Financial de-regulation is a well known word and it’s referring to a variety of changes in financial law. It allows financial institutions more liberty in how they compete whether such changes are beneficial or harmful to the economy as whole has been widely debated. Everybody should know that financial deregulation does not mean removing all essential rules and regulation. The well known form of financial deregulation came in the United States of America in 1999 and it was the result of the repeal of Glass-Steagall act. According to that act, anyone company could only act as an Investment bank, commercial bank, insurance company. A commercial Bank like as Royal Bank of Scotland offered savings and loan service to the customer, simultaneously an investment bank carried out activities such as trading in foreign currencies, assisting firms in mergers and selling securities etc. According to the repeal of this act firm could now carry out the functions of all types of institution. Important argument works in favour of repealing act and it was that, it would limit the effect of economic cycles on individual firm. It was also mentioned deregulation would make firms more competitive. On the other hand, another financial deregulation took place in the British financial sector and there involve building societies. These financial institutions were owned mainly by their customer rather than shareholders or specialised in mortgage lending. In 1980 building societies began to compete with banking sector and that time British government changed the law to allow them to demutualize. Then if the society’s members agreed in a vote, it could change into a limited company. Since that time, every building society which demutualized has either been bought out by a bank or has been taken over by the government after experiencing financial difficulties. The Royal Bank of Scotland is not out of this category.
The Royal Bank of Scotland (RBS) is an Edinburgh based the largest banking group in Scotland and at its earlier peak was second largest bank in the UK, also 5th largest bank in the world by market capitalism. The group operates a wide variety of banking brands offering ,corporate finance, private banking, personal and business banking, insurance etc throughout its operations located in Europe, Asia and North America.The main subsidiary of this group are; NatWest Bank, Ulster Bank, the Royal Bank of Scotland and Drummonds and Coutts & Co in UK and Ireland. In the United States It has own financial group named Citizen Financial Group. It was the eighth largest banks in the USA. This group was the second largest shareholder in Bank of China till 2009.
The RBS Group is a part of consortium with Spanish bank Banco Santander and another Belgian bank Fortis. This consortium acquired Dutch Bank ABN AMRO on 8th October 2007.Rivals speculated that RBS had overpaid for the Dutch bank. Although the bank mentioned that of the �49 billion paid for ABN AMRO and RBS share was only �10 billion which is equivalent to �167 per British citizen.
On 22nd April 2008 RBS announced a right issue and its main aim was to raise �12 billion in new capital to offset a write down of 5.9 billion which resulting from credit market positions and to shore up its reserves following the buying of ABN AMRO.The right issue was announced as part of trading up date and was one the largest seen in the British economic history. That time this group also declared that it would review the possibility of divesting some of its subsidiaries to raise further funds and especially its insurance divisions. Moreover, the bank posted a pre-tax loss of �691 million during the first six months of 2008.It was the second-highest loss in British banking sector. The bank gained a profit of �5 billion during the same period last year. Furthermore, on 13th October 2008, bank officials stood down after the government declared a �20 billion bailout and the plan was meant to secure the future of bank. It also means profits will have to be shared between bank and government, which now owns a 70% share and another �17 billion given into Lloyds TSB and HBOS as part of government’s �37 billion bailout.
As a result of the mismanagement which necessitated this rescue the chief executive Sir Fred Goodwin offered his resignation and chairman Sir Tom McKillop confirmed that he would stand down from that position when his contracts expires in March 2009..
Government again announced injection of funds into the British banking system on 19th January 2009 and its main aim was restart personal and business lending. Simultaneously government announced its intention to convert the preference shares in RBS that it had acquired ending of 2008.In February 2009 Chancellor Alistair Darling announced that the government was limited bonuses paid out to RBS staff and bonus would be cut from �2.5 billion paid last year to �340 million .Mr. Darling also said there would be “no reward for people who have failed” Further, bonus will be paid in shares, but not in cash.
At the same time RBS released a trading statement that its 2008 loss totalled �24.1 billion and it is the largest figure in the British corporate history. The total amount of the loss stands from a �16.2 billion write-down of assets .It was mainly linked to its purchase of Dutch bank ABN Amro in 2007.As a result the RBS share price fell more than 66% in one day to 10.9p share, from a year high of 354 per share, itself a drop of 97%.Some people called this is the Blue Monday crush.
In conclusion, as economists struggle the technical solutions to the recession which has bought interest rates to their lowest level in 300 years and forced government to cut VAT in an effort in an effort to get shoppers back into the high street, simultaneously ordinary people had to ask themselves difficult question about their own lives. In future economist and politician would have to move away from the idea that wealth and profit could be gained without risk and also demanded that environmental cost should be factored into all future economic calculations.
Part-2
Michael Porter developed a model in his book ‘The competitive advantage of nations’. It allows explaining why some nations are more competitive than others are, similarly why some industries within nations are more competitive than others are etc.This famous model of determining factors national advantage is well known as porters diamond model. This model suggests that the national base of an organisation has an important role in shaping the extent and it is likely to achieve advantage on a global scale. This home base provides basic factors. It is also supports or hinders organisations from building advantages in global competition. In this model porter mentioned four important factors and these factors are explained below.
1.Factor Conditions:
Factor condition in a country means production factors as for example infrastructure, skilled labour, fertile land, efficient organiser etc and these are closely related for competition in particular industries. These determinants can be grouped into capital resources,infrastructure,material resources, human resources etc and it’s also consider some other factors like as liquidity of stock market ,deregulation of labour and financial markets, research quality of higher educational institutes etc.
These national factors provide initial advantage as usually and every country has its own some factor conditions. Each country will improve those particular industries which the set of factor conditions is maximum. Michael Porter mentioned in his book that these factors are not god gifted or inherited, may change and develop. Economic development, social or cultural changes, technological advancement, or political roles, for instance, may shape national factor conditions. At this stage of discussion a good example is on the genetic engineering that will impact knowledge capital in this proposed field in European and North American countries.
2. Demand Conditions:
This condition is very important and it analyses the state of domestic demand services and product which produced in a country, Not only that it also plays important role on the shaping of particular factor conditions. According to the opinion of Michael Porter, home demand is determined by three important factors and those factors are:
- a) Their Mixture (Customers needs and demand).
b) Their growth rate and scope.
c) The mechanisms that transmit home preferences to foreign markets.
Moreover, Michael Porter mentioned in his book that a country can gain national advantages in any industrial sector or market segment if domestic demand gives clearer and earlier signals of demand trends to domestic suppliers than to foreign competitors. Generally, domestic market gets higher influence on an organisation’s ability to recognise customers’ needs then foreign markets do.
3. Related and supporting industries:
This sector discusses the existence and non-existence of multinational competitive supplying industries and additional supporting industries. An efficient multinational industry may lead to comparative advantage in other related industries. These industries can utilise and coordinate some activities in the value chain together. Similarly those are concentrating with complementary products like as hardware and software. As for example, China is not only successful in Garments industry but with product and services such as garment working machinery, design etc.
4.Firm-strategy,structure and rivalry:
This is another important condition in a country .It represent how companies are organised, managed, established and it describes the characteristics of home competition. In this part ,cultural plays important role and different countries ,factors like as working style, management structures or interaction between companies shaped differently.Simultaneusly this will explain merits and demerits for particular industries. Michel porter mentioned in his book that home rivalry and the search for competitive advantage within any nation can help provide organisations with base for gaining such advantage on a more global scale.
British Financial industry and Diamond Set of National Influences:
British financial industry may use the model .This model identify the extent to which they can build on home based advantage to create competitive advantage in relation to others on a global context. On the other hand, national level, British government can consider the policies that they should follow to establish their national advantages and its enable financial industry in their country to develop a strong competitive position globally. According to the porter’s theory government can foster such advantages by ensuring high expectations of product performance.
Part-3
Ans:
Introduction:
The banking credit crunch triggered by liquidity shortfall in the American banking system .It has brought in the collapse of many large financial institutions and the ‘bail out’ of banks by national government. It also downturns in stock markets all over the world. Most part of the world housing sector suffered because of numerous evictions, prolonged vacancies and foreclosures etc.Most famous economist think that it is the worst financial crisis since the Great Depression which came in 1930.The results of this crisis are failure of major businesses, declines in consumer wealth which value in trillions of U.S dollars and substantial financial commitments incurred by government, also a significant decline in economic activity.
The collapse of a global housing bubble was highest in United States in 2006, it is the result of the values of securities tied to real estate pricing to plummet thereafter and damaging financial institutions worldwide. The global stock markets had great impact because -banks were not solvent, credit was not available, damaged investor confidence etc and also securities suffered losses from late 2008 to early 2009.Simultaneusly economies globally slowed ,credit tightened and international trade declined. According to the opinion of most critics that credit rating agencies and investor banks failed to he accurately price the risk involved with mortgage related financial products. Not only that, those governments did not adjust their regulatory practices to address modern financial markets. The banking industry was gripped by credit crisis that took American Economy to brink of recession. It was the year the neo-liberal economic orthodoxy that ran the world for 30 years suffered a heart attack of epic proportions. Not since 1929 has the financial community witnessed 12 months like it. An American multinational bank Lehman brothers went bankrupt. Some other worldwide financial institutions like as Merrill Lynch, AIG, Freddie Mac, Fannie Mae, HBOS, Royal Bank of Scotland, Bradford & Bingley, Fortis, Hypo and Alliance & Leicester all came within a whisker of doing so and had to be rescued. According to the statistics of IMF large American and European banks lost approximately $1trillion toxic assets and from bad loans between January 2006 and September 2009,total loss are expected to top $2.8 trillion from 2007 to 2010.Then IMF shows that American and European banks were 60% and 40% through their loss respectively. The first victim of credit crunch was Northern Rock, a medium size British Bank.
Main reasons of Banking Credit Crunch:
The main reason of banking credit crunch was the bursting of the American housing bubble and it peaked in nearly the session of 2005-2006.It happened because of high default rates on “subprime” and adjustable rate mortgages (ARM),introduced to increase rapidly thereafter. An increase in loan marketing ,packing which long term trend to rising housing prices and it had encouraged borrowers to assume difficult mortgages in the belief people would able to refinance at easier terms.
Share in GDP of U.S Financial Sector since 1980:
Lower interest rates and availability of foreign funds created easy conditions many years prior to the crisis, fuelling a housing construction boom and more encouraging debt-financed consumption. The combination of available credit and inflow of capital created to the American housing bubble. There are many kinds of loan like as credit card,auto and mortgages etc were easy to get and consumers enjoyed an unprecedented debt load.So,as part of the credit and housing booms, the total amount of financial agreements called mortgage -backed securities(MBS) and collateralized debt obligation(CDO) and its derived their value from mortgage payments as well housing prices, greatly increased. Such financial advantage enabled investors and institutions all over the world to invest in the American housing market. Since housing prices went down,most financial institutions that had invested and borrowed big amount in subprime MBS reported heavy losses. As a result in home worth became less than the mortgage and its providing a financial incentives to whole foreclosure.Similarly,losses on other loan also increased gradually and crisis expanded from housing sector to rest part of economy.CDOs are the villains of the market turmoil but before they un ravelled the fuelled easy credit and economic growth in many developed countries like as USA,UK etc.Britons amassed a record nearly �1.5 trillion of debts which more than the British GDP as banks loosened their lending criteria.
Growth of the housing Bubble:
From 1997 to 2006, American housing price increased by 125% and during the two decades ending in 2001, the domestic median home price ranged from 2.9 to 3.1times median household income.Similarly, this ratio rose graduall,4 in 2004 and 4.6 in 2006.Therefore,this housing bubble resulted a small number of household refinanced their home at lower interest rate or some financing consumer spending by taking out second mortgages secured by price appreciation.
In October 2008, average American housing prices had got down more than 20% from their mid 2006.Since prices went down, borrowers with adjustable -rate mortgages could not refinance to avoid more payments associated with rising interest rates and finally began default. This situation not only affect US only,also influenced whole world economy .
Easy Credit Condition:
Lower interest rate always support more borrowing and American central bank lowered the federal funds rate target from 6.5% to 1% in 2000 to 2003 This was done to soften the effects of the collapse of the dot-com bubble .
American Current Account or Trade deficit:
The American high and rising trade deficit is liable for downward pressure on interest rate and it peaked along with the housing bubble in 2006.A famous finance analysist Ben Bernanke elaborately explained regarding trade deficits required the American to borrow money from overseas and its bids up lower interest rates and bond prices etc.Mr.Barnanke mentioned that the American trade deficit raised $650 billion from 1996 to 2004 and from 1.5% to 5.8% of GDP. Financing these large amounts of deficits required the USA mainly from the emerging economies in south east Asia and Middleast.According to the economic theory, the balance of payment indent requires that a country like as America if run a current account deficit, must have a capital account surplus of the same amount.So,hence large and increasing amount of overseas capital flowed into the American finance market its import. As a result created demand for many kinds of financial assets, increasing the prices of those assets while becoming lower interest rates. Foreign investor got these funds from their high savings rate or high oil prices etc.
Sub-prime landing:
The term subprime defines the quality of credit of particular borrowers who have weak credit history and there is a greater risk of loan default comparatively prime borrowers. According to the statistics, the American subprime mortgages value were approximately at $1.5 trillion on March 2007 with over 7.5 million first lien subprime mortgages outstanding. Most major American Investment Banks and government coordinate enterprises like as Fannie Mae plays leading role in the increasing of higher -risk lending.
Predatory Lending:
It refers to the practice of unscrupulous lenders, to enter into “unsafe” or “unsound” secured loans for inappropriate purposes. They used classic bait -and-switch method in whole country, advertising low interest rates for home refinancing .Those loans were written into extensively detailed contracts and swapped for high costly loan services on the ending day. A senior employee of ‘Ameriquest’ mentioned a system in which they were pushed to falsify mortgage papers and then sell the mortgages to Wall Street banks eager to the make rapid profits. So, the increasing evidence shows that those fraud mortgages may an important reason of global Banking Credit crunch.
Deregulation:
Some finance specialist said that the regulatory, framework did not keep pace with financial innovation, such as the raising importance of the shadow banking system, derivatives and off balance sheet financing and also some other factors like as changed of laws or enforcement weakened in part of the financial sector.
Increased debt burden:
The world leading financial institutions and households became rapidly indebted or overleveraged that period preceding the crisis. American five leading institutions reported over $4.1 trillion in debt for fiscal year between 2006 and 2007.It was about 30% of American nominal GDP of the same fiscal year.
Financial Innovation and complexity:
Some new financial innovations like as the adjustable -rate mortgages ,mortgage-backed securities(MBS) or collateralized debt obligations(CDO) ,Securitization, credit default swap(CDS) are very complexity and the ease with which they can be valued on the books of financial institutions. The usage of this product s expand rapidly in the years leading up to the crisis.similarly,certain financial product development may also have the effect of circumventing rules ,as for example off -balance sheet financing that affect the leverage or capital cushion reported by most commercial and investment banks.
Systematic Crisis:
Samira main is an Egyptian Marxist economist and he thinks ,the constant decrease in GDP growth rates in western countries since early 1970 created a growing surplus of capital which did not have sufficient profitable investment outlets in the real economy and was to place this surplus into the financial market .Later it became more profitable than productive capital investment ,especially with subsequent deregulation. Simultaneously Mr.Amin thinks, this phenomenon has led to recurrent financial bubble like as technology bubble and is the major of the recent financial crisis. Not only Samir Amain some other sources also supports this statement.
Role of Economic Forecasting:
The banking credit crunch was not predicted by bankers, regulators ,central banks, academies across the world and most financial economists believe that financial crisis are simply unpredictable ,following Eugene Fama’s efficient market hypothesis and related random -walk hypothesis. It also states respectively that market contains all information about possible future movements and that the movement of financial prices are random and unpredictable. Regulator were to focused on the institution -by-institution supervision of idiosyncratic risk ,similarly central banks too focused only on monetary policy tightly defined ,meeting inflation targets etc. According to the IMF global Financial Report, sometimes simply got it wrong and when did get it right, for instance in their warning about over paid credit growth in United kingdom and US, were largely ignored. In future central banks and regulators make judgements about the sustainability of whole business model and macro economic analysis with macro -prudential analysis.
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