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Economic Crisis will most likely experience a falling GDP, a drying up of liquidity and rising/falling prices due to inflation / deflation F I N A N C I A L C R I S I S : F I N A N C I A L C R I S I S Capital Market Bubbles/Crashes Market Price of stocks are higher than present value of future Cash flows. A dramatic decline of stock prices in a market. Crashes are driven by panic as much as by underlying economic factors F I N A N C I A L C R I S I S : F I N A N C I A L C R I S I S Currency Crisis A currency crisis occurs when the value of a currency changes quickly, undermining its ability to serve as a Medium of exchange or a Store of value. F I N A N C I A L C R I S I S : F I N A N C I A L C R I S I S A Short History CAUSES OF FINANCIAL CRISIS : CAUSES OF FINANCIAL CRISIS Strategic Complementarities in Financial Markets Successful investment requires each investor in financial market to guess what other investors will do John Keynes compared Financial markets to a “Beauty Contest Game” Mr. George Soros an Analyst , has called this need to guess the intentions of other “Reflexivity” CAUSES OF FINANCIAL CRISIS : CAUSES OF FINANCIAL CRISIS Leverage It means borrowing to finance investments, is frequently cited as a contributor to financial crises Leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy CAUSES OF FINANCIAL CRISIS : CAUSES OF FINANCIAL CRISIS Asset – Liabilities mismatch This is another factor believed to contribute to financial crises, a situation in which the risks associated with an institute‘s debt and assets is not appropriately aligned. It is also seen as one of the reason bank runs occur. Such as, bear Stearns failed in 2007-08 because it was unable to renew the short term debt it used to finance Long term investment . CAUSES OF FINANCIAL CRISIS : CAUSES OF FINANCIAL CRISIS Contagion Financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from 1 country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries FINANCIAL BAIL OUT PACKAGE : FINANCIAL BAIL OUT PACKAGE Adoption of Strengthened Standards Vulnerability of Financial System Contagion Volatility Role of Rating Agencies FINANCIAL BAIL OUT PACKAGE : FINANCIAL BAIL OUT PACKAGE Restructuring the Financial System Liberalization of interest rates Reduction of controls on credit Encouraging the development of secondary market for government securities Allowing free entry of private banks FINANCIAL BAIL OUT PACKAGE : FINANCIAL BAIL OUT PACKAGE Sound Corporate Governance stabilize & strengthen good capital markets Benefit of Corporate Governance: Protect Shareholder rights Robust growth of corporate sectors Enables corporations to realize Corporate objectives Demonstrate to the wider public about the business FINANCIAL BAIL OUT PACKAGE : FINANCIAL BAIL OUT PACKAGE Legal infrastructure must be made Bank secrecy laws should be improved Financial supervision & Bankruptcy Deposit insurance scheme is needed You do not have the permission to view this presentation. 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