In view of keeping up the fast pace of the industry and maintaining the competitive edge in the market, this report critically explored on the various approaches, namely diversification, disposal of assets, securitization, sourcing bigger companies and loan restructuring. These approaches were further elaborated and discussed on the pros and cons of using each approaches, in a bid to deal with the capital rationing issues, as well as preventive measures from losing strategic market share. The report subsequently focused on the approaches could be implemented by Lone Star Bank were then looked into. Additionally, alternative solutions were developed and incorporated in the approaches analyzed which we have identified to further enhance their sustainability efforts for the bank.
INTRODUCTION
During late nineteen centuries, eleven euro zone members with their individual monetary and fiscal policy substitute their domestic currency with the same currency, the Euro. With the number increasing to seventeen, the single currency proves to be political integration in terms of competition in goods and services, flow of capital or even increase the cross-border competition. Furthermore, this will largely reduce the transaction cost and at the same time maintain price stability. With the introduction of the new currency into the economy, there were several changes in the financial sector and mainly are the segmented bond markets, yield convergence on government and declined in interest rates offered by the banks.
Fuelled by the global financial crisis during the 2007-2008, the growth in Euro zone declined and public debts was accumulated due to excessive lending. The rating agencies downgrade the rating of European Monetary Union country and thereafter other countries in the Euro zone dramatically were affected in terms of fiscal deficit and sovereign debt refinancing which eventually led to the beginning of the Eurozone debt crisis. With the on-going debt crisis happening and in fear of contagion to the other Euro Zone countries, there were several organisations were involved in assisting and helping to rescue and revive the economy and the countries involved and one of the main participant are the 'Troika'.
TROIKA
With respect to the Eurozone Debt Crisis, Troika refers to the group that includes the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF). They are responsible for resolving the Eurozone Debt Crisis by making policy recommendations.
European Commission (EC)
Roles and Responsibilities
Formally known as the Commission of the European Communities, The European Commission operates under the executive branch of the European Union, largely ensure the EU law are not been violated and are properly aligned and acts as a body whose decision are not influenced by any organisation or government, perform the role as an independent supranational authority.
Generally, the European Commission operates several main functions. Firstly, they work in partnership with other European institution and make the proposal and the decisions on important legislation where the interests of the citizen are maintained and benefits are evenly shared and balanced. They also negotiate trades and ensure cooperation between the countries on behalf of the European Union on a global level is fostered. Managing the budget annually was one of their key roles and ensure the free movement of goods and services, flow of capital and other factors are not been compromised within the territory of the Union. On top of that, they are given the authority to take actions to those who fail to respect or comply with the agreement and the European law. Imposing fines, institute legal proceeding or even to the European court of Justice were several actions against the Member States who did not fulfil their obligations and these could help to ensure the benefits of integration are balanced.
Actions taken
The ECB define on its own quantitatively the inflation target. They have taken 2% nominal inflation in the Euro-zone as a threshold. Is inflation going beyond this limit, the ECB will intervene, i.e. raise interest rates.
Actions plan
The European Commission (EC) has raised a range of proposals to harmonize capital requirements,
Proposals by the European Commission (EC) to harmonize capital requirements, resolution, DGS, and insurance supervision frameworks at the EU level should be implemented promptly. While ensuring that the Fourth Capital Requirements Directive and Capital Requirements Regulation (CRD IV/CRR) are in full compliance with Basel III, their swift adoption, as well as that of the directives on resolution, DGS and insurance supervision, are necessary. The resolution directive needs to be enhanced to provide for automatic intervention in the event that a bank's solvency position falls below a certain trigger level, as well as to provide flexibility for intervention in the event of liquidity or other problems. In addition, more effective supervision and resolution arrangements need to be worked out for financial institutions crossing the borders between the SSM and the rest of the EU and beyond
European Central Bank (ECB)
Roles and Responsibilities
The European Central Bank, one of the EU institutions is mainly responsible to stabilise the prices and keep the inflation under control by implementing the European Union's economic and monetary policy. They are to ensure the Euro and other financial markets with adequate liquidity and to stabilize the economy. They lend money to the commercial banks by using reverse repurchase agreements and conduct money market operations to ensure overnight liquidity is maintained, thus uphold crisis prevention and reduce volatility of the short term interest rate. Furthermore, European Central Bank also has the responsibility to implement and maintain monetary policies to keep the financial system stable so as to support broad economic policy of the European Union. Other than that, they also take on the role of monitoring the price trends and highlight any risks or crisis might occur to the stability of the price in the Eurozone. In the event of inflation takes place, they could set the interest rate level and control the money supply by issuance of physical notes and coins.
Actions taken
At the beginning of the crisis, the European Central Bank was not aware and did not manage to assess the seriousness of the damage that could be done to the economy whereby they raised the inflation targeting in 2008. They subsequently lower the interest rate after the collapse of Lehmann Brothers. They then launched a programme called 'Enhanced Credit Programme' whereby they purchases bonds from Eurozone countries that requires financial assistance so to increase money supply in the economy, easing the lending requirements and as well as lengthened the maturities and relaxed the collateral criteria. Firstly, European Central Bank buy sovereign government bonds from the secondary markets which are to lend money to the government indirectly. On top of that, European Central Bank also acts as a role in lender of last resort. Separately, European Central Bank also offer the Eurozone banks an option called the longer-term refinancing operations (LTROs). This refers to Eurozone banks are able to borrow an unlimited amount of money for a three-year period at very low interest rates from European Central Bank. However, this has caused a severe moral hazard issue since any form of collateral were been accepted. Thus, this leads to an increase in size of the commercial banks' balance sheets and European Central Bank are to monitor the banks and impose incentives for banks to strengthen the banks' balance sheet to reimburse the liquidity gathered from European Central Bank. Apart from that, they also conduct interventions into the debt securities market to ensure depth and liquidity in the market and ensure the sustainability of the economy. Adoption of a fixed-rate tender procedure with full allotment in the regular 3-month longer-term refinancing in order to sterilise the impact so to re-absorb the liquidity injected. Subsequently, as they ended the covered bond programme in Jun 2010, they announced on the stricter rules on the collateral by reviewing the risk control measures in the framework for assets eligible for use. Interest rates were subsequently adjusted on several occasions to improve on their monetary policy standards and to meet the fundamental of the economy. European Central Bank subsequently continues to conduct the main refinancing operations (MROs) in June 2011. In December 2011 and March 2012, European Central bank allotted 489 billion to 523 banks and 530 billion to 800 banks respectively with the purpose to improve the liquidity conditions in Eurozone markets. European Central Bank also involve in rescue operations whereby moving the weak and bad asset off the balance sheet of the weaker member banks into the balance sheet of the European Central so as to save the weaker member countries from the collapse in the market of collateralised debt obligations.
Actions plan
The ECB also have the responsibility to supervise any of the largest 150 banks and acquire the power to exert direct supervisory authority over any bank when necessary.
. To ensure consistent supervision and safeguard against forbearance, the national supervisory authorities (NSAs), which will continue to supervise most banks in the countries covered by the SSM, are required to share information among each other and with the ECB.
21. Transition risks will need to be managed. Initially, the ECB will need to rely on cross country teams supplied by national authorities and led by an ECB supervisor. It will be critical to avoid mistakes during this start-up period, since these could cause a loss in credibility that would take much time and effort to reverse. Providing support to a bank asset quality review coordinated by the EBA would also help the SSM avoid early difficulties and get a better understanding of the condition of the banks. The ECB has scope to postpone the date when the SSM becomes effective if it feels it is not ready. However this may have knock-on effects; thus every effort is needed to ensure that the ECB has its necessary resources in place by the SSM'sMarch 2014 postulated starting date.
Risks related to financial infrastructure seem to be manageable but care will be needed on this front too. TARGET2 functioned well in the crisis although enhanced information sharing with the ECB would be appropriate. The ECB's' capacity and competences should be strengthened as it is moving toward a risk-based oversight approach. Increasing reliance on Central Counterparties (CCPs) and Central Securities Depositories (CSDs) reduces overall risk to the financial sector. Risks in the event of the failure of a CCP or CSD are, however, substantial, and important work is in train to seek to address them.
International Monetary Fund (IMF)
Roles and Responsibilities
The International Monetary Fund (IMF) is generally an organization founded for the purpose of provide emergency loans to countries. They also act as an exchange rate stabiliser where they monitor the exchange rate policies to prevent exchange rate manipulation as well as promoting macroeconomic stability to support and attain economic growth by dealing with members who have difficulties in balancing their balance of payment. Reports were produced by IMF to firstly, oversee the country's economy and highlight or pinpoint any weakness so to prevent any crisis form occurring, and secondly to educate the economies by releasing reports and publications for technical assistance and economic training. This will eventually leads to foster good governance and promote sustainable growth. They have also take up the responsibility to foster relationship with countries in terms of monetary policy with the ultimate motive to ensure the world's financial system remains safe and sound.
Actions taken
During the Eurozone Debt Crisis, IMF loaned substantially huge amounts of financial assistance to Greece, Ireland, and Portugal. The first and second loans to Greece amounted to more than US$290 billion - which was equivalent to half of IMF's usable resources. IMF also adopted Stand-By Arrangement in order to finance the loan to Greece. As crisis spread to other European Union countries in early May 2010, European Financial Stability Facility (EFSF) and the European Financial Stabilization Mechanism (EFSM) was established where IMF contribute more funds in order to fund the rescue operation. Subsequently, IMF contributed € 22.5 billion through its Extended Fund Facility
(EFF) which is the IMFs fast-track Emergency Financing Mechanism as Ireland require financial assistance that was caused by collapse of the Irish real estate sector in the wake of the financial market crisis in 2008 and 2009. Low economic growth, weak international competitiveness and high fiscal deficits contributed to the need of Portugal of a financial rescue package where IMF contributed € 26 billion using their Extended Fund Facility. As these situations are highly prone to serious moral hazard, monitoring will be essential in order to reduce moral hazard. As such, the IMF and other EU institutions also did quarterly monitoring programs of disbursement of the loan tranches is conditional on reform progress controlled by a close monitoring. In terms of financing the loan, IMF had to issue Special Drawing Rights (SDRs) and grant credit to the EU countries in order to provide a potential monetary effect - with an additional contingent claim on the IMF or gives them additional funds.
Conclusion
The Troika demanded fiscal and structural changes in exchange for rescue funding and jointly overseen implementation of these bailout program.
Proposals to separate banks' retail activities from those deemed more risky are no panacea. However, such separation could reduce cross-subsidization of the latter, and make resolvability easier. These proposals are not substitutes for other enhancements in loss absorption capacity, such as capital surcharges, bail-ins, ex ante deposit insurance funds, and common backstops, which should in any case be taken forward. Also, care must be taken to avoid regulatory arbitrage to the extent that EU or national proposals differ
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