Introduction
Credit crisis refers to a general decline in the availability of loans in banking institutions (Hull, 2010). This situation often manifests itself in the tightening of conditions needed in order to obtain credit in the form of loans from banks. It is also evident in the escalating interest rates charged, which are often detrimental to small and medium sized business ventures (Hull, 2010).
This inevitably results into a financial crunch which currently takes place worldwide. The credit crisis has various implications to financial risk managers in international business. The implications are discussed in this paper.
Implications
The global credit market hit a rock-bottom in 2007 and its effects reverberated throughout the US and the UK a year later, before spilling over to the rest of the world (Avgouleas, 2008). It occasioned far-reaching consequences to financial risk managers in international business.
It happened because of the fact that financial markets in the US and the rest of the world almost dived into free-fall while most financial institutions collapsed. As such, the financial risk managers found themselves facing the challenge of survival in the face of the worst ever financial crunch in the history of world business. Financial risk managers are thus forced to design survival strategies in the face of a desperate and depressed world economy.
Another effect of credit crisis is seen in the crashing of stock markets (Kindleberger and Aliber, 2005), which has various repercussions to financial risk managers as they have to cope with two extremes in the stock market: on the one hand, there exists heightened activity as panicked investors are desperately trying to dispose off their investments and pull out, and on the other hand, little or no activity at all, as investors keep away from the stock market waiting for the economic recession to subside (Kindleberger and Aliber, 2005).
It is also associated with panicked banking as in the case when financial institutions and assets lose a large part of their value. It has been noted that many recessions coincide with these economic occurrences. In this case, financial risk managers have to advise their companies on the most economical strategy to employ in order to survive in the market regardless of the crisis.
Credit crunch also leads to financial contagion for stock markets, particularly in African countries (Te Veld, 2009). The contagion is usually fuelled by sell-offs by foreign investors leaving the stock markets volatile leading in its return to weakening of the nation’s currency and hence high cost of business (Te Veld, 2009).
A good example is the current case of Kenya in which the shilling has drastically weakened against the U.S. dollar and for the first in history reached the highest exchange rate of Ksh. 100 against the dollar.
Most importantly, jobs in financial services all over the world have been adversely affected by credit crisis. Financial risk managers stare at looming unemployment given the fact that they are at the core of financial services. This arises from the fact that the tumbling of financial institutions witnessed leads to a sharp decline for the demand of their services.
Falling stocks, withdrawal of both local and foreign investors and the general volatility of the financial markets is surely rendering the financial risk managers irrelevant. The common staff lay-offs in most financial institutions around the world are attributed to this factor.
Credit crunch also leads to political instability, which is the major area of concern to financial risk managers. It is the case in the East European countries where financial markets are experiencing hitch (Pan, 2009). In fact, in some countries such as Iceland and Latvia, governments have tumbled under the weight of sustained public protests over the way they handle financial crisis (Pan, 2009). The resultant chaos disrupts economic activities, which also includes operations in the financial markets.
Redundancies in front, middle and back offices also personify financial crisis. Most financial and banking institutions are resorting to job cuts as a bail-out from credit crisis. Hence, some financial crisis managers have to be relegated to the periphery as they are left with little or no responsibility.
Policies
The devastation caused by credit crunch in many financial markets around the world calls for appropriate mitigation measures. One approach to the problem has been the currency creation, which was one of the measures adopted by the U.S. through the Federal Reserve. The Federal Reserve injected $600 billion directly into banks as a way of rejuvenating them. The fund was intended to enable banks finance more domestic loans and refinance mortgages.
However, most US banking institutions invested money in more profitable ventures in the international front. Many other governments have undertaken huge financial responsibilities of bailing out financial firms. It has been done through spending enormous amounts of money on loans, asset purchases and direct spending.
Moreover, many other policies have been considered when mitigating the worldwide credit crunch. First, credit rating agencies have been prevailed upon to embrace more transparency in the factors that determine credit ratings (Avgouleas, 2008). Second, regulatory agencies are required to raise capital requirements for complex structured credit products and to account for liquidity risks (Avgouleas, 2008).
They are also required to set more strict capital and liquidity buffers for financial institutions. Third, financial intermediaries have adopted the policy of creating an independent agency tasked with monitoring systemic risks. They are also set to put into operation a financial oversight committee to improve inter-agency coordination and cooperation.
Conclusion
The credit crisis experienced all over the world has presented new and unprecedented challenges to financial risk managers. Apart from the huge losses that have rocked major financial markets globally, there is the issue of imminent unemployment facing them. In addition, they are also affected by the resultant political instability, which impacts negatively the operations of financial markets.
They also have to grapple with financial contagions in the stock market as well as deal with the issue of redundancy of the front, middle and back offices. However, the redeeming factor is that most governments have taken measures to cushion the financial world from ravages of the credit crunch. This has been accomplished through direct injection of funds into financial institutions and drafting of appropriate policies to tackle the situation.
List of References
Avgouleas, E., 2008. Financial regulation, behaviour finance, and the financial credit crisis in search of a new regulatory model. Web.
Hull, John C., 2010. Fundamentals of futures and options markets, 7th ed. London: Prentice Hall.
Kindleberger, Charles P. and Aliber R., 2005. Manias, panics, and crashes: A history of financial crises. New York: Wiley.
Pan, P., 2009. Economic crisis fuels unrest in E, Europe, The Washington Post, p, a1.
Te Veld, Dirk W., 2009. The global financial crisis and developing countries: taking stock, taking action. Briefing Paper No. 54. London: Overseas Development Institute.