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ASIAN CURRENCY CRISIS.
Term Paper ID:26178
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Essay Subject:
Causes & effects. Devaluation, historic bank failures & impact on international banking, currency exposure risks. Tables.... More...
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11 Pages / 2475 Words
9 sources, 18 Citations,
APA Format
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Paper Abstract:
Causes & effects. Devaluation, historic bank failures & impact on international banking, currency exposure risks. Tables.
Paper Introduction:
BANK FAILURES AND CURRENCY CRISIS IN THE ASIAN REGION
This paper is an examination of the Southeast Asia currency crisis in general and its relationship to, and possible impact on, the field of international banking (The BCCI affair..., 1992, Online; Haq, 1998). One of the primary topics to be discussed is the fact that as a business and practice, an international bank has the primary goal of measuring an economy's performance and the stability of its currency so that investors can identify investment opportunities and thereby make value-added business decisions (Tamburini, 1997, 32).
Another topic addressed in this paper will be to explain and examine the reasons for the fluctuations in currency values, most of which are caused by a phenomenon caused by the currency exchange rate. Simply defined, this means the value comparison
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However, most critics and analysts agree that the Asian banking crisisand the currency crisis are tightly interwoven, and a large part of theproblem is due to mismanagement of risk exposure connected with "hedging,"especially hedging in the foreign currency exchange markets. That remains tobe seen. Liebhold, D. Until the recent crisis, East Asia has been the fastestgrowing area in the world for the past three decades. In this these banks were typical of other banks around theworld which were attempting to generate new capital bases (McClintock,1996, 17). This paper will analyze these problems in three major sections: 1)HISTORIC BANK FAILURES, summarizing the recent history and causes ofbanking failures around the world; 2) THE ASIAN CURRENCY CRISIS, providingan overview of what the countries' banks have done and why they did it;and 3) CONCLUSIONS AND OPINIONS.Historic Bank Failures The year 1974 saw failures of two major international banks, BankHarstatt and Franklin National Bank. Comptroller's office, 1 2 U.S. These tables are not meant to be comprehensive butto show trends in activity (Liebhold, 1997, 4).Table 1: Asian Bank Summary|Country |# Banks |Bad Loans |Loan |Risk Factor|Last || | | |Exposure | |Failure ||Hong Kong |182 |NA |1.43% |42-5 % |1985 ||Indonesia |239 |1 .2% |1.88 |18 |1992 ||Malaysia |37 |6.4 |4.9 |23 |1989 ||Philippines |45 |NA |1.59 |22 |1986 ||Singapore |6 |NA |2.21 |33 |None ||Taiwan |82 |3.7 |3.1 |39 |None ||Thailand |53 |2.9 |2.11 |14 |1996 |Table 2: Bank Failures|Bank |Loss in Millions |Government Action ||Overseas Trust Bank [Hong |9 |Rescued ||Kong] | | ||Bank Summa [Indonesia] |8 |Liquidated ||Bank Bumiputra [Malaysia] |369 |Rescued ||Philippine National Bank |2, |Rescued ||[Philippines] | | ||Singapore |NA |NA ||Taiwan | |NA ||NA | | ||Bangkok Bank of Commerce |2,9 | Rescued ||[Thailand] | | | "Time [Magazine] asked regional banking analyst Robert Zielinski atJardine Fleming in Singapore to name the banks he thinks are the most solidfrom a depositor's point of view. Many factors have been identified as the causeof East Asia's relative success -- outward orientation, high saving andinvestment rates, macroeconomic discipline, and other good public policies-- although the relative weight of each in explaining the region's successis still a matter of considerable debate (McClintock, 1996, 2 ). Corporate capital requirements are increasingly being met through bondissues and commercial paper--shorter-term IOUs issued by companies and heldby investors. Italian bank deals follow oldalliances. FAS. Oneof the primary topics to be discussed is the fact that as a business andpractice, an international bank has the primary goal of measuring aneconomy's performance and the stability of its currency so that investorscan identify investment opportunities and thereby make value-added businessdecisions (Tamburini, 1997, 32). (1987, March 9). The Asia Society hasrecognized that the crisis, which began when "speculative attacks and bankfailures hit first Thailand, and then the other East Asian economies lastsummer, will continue to cause severe economic and political fallout" (Haq,1998, Online). Table 2 also shows whatactions were taken to save the bank if possible and what agency or agenciesinstituted the action. Tamburini, F. He selected three institutions thatoperate across the region and one national bank in each market.Zielinski's lists, however, do not necessarily represent the views ofJardine Fleming, and he does not intend to imply that there are significantrisks in depositing money with banks not included here (Liebhold, 1997, 7).International Banks in the Region(From very, very safest to very safe)CitibankHongkong BankStandard & CharteredNational BanksHong Kong: HongkongBankIndonesia: Bank BaliMalaysia: MayBankPhilippines: MetrobankSingapore: Development Bank of Singapore (DBS)Taiwan: First Commercial BankThailand: Bangkok Bank These banks have "weathered" the Asian crisis because of themanagement of currency exchange rates investments. Alsodiscussed in this paper will be the fact that depositors are not contentwith the meager return from a savings account and are finding that they cando better elsewhere, in money-market or other mutual funds. BANK FAILURES AND CURRENCY CRISIS IN THE ASIAN REGION This paper is an examination of the Southeast Asia currency crisis ingeneral and its relationship to, and possible impact on, the field ofinternational banking (The BCCI affair..., 1992, Online; Haq, 1998). When the dollar buys more yen, it is said to be worth more and itsvalue is said to "appreciate" while the Yen is said to "depreciate." Otherways this has been expressed in news stories is "the dollar is worth more,""the Yen is worth less," and so on. The Vatican: Hiding behind the walls. Both of these were crashes thatoccurred because of poor securitization which did not balance the loanobligations. The market concept of "supply and demand" determines the exchangerate, in this case, the "supply" of the dollar versus the "demand" for thedollar. Money monitor: Five ways to protectyourself from a bank meltdown., TIME International, 4+. In effect, no banker can predict exchange rates. Another topic addressed in this paper will be to explain and examinethe reasons for the fluctuations in currency values, most of which arecaused by a phenomenon caused by the currency exchange rate. Using this criterion, Asian banks (as do any internationalbanks around the world, face two essential problems: Predicting theexchange rate changes, and determining the impact on cash flows. Banks are burdened by the cost of maintaining capitalreserves as security against bad debts. (1995, March 13).Global agenda: Banking the business that will never be the same again, TIMEInternational, 46+. The BCCI affair. This is sometimes looked at as the "equilibrium value" at whichthe quantity of dollars demanded (by foreigners interested in doingbusiness in the United States) just equals the quantity of dollars supplied(by US residents who want to do business in other countries. The table also shows when the lastbank failure occurred and how severe the damage. online at www.fas.org.irp/congress/a992_rpt/bcci/ 1exec.htm Extract from the conclusion of the Bank of England report on thecollapse of Barings. "Securitization," the packaging ofvarious individual debts like mortgages into bond-like units that can betraded, has spirited off to the marketplace assets formerly carried on bankbalance sheets. (1997, July 31). According to a study by the U.S. This it dealswith changes in cash flows that result from existing contractualobligations. Will they move when the climate improves? The transaction exposure isstill there overall, but it is spread out over a longer period of time,allowing for the possibility of equilibrium. Part of these services was the act of foreignbanks buying up United States banks, internationalizing them by makingtransactions available in many world currencies. Bank of England Report on Barings. In effect, all of these bank failures can be attributed to currencytrading practices and poor management.Banking in the Asian Currency Crisis To gauge the health of banking systems, analysts look at severalfactors, including the level of non-performing loans (loans on whichborrowers have ceased making payments), loan loss reserves (money set asideto cover losses as a percent of outstanding loans) and the level ofproperty-related lending. The European, 38-4 Tully, S., (1987, Dec. 54. The relation between the currency shifts which are a constant eventand this concept of calculating the costs and risks of banks with heavyloan exposure commitments or FXX investments in regions will challengeaccountants and banking executives into determining new methods ofconsidering value added or value-diminished arbitrage in their balancesheets and income statements. The world cover story: The Vatican'sfinances. Alternatively, the dollar can depreciate, and is worth less, if thenumber of yen it will exchange for decreases. 12 McClintock, B. Ball, R., Branegan, J., Gibson, H., and Satsuki, O. The Asian banks, and all world banks,must pay greater attention to translation exposure, seeking to minimize itby remembering the bilateral and bi-directional nature of currency trading. This exposure analysis considers the change in thepresent value of the bank's liquid assets resulting from any change in thefuture operating cash flows of the banks caused by an unexpected change inthe exchange rates. In the new competitive environment, international banks maydifferentiate themselves through specialization--doing a few thingssupremely well--or by seeking the size and international clout to competeeffectively across a whole range of services. The scandalheightened when its chairman Roberto Calvi was found hanged in a suicide.The news stories blamed poor management and bad investments and Ambrosianahad to be merged with the Catholic bank, Banca Cattolica del Veneto and berenamed Banca Ambroveneto before it could regain stability (Tully, 1987.28). Journal of Economic Issues, 3 . What can be done ispredict, based on trends, what might occur. No matter howsophisticated the computer systems and the methods of performinginternational financial transactions, bank executives must make decisionsbased on incomplete data, and based on unknown future values (Ball,Branegan, Gibson, & Satsuki, 1995, 46). (1996, March 1). Finance Asia: Warnings on East Asian crisis.Inter Press Service English News Wire. With the Asian currency crisis much in the news, and a disturbingarray of headlines discussing what seems to be an almost daily rush of badnews for financial advisors and managerial accountants, it is necessary toclear up what has really happened, and what that really means (Ball,Branegan, Gibson, & Satsuki, 1995, 46). Franklin NationalBank, for instance, was undercapitalized and highly leveraged and when itfolded in 1974, was purchased by European American Bancorp, a company ownedby six European banks (McClintock, 1996, 15). (1998, November 5). 13-34. For example, if $1 is converted into 125Japanese yen, then the exchange rate is 125 Yen/dollar. In 1982, the world banking community was shocked when it was revealedthat Banco Ambrosiano which had close links with the Vatican, was for allpractical purposes financially insolvent (Allis, 1987, 54). Banks, particularly international banks, are responding tothe various challenges by recognizing that "lending" is a dwindling part oftheir business and by seeking new activities such as issuing and trading,which promise long-term growth. (1997, May 1). At the moment, Japanesebanks are too busy clearing up the mess left by the burst real estatebubble and the recession-induced slump in lending to worry about any formof expansion. This is done by examining indetail the four main types of exposure risk involved in a multinationalcurrency swap. Thus if the dollardepreciates to 115 yen, a single dollar buys fewer Japanese goods when thetrade is made (McClintock, 1996, 15). Anarrest warrant leads to a legal standoff with Italy. Banks should thus utilize an economy model that takes into account thepotential impact of economic indicator risks, such as unemployment, GNP,inflation, etc., all of which impact the Forward FX rate to varyingdegrees. The primary cause can be said to be "operating exposure," which isalso referred to as economic exposure, competitive exposure, or strategicexposure measures. This fluctuation in currencyvalues is not the only problem facing international bankers today. (1998, May 11). Simplydefined, this means the value comparison of one currency in relation toother currencies of the world. Fortune, 28. The change in value depends on the effect of theexchange rate change on future deposits, loan payments and so on.Conclusions It is apparent that a complete rethinking of the business structure ofinternational banking is called for. This figure isshown in financial tables in newspapers usually as YD/125:1 (McClintock,1996, 15). When the dollar "appreciates" againstthe Yen, say to 135:1, then that also means that $1 buys more Japanesegoods than it would if the rate was 1 :1. Online at www.numa.com/derivs/ref/barings/ bar 1.html Haq , F. Those are:* Transaction Exposure* Operating Exposure* Translation Exposure* Tax Exposure Transaction exposure is a measurement of the changes in the value ofoutstanding financial obligations incurred prior to an exchange rates butnot due to be settled until after the exchange rates change. The economies ofJapan and the Newly Industrializing Economies (NIEs) of Hong Kong,Singapore, Korea, and Taiwan have been hailed as models of achievement forother emerging economies. International financial instabilityand the financial derivatives market. References Allis, S. 21). (1992). Beta risk problems occur in every hedging formula(McClintock, 1996, 22). In the new competitive environment of the 197 s, banks differentiatedthemselves through specialization--doing a few things supremely well--or byseeking the size and international clout to compete effectively across awhole range of services. bankswere acquired by foreign concerns during the period from 197 to 1984, aperiod which also saw the beginning of bank failures. In a report entitled "TheBCCI Affair" it is described as "an elaborate corporate spider web withBCCI's founder, Agha Hassan Abedi and his assistant, Swatch Naqvi, in themiddle -- was an essential component of its spectacular growth, and aguarantee of its eventual collapse" (BCCI Affair..., 1992, 1). Below, in Table 1, are the latest such data onbanks in seven southeast Asian markets. A similar report on the failed Bank of Barings by the Bank of Englandsuggests that that bank institution failed because of "unauthorized andconcealed trading activities of the bank" and a "serious failure ofcontrols and management confusion within Barings" (Extract from..., 1998,1). It was not the banks transaction exposures that caused the currentcrisis. For blatant fraud and mismanagement, as well as illegal conversion offunds, the BCCI scandal of 1991 is unequaled. Becauseof its importance, considerable study has centered on issues related to theestimation and behavior of the models, especially the systematic riskparameter, beta.
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