are three main parts including the introduction part, literature review part and the conclusion part First, the parts of introduction will describe the purpose of literature review for the entire study In addition, this introduction part will cover the main content of each section in this chapter, what issues the sections will deal with The second part of this chapter consists of main theories from literature that will be used for analysis This part is considered as the most important part of this chapter because it deals with the whole theory from previous relevant studies, which includes analysing from the situation of bank crisis due to the pandemic, the problems that firms in banking industry have faced during the epidemic as well as the solutions that they have come up with Then, the author came to some personal evaluations about these measures that were really effective or not The third part is the conclusion for the chapter In this section, the author will conclude through summarizing all literature, analysis Moreover, achievements about theory and framework were also displayed in this part, which will be used to apply for analysis into specific contexts of the study 2.2 LITERATURE REVIEW 2.2.1 Lessons from previous financial crises “The Great Depression of 1929-1933 and 2007-2009? Parallels, Differences and Policy Lessons” of Peter Eigner and Thomas S Umlauft, 2015 These articles made a comparison of the causes and developments of two major world financial crises, the Great Depression from 1929 to 1933 and the global financial crisis in the 2007-2009 period After that, the articles gave many lessons related to financial system instability (real estate bubbles, subprime debt, economic inequality problems, financial products causing systematic risks) These two global financial crises were the worst since World War I In both crises, the US banking system has always played a key role in letting the crisis spread around the globe when the banking system is mis-constructed and loosely managed to cause chaos finance increase While during the Great Depression, the US’s nominal gross domestic product fell 29%, pricing level also fell 25%, unemployment rate stretched out more 20%, approximately 9,000 bankers stopped common operations In the 2008 crisis, the global GDP in 2009 had the strongest drop in the past 60 years At the same time, there was a great decline in economic resources from other countries until now, like Brexit, European government debts The intervention of governments of the countries is the main difference between the two crises During the Great Depression, the governments became more passive when it came to policy to prevent crises developing However, the role of the government in the economic recovery in the 2008 crisis became more pronounced Finally, Peter Eigner and Thomas S Umlauft pointed out some lessons from those crises: - Real estate bubbles leading to a series of defaults, and then bank run - A loose legal framework that includes regulations on risk management and equity-debt structure - Banking institutions had been granted too much power than allowed leading to bad decisions - Legal intervention was needed to prevent the crisis spreading However, the 2020 recession bore different characteristics from the two previous great crises The aforementioned lessons whether happen or not happen in the immediate recession will be the focus of this research COVID-19 and non-performing loans: Lessons from past crises (Anil Ari, Sophia Chen, Lev Ratnovsk, 2020) is a fairly detailed research on the problem of solving bad debts from the banking crisis COVID-19 followed the global economic crisis This leads to an increase in NPL The sustainability of bank reporting is reduced, the economic recovery is stagnant, and bank credit is significantly affected by high debt (Aiyar et al 2015, Kalemli-Ozcan et al 2015) It can be seen that high debt is one of the typical characteristics when the bank is in crisis and this problem is studied a lot This paper has been collecting data on banking crises since 1990 Economists say this is a crisis that has caused large public debt, which has led to an increase in many bad debts, and the problem of resolving bad debts will be even more difficult First of all, the article shows the status of NPL Normally, bad debt accounts for 20% of loans, but in many cases, the ratio will vary in countries (sometimes up to 50% in developing countries) The probability of a bank avoiding bad debt is high below 0.25% The crisis has left a lot of consequences, the bad debt ratio often increases sharply by 3.4 times, and even up to 10 times Thus, the NPL is increasingly high in the case of a crisis bank Next is solving the bad debt after covi 19 Solving the bad debt is always a difficult problem for economists, but it is necessary to help the economy recover.The article shows some useful measures such as:Reassessment of financial statements to review capital structure.Divide assets into types of good and bad assets This will make the bank's financial problem more transparent, giving the bank many loan opportunities In summary, the paper summarizes the measures that can solve bad debts If the recession is short-term, the reason may be because the company is illiquid Besides, the report also compares the solution of NPL in 2020 compared with 2008 In 2020, the public debt ratio will increase, in addition, the slow economic recovery rate after the epidemic will make the bad debt ratio higher Thus, the introduction of policies to resolve bad debts is the situation that needs to be resolved as soon as possible to avoid causing a crisis for the economy Through assessment, we can see that this article gives quite detailed information about the status as well as solutions for the NPL The article has many models and tables to compare the fluctuations in bank debt before and after the pandemic That article is really necessary for this research article, because NPL is one of the most fundamental features for the banking crisis 2.2.2 How banking system over the world responded to the impacts of COVID 19 “Banking system resilience in the time of COVID-19” of McKensey In July 2020, McKensey - a global financial consulting company - released a description report about the ways banking systems over the world responded to the impacts of the COVID 19 disaster based on capital cushions First, the report conducted a review of the 2008 financial crisis, which was triggered by a direct shock from the banking industry; meanwhile, the current shock originated from a world pandemic and the banking system just was an affected object However, the banking system plays an important role in the process of supporting economic recovery through supplying many loans to organizations affected by the disease Unlike the financial crisis in 2008, the world banking system entered the global economic recession in 2020 by the pandemic with a more dominant position By applying Basel III - a comprehensive standard set of reform measures built to improve regulations, supervision process and risk management of the banking sector, Europe’s CET1 ratios were 13%, this number in the UK reached 14% while 12% was in the US As a result, the global banking system could absorb $100 bil to $400 bil loss in CET1 and be ready to decrease CET1 ratios to – 8% Furthermore, banks all over the world can continue to resist the expansion of the global economic recession based on a capital conservation buffer with the value of 2.5% total risk weighted assets After that, McKensey had built scenarios for resilience to the world economy after the pandemic: (Resource: McKensey) In which, there are three most likely scenarios: the global economy can recover successfully by 2023 compared with before the time of the outbreak based on scenario A1; while scenario A3 made the forecast in 2021, scenario B2 gave a negative assessment of the effectiveness of public health The activity of economics is getting slower and this situation will lead to a higher pressure for wanes and liquidity in the market There is a fact that the covid19 pandemic is still riding around the world continuously with a high rate Economic effects are being swamped by the liquidity of the central bank and create a disconnection among economic fundamentals of market pricing The collapse of the spreads in U.S high yield credit is one of the best highlights about the impact of liquidity support (figure 4.9) Figure ICE BofA US High Yield Index Option-Adjusted Spread Source: Sean Fenton, 2020 Furthermore, the corporate sector has been left for cash by the pandemic of Covid-19 Till now, short-term funding has been provided by a relatively robust system of finance, mainly via the bank credit’s revolving lines which are available to most firms regarding JPMorgan, by the end of March, a huge number of companies through revolver drawdowns have borrowed a number of $208 billion, which accounts for 77% of the available funds in the facilities However, due to the plain report in this year, this approach has not worked in economics In fact, the profitability of economics has been going down globally and almost market returns have been shrinking Besides, the economics have also witnessed a lackluster growth of income Although most banks have continued efforts in cost reining, they could not sustain to gain the needed performance to secure their future The current Covid-19 crisis created the strongest test for the financial system around the world from 2007-2009 and whose effects of the longterm are still unknown Thus, the signs of economic recession in 2020 caused by the covid-19 pandemic cannot be concluded for a world financial crisis With the difficulties that banks may likely face, they should take steps certainly to address those challenges promptly to have effective management the current risk of liquidity and have better prepare for actions in the longer term as follow: (1) Liquidity challenges and management requests' rapid assessment and action: because in the crisi of the financial market, the overarching goals of banking organizations are cash preserving and liquidity assessment.The senior management should have the highest priority in understanding the cash requirement about the size, timing and funding A focused and dedicated team may be required for quick and effective responses to quickly react and offer adjusted processes and innovative approaches Executive management should also sponsor operational and technical resources for the first and second line of cross-functional teams’ defense Besides,it is also necessary to consider carefully to ensure that ongoing and business as usual operations need to be continued to meet in which they have to deal with crisis related issues at the same time (2) Strengthen the capabilities in reporting and monitoring liquidity: Banks need to utilize updated information accurately to manage the liquidity during time of a crisis They can use the existing report, data, processes, resources and tactical solutions that were implemented from the crisis in 2008 by enhancing the liquidity’s scope, depth and timeliness Some available tools for liquidity management should be focused on to improve monitorìn and forecast on expected as well as potential inflows and outflows, warning indicators on time and limiting risk Besides, banks’ liquidity monitoring also needs to cover collateral and specifically availability, haircut behavior, quality of credit, delivery calls, receipt calls, capacity of substitution and so on (3) Establish processes for coordinating regulatory responses: Banks need to conduct processes so that to have effective reactions in required information and in the needed report variations Based on available reporting regimes and implementation of inquiries which is established and expanded from those regimes, Banks also should expect investigation using the financial market crisis which is reputed as a pattern The information, which must have to finish these inquiries can be collected by an internal survey Staff, who are in the liquidity team should appraise about existing procedures which belong to the reporting team whether they are enough capacity or not in the answers of supporting regulatory and other internal requirements simultaneously In parallel, supplemental resources also need to be estimated to buy or not in order to improve existing abilities (4) Revise cash flow forecast and liquidity model assumption: In order to more precisely reflect current and prepared conditions against COVID-19 crisis(in consequence, such as renewal and modification in the economy ), the Liquidity model and prediction of cash flow will need to evolve Modeling supposition should be evaluated in the recent environment situation involving Asset haircut and cash flow timing (e.g., roll-off, money withdraw) Haircuts and relevant assumptions should be upgraded based on the decrease of market assessment Consulting subject matter resources on assumption reasonableness is encouraged.Moreover, Whether in-house modeling crews can have ability to keep rate of progress in which revisions is essential Additional resources may be required to break inner limitations and weaker abilities and solve the more heavy influences the more effective the more possible 4.3 THE SUMMARY OF THE RESULTS INTERPRETATION The study examines Tabel's black swan hypothesis based on previous markings of black swans However, pandemic COVID 19 is not really a black swan in the world The effects of the pandemic on the stability of the global banking system are almost short-term Liquidity plays an important role in financial markets, and is considered to be one of the major causes of this market crisis Compared with the present signs, it is impossible to conclude that there has been an ongoing crisis However, banks still need to take the necessary precautions to deal with crises Factors in the macroeconomy show signs of a banking crisis However, assessing the anti-crisis ability of banks today, the reforms of the banking crisis in 2008-2009 have helped the global banking systems to operate better According to The Economist, after the global financial crisis a decade ago, when governments reformed their financial systems, the banking network became more secure and resilient enough to overcome shocks as bad as the crisis over 10 years ago The US Federal Reserve (FED) has just announced the results of an annual assessment for US banks, which includes comparing the banks' reserve money with the damage that banks may have to deal with face in case of economic recession Accordingly, through the waves of crisis, today the US banking system has become truly more secure Last time, "Covid-19 storm" passed through most of the global economies and immediately caused a wave of crisis for economic sectors such as tourism, aviation , but up to this point, the banking system in the world basically still stood up to the shock mentioned above However, once the pandemic lasts or the second wave breaks out this year, this will be a huge challenge for the financial sector in general and the global banking system in particular Thus, macroeconomic factors have shown signs of a banking crisis, but it is not possible to draw a firm conclusion about the macroeconomic factor that led to the banking crisis during the period disease point COVID-19 4.4 CONCLUSION The most obvious cause of an economic crisis often comes from a great imbalance of economic resources with each other As a result, an economy after a period of hot developing will lead to an imbalance In this case, the research considered three factor groups of a common financial crisis Both black swan theory and banking factors did not yet confirm this pandemic will be a new global financial crisis while macroeconomic factors can not draw a clear conclusion Normally, some factors trigger a crisis including banking system defaults, government defaults, monetary policy and fiscal policy or even production stagnation Intense and timely intervention by governments and central banks to world economies had mitigated the negative effects of social distancing and economic closing policies Many financial bailout packages pumped into the economy had also made most stock markets strongly rebound after a short period of plunge from July to August 2020 and showed the positive results In many markets The recovery level of stock indices close to pre-crisis levels CHAPTER FIVE: CONCLUSION 5.1 INTRODUCTION This chapter has the purpose of summarizing all the dissertation about its findings, recommendations as well as limitations There are five main parts in this conclusion chapter which are introduction, summary findings, policy recommendation, limitation of dissertation and suggestion for further research First, the parts of the introduction will describe the purpose of chapter In addition, this introduction part will cover the main content of each section in this chapter, what issues the sections will deal with The second part of this chapter will sum up all the findings of the dissertation from analysis The third part will give some recommendations about policy to businesses in the banking industry The fourth part is indicating the dissertation’s limitation and the last part is about suggestions for further research in this field to be more completed 5.2 SUMMARY FINDINGS The thesis aims to describe the short and long term effects and devastation of the epidemic on the global economy and prospects for the recovery of the international banking market in general, and the development opportunities from that recovery Besides, the thesis also mentions some recommendations and suggestions for development of the banking industry Qualitative methodology was used in this study to analyze the international financial system through collecting the second data in the past and three main aspects include “The Back Swan”, “Macroeconomic” and “Risk Model” applied to analyze There are three main findings in this thesis includes: First, through The Bacl Swan analysis, the author saw that pandemic COVID 19 is not really a black swan in the world The effects of the pandemic on the stability of the global banking system are almost short-term Second, compared with the present signs of liquidity - which plays an important role in financial markets and major causes of this market crisis - it is impossible to conclude that there has been an ongoing crisis but they need to take the necessary precautions to deal with crises Last but not least, factors in the macroeconomy show signs of a banking crisis However, assessing the anti-crisis ability of banks today, the reforms of the banking crisis in 2008-2009 have helped the global banking systems to operate better 5.3 POLICY RECOMMENDATIONS During the COVID-19 period, it was not possible to conclude with certainty that the bank was in crisis However, it can be realized that the liquidity of a bank is at stake.There are too many lessons from the financial crisis of 2008 However, based on what is outlined below are some proposed policies The leverage in accounting books should be given priority The immediate priorities are to finance the bank's own portfolios and manage the income impact from the recent emergency rate cuts The liquidity and equity effects of customer and partner support decisions also need to be carefully considered Furthermore, banks use capital and liquidity buffers but expect them to strictly handle the sources and uses of cash and collateral with clear information about the disparities what has been previously reported to regulatory agencies (PWC, 2020) 5.4 LIMITATIONS OF THIS DISSERTATION The main objective of this research is to assess whether there will be an immediate financial crisis that has stemmed from the COVID 19 pandemic At the time the research conducted, the economic recession is occurring all over the world and there is the first recession from a pandemic that previously, it was hard to find a reasonable forecast model for this situation The research evaluates the likelihood of a financial crisis flare-up from three main groups of factors including: black swan, macroeconomic factors and banking factors However, qualitative research still contains many issues of concern - Strength: this method is very suitable to research behaviour and event occurrence; especially, this research conducted analyzing COVID 19 disaster impacts to the global banking system Data came in the form of observation and description Focusing on the particular than the generalization - Weakness: based on too many personal interpretations leading the accuracies and objectives of the research are dependent to the researcher - Opportunity: the existences of theories and hypotheses are not necessary The nature of this method is explorator - Threats: Data collecting based on the researcher; the verification measurement was not built from measuring of validity 5.5 SUGGESTIONS FOR FURTHER RESEARCH This study has a few points that are used according to the sensory factor, so it has not been evaluated accurately and objectively However, based on the results of this research, some suggestions are stated below to evaluate the topic 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Black swan theory of Nassim Nicholas Taleb 2008 global financial crisis as a black swan The financial collapse in 2008 deriving from the housing market in the US was one of the most famous and