Introduction
Out of the impact of the global financial crisis, there was an intensified alarm that a decreased accessibility of lasting funding and the resultant investment risks would negatively influence the success of small as well as medium-sized companies and impede large fixed ventures. Policymakers asserted that, consequently, the capacity of banks and developing nations to uphold the level of economic development adequately high to decrease poverty and guarantee collective affluence would be lessened. Just like the global financial crisis, banking instability at that time was unanticipated (Haas and Lelyveld 337). It happened out of the scope of problems that had developed with time. Some of the causes encompass light directives of banking institutions, exceedingly intricate credit products, taut cross-border connections, and illogical excitement in the housing sector. Though the combination of aspects that resulted in the banking instability in the course of the global financial crisis had never been witnessed previously, the shift from extreme risk-taking to fiscal chaos was a common one. Every crisis is exceptional, but banking instability and financial crisis happen rarely and demonstrate certain patterns when they take place.
Causes
In line with a wide pool of studies, debt maturity and leverage are anticipated to wane in the course of a crisis since banking institutions make efforts to acclimatize to high uncertainty, increased risk, and poor proceeds by addressing risk and term premium (in most instances, the suppliers of funds just reduce the availability of term loan) and banks strive to reinstate or sustain their unassailability partly through making the lending regulations more restrictive. The resultant decrease in the utilization of long-term finance might not be optimal though, since such a decline may lead to a reduction in gainful fixed ventures and low productivity and development (Vazquez and Federico 8).
The influence of the global financial crisis on banks’ stability was experienced in many nations across the globe (Demirguc‐Kunt et al. 1154). Firm leverage, in addition to the application of long-term debt, decreased not just in high-income nations, where the crisis commenced, but in developing states as well, encompassing countries that never encountered an organized banking crisis. The impact on debt maturity and leverage are economically noteworthy amid privately owned institutions, even after factoring in return on assets, the size of the institution, business time-invariant attributes, and sales turnover (the proportion of income to total assets). The experiential approximations signify that amid private institutions that employed long-term debt prior to the crisis, the fraction of such a debt to total assets decreased by about 1.5% in developed countries and approximately 2.9% in developing nations. On the contrary, the development of debt maturity and leverage appears to have been exceedingly intricate amid public firms.
The magnitude of the global financial crisis on capital structures could have relied on the quality of monetary systems and institutional settings (Bekaert et al. 2612). In nations where the banking institutions are not excellently developed (for instance, where monitoring outlays are high) or in states with ineffective legal structures (for example, where bankruptcy processes are prolonged and expensive, and contracts hard to implement), deleveraging and cutting down of maturities was stern when judged against any other place since the conflict of interest involving the suppliers and borrowers of funds turned out to be a major limitation in financial decisions. In this regard, the lenders were more hesitant, during the global financial crisis, to issue long-term credit in nations with ineffective security and bankruptcy regulations attributable to the high probability of not recovering the assets in a situation of default. The existence of highly-developed capital structures assisted in the alleviation of the effect of a credit slump attributable to the banking instability, particularly for big and publicly traded firms.
Studies affirm that institutional aspects and monetary development indubitably played a considerable task in generating the response of capital markets in the course of and following the financial crunch, regardless of whether the nation suffered an extensive banking instability (Ho et al. 207). With respect to privately-owned companies, researchers establish that the reduction in debt maturity, leverage, and utilization of long-term debt was considerably bigger amid small and medium-sized enterprises situated in nations with less effective bankruptcy laws, poor coverage, extent, and availability of credit details sharing methods (that is, credit agencies). Such countries had a poorly developed banking sector or strict limitations on bank entry. While net interest revenue stayed nearly constant, the instability was highly linked to decreasing fee and commission proceeds (encompassing in other operating returns) and more damage costs in view of non-performing credits and a severe fiscal outlook.
Hong Kong
Before banking institutions in Hong Kong went into a state of instability caused by the global financial crisis, they were in a healthy situation with proceeds on assets nearly 2%, adequate capitalization, powerful but discreetly handled loan growth, and extremely low impairments. Although the margins were narrowing because of tough competition for deposits and credit facilities, banks gained from increasing fee and commission returns from assets management, brokerage practices, and trade finance to mention a few (Ho et al. 207). Loan development was especially greater in mainland China as banking institutions funded the extension of their customer base. Most of the clients (not just big firms but progressively small and medium-sized enterprises) commenced or expanded their property and manufacturing practices in China. From the credit products offered for use in Hong Kong, over 50 percent went to property improvement/venture loans and residential mortgage, resulting in a huge proportion of bank’s funds susceptible to the unstable property market. Unpleasant experiences (encompassing substandard and uncertain credits and losses) were extremely low (less than one percent for about four years before the crisis).
When the global financial crisis hit the banking sector in Hong Kong in 2008, it weighed heavily on the bank’s earnings statements (He 112). For the ten largest banks in Hong Kong, profits before tax decreased immensely in 2008, reducing by nearly 50% when judged against the previous financial year. In 2009, the interest margins rose higher when compared to 2008 when there was a sharp reduction due to Lehman Brothers Holdings failing to save their liquidity, with the Hong Kong Interbank Offered Rate (HIBOR) nearing the increasing United States Interbank Rate attributable to the connection of the currency (Hong Kong Dollar and US Dollar) being used in the two countries. The Hong Kong Monetary Authority reacted through the injection of liquidity into the banking sector via numerous operations that resulted in the HIBOR decreasing to less than 0.5% suddenly while the level of loaning for major borrowers stayed nearly stable at about 5%. A constant level of loan demonstrates higher discretion for banking institutions, poor risk desire, and enhanced bargaining power as a cost marker especially with reference to riskier small and medium-sized enterprises. Financing challenges of banks coupled with the progressively bleak financial position resulted in banks’ decreased lending.
The decrease in loan facilities was especially unpleasant for credits outside Hong Kong, mainly revealing the reduced demand for finances by Chinese firms (He 112). In Hong Kong, most forms of loans (for instance, brokerage and financial, leisure practices, hotels, gas, and information technology to mention a few) reduced greatly, decreasing by 5% to 10% QoQ. Property loans acted as the only group that demonstrated an increase of 2.2% QoQ whereas the other huge element, residential mortgage, dropped slightly by 1.5 percent as commission and fee proceeds came under duress. Assets management and brokerage costs declined as individuals became increasingly hesitant to venture (in structured merchandises, for instance) as most investors experienced huge losses. Revenue from initial public offering and issuance of bonds decreased because of the deteriorating capital market settings. Money obtained from trade finance was affected by declining export orders. Asset value demonstrated initial indications of worsening in 2008.
The supplies and adequate capitalization of Hong Kong banks make them excellently primed for the anticipated weakening in asset value (Ho et al. 208). As loan impairment costs increased by around 300%, other costs that increased (mostly allowances for securities holdings) rose from nearly zero to about HKD 14 billion in a span of two years. Capital, a strong cushion to losses was increased in 2008, mainly because of the adoption of the Foundation of Internal Ratings-based (FIRB) practice for Hong Kong and Shanghai Banking Corporation as well as Hang Seng Bank. Since banks in Hong Kong have a moderately low possibility of subprime and controlled credit facilities (apart from a few exceptions) coupled with the reality that many major banks are subsidiaries of successful global banking institutions, instability did not pose a critical risk.
Enhanced instability alleviation aspects encompassed the eradication of any indications of credit card issues as well as the lack of a heated residential mortgage bazaar in Hong Kong (He 112). The rate of credit card accounts rose just moderately in the course of the recent years and delinquent amounts, though probable of rising, are presently extremely low. On the same note, modest development and low delinquencies hold factual for real estate-associated credits, which signify the highest proportion, over 50 percent of all loans issued in Hong Kong. The decrease in the cost of property might have had a negative effect not just on consumption and venture but as well on bank lending since their use as collateral for personal and business credits were prevalent in Hong Kong. Nevertheless, prudential directive (utmost loan-to-worth proportion of 70% integrated in the Hong Kong Monetary Authority’s guidelines) and restricted credit expansion in the course of economic prosperity ought to avert the possibility of banking instability.
Conclusion
Similar to the case of the global financial crisis, banking instability was not anticipated. It was caused by a scope of setbacks that had developed with time, for instance, light directives of banking institutions, remarkably complex credit products, firm cross-border relations, and unreasonable enthusiasm in the housing sector. Each crisis is special, but banking instability and financial crisis happen infrequently and display certain patterns when they strike. When the impact of the global financial crisis began in the banks in Hong Kong in 2008, it weighed greatly on their profits. Nevertheless, prudential measures and checked credit growth seek to avert the likelihood of banking instability.
Works Cited
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Haas, Ralph, and Iman Lelyveld. “Multinational Banks and the Global Financial Crisis: Weathering the Perfect Storm?” Journal of Money, Credit and Banking, vol. 46, no. 1, 2014, pp. 333-364.
He, Dong. “The Effects of Macroprudential Policies on Housing Market Risks: Evidence from Hong Kong.” Financial Stability Review, vol. 18, no. 1, 2014, pp. 105-119.
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Vazquez, Francisco, and Pablo Federico. “Bank Funding Structures and Risk: Evidence from the Global Financial Crisis.” Journal of Banking & Finance, vol. 61, no. 1, 2015, pp. 1-14.