Risk Analysis in International Banking & Capital Markets: Macro-economic Impacts & Payment, Study Guides, Projects, Research of Finance

Download Risk Analysis in International Banking & Capital Markets: Macro-economic Impacts & Payment and more Study Guides, Projects, Research Finance in PDF only on Docsity! International Banks & Capital Markets Lecture 5: Measuring & managing risk Monday 08 March 1. Introduction In considering this topic we will seek to look at a number of risks to financial markets, systems and economies and how these impact on international banking and finance. This list is not exhaustive, nor exclusive, but takes the opportunity to look at some of the major issues. These include: • Macro-economic impacts – e.g. inflation, fiscal instability and balance of payment/current account dysfunctionalities • External issues – e.g. foreign debt, foreign debt servicing and FX reserves • Monetary impacts – e.g. exposure to FX risk • Payments performance – critical issues about cash flow & sustainability I will try to associate each of these topics with a real life case study scenario, but essentially we have to take a firm grip on the concept that the past is absolutely no guide to the future. If it were, then we would have no need for analysts and their like, nor indeed would we need to employ fund managers; it would simply suffice to have large computers which replicated past indexed portfolios. We could manage by employing statisticians and economic historians, who together would provide all the data we needed. Regrettably this is not the case, yesterday’s boom or bust is not tomorrow’s. The lesson of 2007-2008 is that we don’t know what is round the corner, although we can often have a pretty good guess that our rosy perceptions of ever expanding growth and ever inflating property prices are really bizarre to say the least. 2. Returning to the analysis – what is a bank or a market? At this point we need to return to our previous analysis – before we started to look at specific instruments – when we posed the questions about the role and functionality of a bank or a market. Economic historians will tell us that the origins of banks and of capital markets can be found in the huge expansion of trade in cities states such as Firenza, Venezia and the components of the Hanseatic League (centred on Hamburg) in the late medieval era. The financing of trade with the east – spices, silk – and the west – wool, fish – sparked the creation of two types of entity. 3. Macro-economic impacts Our first action is therefore to look at the effect of macro-economic impacts on the symbiotic relationship between business-trade- government and the financial markets in general. The events of recent years have demonstrated very clearly that we cannot ignore the effect of such factors on banking/markets as interest rates, inflation and the rapid decline of real economic growth. TABLE 3.1: GROSS DOMESTIC PRODUCT 2009 QUARTERLY % CHANGE Country Q1 Q2 Q3 Q4 Australia 0.8 0.7 0.3 0.9 Canada -1.8 -0.9 0.2 1.2 EU-27 -2.5 -0.2 0.3 0.1 Indonesia 1.1 1.3 1.5 1.5 Japan -3.2 1.3 0.0 1.1 USA -1.6 -0.2 0.6 1.4 TABLE 3.2: CONTRIBUTIONS TO GDP: PRIVATE CONSUMPTION 2009 QUARTERLY % CHANGE Country Q1 Q2 Q3 Q4 Australia 0.5 0.9 0.7 0.7 Canada -0.3 0.4 0.9 0.9 EU-27 -0.8 -0.2 -0.2 0.0 Indonesia 1.9 0.4 1.1 0.7 Japan -1.3 1.1 0.6 0.7 USA 0.2 -0.2 0.7 0.4 TABLE 3.3: CONTRIBUTIONS TO GDP: GOVERNMENT CONSUMPTION 2009 QUARTERLY % CHANGE Country Q1 Q2 Q3 Q4 Australia 0.4 0.9 1.4 1.8 Canada 0.5 0.9 1.5 1.4 EU-27 0.2 0.6 0.7 0.1 Indonesia 5.0 2.6 1.9 6.4 Japan 0.8 0.3 0.1 0.8 USA -0.3 1.0 0.4 0.1 TABLE 3.4: CONTRIBUTIONS TO GDP: INVESTMENT 2009 QUARTERLY % CHANGE Country Q1 Q2 Q3 Q4 Australia -2.7 0.6 0.9 4.8 Canada -7.8 -1.6 2.5 1.6 EU-27 -5.5 -2.5 -0.7 -1.3 Indonesia -1.6 0.5 3.1 2.1 Japan -6.2 -2.9 -3.1 0.3 USA -9.8 -1.6 0.1 0.6 TABLE 3.5: CONSUMER PRICE INFLATION 2009 QUARTERLY AS % CHANGE ON SAME PERIOD ONE YEAR PREVIOUSLY Country Q1 Q2 Q3 Q4 Australia 2.5 1.5 -1.3 2.1 Canada 1.2 0.1 -0.9 0.8 EU-27 1.6 0.9 0.4 1.0 Indonesia 7.7 4.8 2.8 2.6 Japan -0.1 -1.0 -2.2 -2.0 USA 0.0 -1.2 -1.6 1.4 TABLE 3.6: GOVERNMENT FISCAL DEFICIT FORECAST FOR 2009 AS A % OF GDP Country 2009f Australia -2.3% Canada -4.0% EU-27 -6.3% Indonesia -2.6% Japan -9.5% USA -14.0% 4. The external economics environment It is also important to assess the impact of the wider trade flows and related issues. Trade imbalances submit bankers and their customers to a range of pressures – they affect currency values, impact on credit ratings and drive interest rates. TABLE 4.1: NET TRADE BALANCE 2009 QUARTERLY AS % OF GDP Country Q1 Q2 Q3 Q4 Australia 0.5 ± -0.4 -0.7 Canada 0.1 -0.2 -0.4 ± EU-27 -0.4 -0.1 ± ± Indonesia 1.1 1.4 0.9 1.6 Japan -0.2 0.3 0.3 0.6 USA -1.2 -1.1 -1.2 -1.4 TABLE 4.2: CURRENT ACCOUNT BALANCE 2009 FORECAST AS % OF GDP Country 2009f Australia -3.8 Canada -1.2 EU-27 -1.0 Indonesia -1.4 Japan 3.0 USA -3.1 TABLE 4.3: REAL EFFECTIVE EXCHANGE RATE OECD DATA 2009 BY QUARTER 2005=100 TABLE 5.2: TERMS OF TRADE Key issues affecting exporters and those financing exports to this sample of countries Country Time delay for bank transfers (months) Terms of trade (instruments)* Terms of payment (days) Export Credit insurance Australia 0-1 Sight Draft 30 days Full cover Canada 0-1 Open Account 30 days Full cover Indonesia 0-2 Letter of credit 30 days Short Term only Japan 0-1 Sight Draft 30 – 90 days Full cover USA 0-1 Open Account 30 days Full cover * TERMS OF TRADE INSTRUMENTS Letter of Credit = a guarantee of payment to an exporter from the importer’s bank normally conditional on delivery of goods/services Sight deposit = a bank draft or bill payable on demand or presentation Open account = credit is extended without a note, bill or guarantee 6. FX risk – effects on companies, banks and economies TABLE 6: FX risk – effects on companies, banks and economies SCENARIO 1 - DOMESTIC CURRENCY REVALUES (i.e. strengthens) + Imports become cheaper + Import cover increases + Capital flow attraction – FX reserves improve + FDI becomes more attractive + Improved borrowing propensity + External debt servicing costs decrease - Exports come under price competition - Capital inflows lessen in value SCENARIO 2 - DOMESTIC CURRENCY DEVALUES (i.e.