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Emerging Markets

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In emerging markets, there is a mixture of ownership of banks by the natives and the foreigners. Both the domestic and foreign-owned banks responded to the GFC in different ways that cannot be easily analyzed. Reports by the majority of central banks in nations that own both small and large shares of foreign banks showed that; there has been no main distinction between reactions of domestic owned and foreign-owned banks throughout the crisis.

Both the domestic and foreign-owned took preventive measures to mitigate the risk associated with lending, and lowered their off-balance sheet dealings and in derivatives in the foreign exchange market. However, the crucial difference was that while the domestic banks increased household lending and kept secured loans unchanged the foreign-owned banks lowered household lending and increased secured loans.

Another distinction was that local banks were concerned with attaining stable financial support in the retail market. This is by giving desirable deposit rates.

In most of the countries where foreign-owned banks have a significant role in domestic financial transactions, the principal question was whether the foreign-owned banks took part in ensuring financial stability is maintained in the time of crisis. Experience varied e.g.inMexico some branches particularly those whose parents had problems reduced their lending faster than the others, and they were later followed by domestic banks. Most of the foreign banks in Mexico ended up lending their parent banks. While some parent, banks transferred loans to their subsidiaries in order to lower the leverage of the head office.

Foreign subsidiaries also lowered their risk by being cautious on the trading activities they carried out in the foreign exchange markets. (Bordo & Redish, 2011)

Branch banking looked more desirable to host country as it facilitated transfer of technology and knowledge to the E.M.E.s. (I.M.F, 2011)

Because of this crisis, the attention of E.M.E.s changed from financial stability. Subsidiaries have, therefore, become more desirable due to the possibility of controlling their assets more closely than branches.

Some countries are, however, drifting away from foreign banks branches. Some like China prefer foreign banks to be in the form of branches this is mostly due to many activities in foreign bank branches.

In conclusion, in most E.M.E.s where foreign-owned banks have minor roles in local financial activities the reactions of both the domestic and foreign banks were minor and mainly in the form of funding and lending.

In emerging market economies where foreign banks are vital to the financial sector their reaction depended on how exposed the parent bank is the financial status of the subsidiaries, and the significance of subsidiaries to the parent institutions. (Bordo & Redish, 2011)

This made the banking system of Australia to be flexible at the time of the global financial crisis. This is particularly because there are only a few leading banks that carry around 75% of the banking sector. The banking system has only four key banks. This is as a result of slow growth of the other smaller banks that are dependent on securitization and have inadequate access to funding. These small banks are also acquired from time to time by the large banks. (Davis, 2011)

Profitable banking sector in Australia also enabled it to cope with GFC. Banks in Australia had conventional lending practices, enhanced by the strong supervision by APRA. This facilitated high performance of these banks. Strict controls and regulations also ensured that the level of non-performing loans is low. (I.M.F, 2011)

Australian banking system has capital that is higher than the regulatory minimums and is dominated by banks that are locally owned. These banks are the main players in the financial market. The four key ones and they are collectively large when compared to the banking system. (Davis, 2011)

One weakness with Australia at the time of GFC was that two of its main hedge funds had fallen in July 2007. There were also the financial difficulties of the great security market which had just been floated. This led to the rise of credit spreads and worries in the banking sector. This was indicated by a rise in number of people willing to hold exchange settlement account balances.

The financial system in Germany was relatively stable. This was because there was proper financial intermediation in the economy. Lending to customers was also at a low cost and this enabled most of the natives to get access to loan facilities. (I.M.F, 2011)

Some of the weaknesses in Germany included; low profitability even when adjustments for risk have been made. This was partly due to poor regulation and supervision of the banking sector and this made Germany vulnerable to the GFC. (I.M.F, 2011)

There is also vulnerability to excessive political pressure which makes decision making not be purely on the interest of the economy.

Before the GFC, both Australia and the emerging markets sourced their funding both locally and from foreigners. However, Australia had a well controlled banking system which controlled the funding while in the emerging markets, there were no controls, and they were, therefore, more prone to financial crisis from oversees. (Davis, 2011)

After the GFC banks both in Australia and emerging market countries were faced by high cost of funding. When the global securitization markets were closed this hit the Australian security market badly and while local issuance went on for some time, ultimately local markets also failed. The banks that relied on international financing faced increased cost of funding. Banks emerging economies countries were also increasingly depending on foreign sources so as to finance the rising level of credit. This made them charge a higher cost to borrowers. (Jang, & Sheridan, 2012)

The worldwide economic slowdown together with uncertainties brought about the re-ratings of borrowers downwards and eventually the stock market collapsed globally, and this was indicated in the stock prices, in Australia. (Davis, 2011)

In the beginning, of the GFC, before the Lehman Brothers failed in September 2008, the cost of borrowing was high and asset and equity prices were low. This led to problems in listed property and financial institutions. These companies could no longer sustain their complicated business models.

In the emerging markets, the funding of banks had two main attributes, first there was slow growth in the domestic deposits than in lending, and secondly, banks in emerging markets were increasingly their dependency on oversees sources in order to be able to fund the increasing level of credit. Almost all emerging markets recorded negative growth in funding from oversees. (Davis, 2011)

The main difference between Australia and the emerging markets is that after GFC Australia was able to cope with the crises. This is because its banking system was properly regulated and, therefore, was not adversely affected. The emerging economies, on the other hand, had poorly controlled banking systems, which highly depended on foreign banks. Therefore, they were not able to hedge against the risk associated with GFC. (Jang,& Sheridan, 2012)

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