GFC Global Financial Crisis, banking system, subprime crisis, sourcing, financial system, economy, banking crisis, financial market, Europe, USA United States of America, capital flows, financial fragmentation
Subject: Discuss how the global financial crisis of 2007-2009 affected different banking systems in the world. After the Global Financial Crisis (GFC), many commentators suggested that global financial integration would reverse and the banking system would need to change. Although the collapse in capital flows and signs of financial fragmentation are well documented, the developments in the banking system, and the implementation of certain regulations are not as well documented, creating some confusion on the actual facts.
[...] Indeed, financial losses began in 2006 for American banks, with a drop of 43 billion dollars, while in Europe, at the same period, banks' net results were still rising. However, it was really from 2007, the year of the crisis, that banks began to suffer the full force of very large losses in terms of net income, causing a significant weakening of their balance sheets and structure (see Chart 2). Chart Banks' net income Thus, during the year 2007, banks found themselves completely weakened by toxic asset choices that led to a devaluation of their financial capitalization and their financial structures, thus restoring their solvency capacity, thus leading to the start of the financial crisis on a global scale. [...]
[...] and PUJALS Les banques dans la crise, Revue de l'OFCE 2009/3 (n° 110), Éditions OFCE, pages 179 à 219 International Monetary Fund: "Global Financial Stability Report," April 2009. ECB Monthly Bulletin, April 2009. [...]
[...] A bank's solvency is generally measured by the capital adequacy ratio, also known as the "Tier 1 ratio". Following the directives and applications of the new accounting standards (IFRS), in the midst of the crisis, banks had to write down several hundred billion euros of assets by an equivalent drop in equity. While according to the regulations of the supervisory authorities, it is the Basel II agreements that are in force with a regulatory solvency ratio of set by the Basel II agreements, since the crisis banks have revised their requirements upwards. [...]
[...] Indeed, from that date on, banks understood their interest in carrying out their M&A operations in order to refocus their activities with more than 680 billion dollars of transactions recorded in 2008. At the same time, banks have also decided to carry out numerous transactions to sell non-strategic assets, always with the same logic of refocusing their activities on their core business and controlling the related risks. Banks also want to refocus at the national level. Whereas in the years leading up to the 2007-2009 crisis there was a trend towards internationalization, the crisis has led banks to change their strategies by changing their industrial logic, both in terms of business lines and geographical markets, in order to return to the markets they know and master. [...]
[...] The public authorities decided to intervene through aid to banks in order to support the financial sector, which took different forms depending on the country. The various governments then either set up refinancing facilities for the banks or set up recapitalization plans for the banks in difficulty. As a first step, the public authorities then acted as collateral in the context of the issuance of bank debt securities in order to be able to deal with the liquidity crisis and to reassure the various players in a context of dysfunction of the interbank market. [...]
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