How Canada, Australia and India is not affected in the Sub-Prime Crises- Lessons to be learnt and the Current Solution to be taken:
Sub-prime crises, a shocking word not only to a financial world but to anyone throughout the world. Almost every part of the world is throughly shaken up by the Sub-prime Crises. But there are countries which remained unaffected by the crisis. There are certain lessons which has to be learnt from those countries.
First we can take the case of Canada. The canadian banks are able to manage and are able to effectively come out from the crisis. The reasons behind their success is:
1.Canada has a very different Mortgage Market Structure. All high-to-value loans has to be typically insured with a government agency or an agency with a government guarantee. This has cushioned the Canadian Banks and most of the loan loss are insured and the associated credit risk is mitigated.
2.On the capital side the quality of tier one capital is concenterated well and 75% of the tier one capital has to be in common shares, targets were set for 7% of tier one capital and 10% of total capital and most of the banks were well above it.
3. The Canadian Banking Supervisory authority OSFI's (Office of Superintendent of Financial Investigation) supervision model was unique compared to other Banking Supervisors and it focussed more solvency, meaning first to understand the financial condition of the bank and then to deal expeditously deal with the problems. Some of the regulators outsource onsite audits, but OSFI's (Office of Superintendent of Financial Investigation) directly employs 500 people for this.
OSFI's (Office of Superintendent of Financial Investigation) is considering to include a risk professional in the Board of Directors as there is no one in the top management who is well aware of the risk the organisation is prone to. This will be a very important step, because throughout the world the Management Board of the financial institutions will comprise a set of people who are in the industry for a long time and definitely they will not be a risk management professional.
The other important reason for the Financial Crisis is still the most of the banks in US are not fully compliant with the Basel II and most of the Canadian Banks had implemented it and they have better data to assess the risk involved. Gross leverage ratio for a Bank is available in Canada before the Basel II implemention itself and that has helped them. It is very difficult to measure the risk with 100% accuracy. So having a leverage ratio on top of risk based capital is an added measure.
Dynamic provisioning for the loan loss provisioning is still under the discussion of International Accounting Standards Board (IASB) and will also be implemented.
Second we can take the case of Australia and India. Why the Australian and Indian Banks remained unaffected by the crisis is the Australian and Indian banks did not make themselves vulnerable by handing out risky loans during the good times. The banking system soundly capitalized and it has only limited exposure to sub-prime related assets and it continues to record sound profitability and so has low levels of problem loans. The Reserve Bank of Australia and Reserve Bank of India has taken the right step in right from granting the loans, which was the seed of the whole eceonomic crises. In simple words prudence has been used in granting loans. Moreover most of the Indian Banks were State Controlled and had a limited exposure to the global market. This made the Indian Banks more safer in every aspect.
In a nutshell, the solution for the crisis lies behind the prudence in granting the loans even during the good times, effective risk monitoring, Risk Manager's Participation in Board of Directors and risk based decision making by qualified risk management professional and dynamic provisioning to be made for loan losses are the steps used by the Banks which remained unaffected during the economic crisis.
But it always better to have the principle " Prevention is always better than cure"
Note: The views and opinions expressed here are purely my personal views and does not reflect anything beyond that.
Sub-prime crises, a shocking word not only to a financial world but to anyone throughout the world. Almost every part of the world is throughly shaken up by the Sub-prime Crises. But there are countries which remained unaffected by the crisis. There are certain lessons which has to be learnt from those countries.
First we can take the case of Canada. The canadian banks are able to manage and are able to effectively come out from the crisis. The reasons behind their success is:
1.Canada has a very different Mortgage Market Structure. All high-to-value loans has to be typically insured with a government agency or an agency with a government guarantee. This has cushioned the Canadian Banks and most of the loan loss are insured and the associated credit risk is mitigated.
2.On the capital side the quality of tier one capital is concenterated well and 75% of the tier one capital has to be in common shares, targets were set for 7% of tier one capital and 10% of total capital and most of the banks were well above it.
3. The Canadian Banking Supervisory authority OSFI's (Office of Superintendent of Financial Investigation) supervision model was unique compared to other Banking Supervisors and it focussed more solvency, meaning first to understand the financial condition of the bank and then to deal expeditously deal with the problems. Some of the regulators outsource onsite audits, but OSFI's (Office of Superintendent of Financial Investigation) directly employs 500 people for this.
OSFI's (Office of Superintendent of Financial Investigation) is considering to include a risk professional in the Board of Directors as there is no one in the top management who is well aware of the risk the organisation is prone to. This will be a very important step, because throughout the world the Management Board of the financial institutions will comprise a set of people who are in the industry for a long time and definitely they will not be a risk management professional.
The other important reason for the Financial Crisis is still the most of the banks in US are not fully compliant with the Basel II and most of the Canadian Banks had implemented it and they have better data to assess the risk involved. Gross leverage ratio for a Bank is available in Canada before the Basel II implemention itself and that has helped them. It is very difficult to measure the risk with 100% accuracy. So having a leverage ratio on top of risk based capital is an added measure.
Dynamic provisioning for the loan loss provisioning is still under the discussion of International Accounting Standards Board (IASB) and will also be implemented.
Second we can take the case of Australia and India. Why the Australian and Indian Banks remained unaffected by the crisis is the Australian and Indian banks did not make themselves vulnerable by handing out risky loans during the good times. The banking system soundly capitalized and it has only limited exposure to sub-prime related assets and it continues to record sound profitability and so has low levels of problem loans. The Reserve Bank of Australia and Reserve Bank of India has taken the right step in right from granting the loans, which was the seed of the whole eceonomic crises. In simple words prudence has been used in granting loans. Moreover most of the Indian Banks were State Controlled and had a limited exposure to the global market. This made the Indian Banks more safer in every aspect.
In a nutshell, the solution for the crisis lies behind the prudence in granting the loans even during the good times, effective risk monitoring, Risk Manager's Participation in Board of Directors and risk based decision making by qualified risk management professional and dynamic provisioning to be made for loan losses are the steps used by the Banks which remained unaffected during the economic crisis.
But it always better to have the principle " Prevention is always better than cure"
Note: The views and opinions expressed here are purely my personal views and does not reflect anything beyond that.
No comments:
Post a Comment