Are Indian Banks Heading Towards Financial Embarrassment?

The banking industry has undergone major upheaval in recent years, largely due to the lingering recessionary environment and increased regulatory environment. Many banks have failed in the face of such tough environmental conditions. These conditions

To begin, the article explains the Federal Reserve’s plan to take a careful approach to enacting contractionary monetary policies, policies used to decrease money supply, in the future. Last December the Federal Reserve raised the interest rates after they had been near zero for years to ensure inflation was kept in check and to promote economic growth. It appeared the economy would be in for another increase in the interest rates sometime this year, but the Feds have rethought that strategy. If the Federal Reserve were to continue to raise interest rates it would have short-run and long-run effects on the Money Market, Goods and Services Market, Planned Investment, Phillip Curve, and Aggregated Supply and Demand. These effects are aspects that have to be considered because they express and explain the effects the increase in interest rates has on the economy and explain if the Federal Reserve is enacting the correct policy to achieve their goal.

The FED decided to carry out its bond purchasing program in August to help prevent deflation (Hauser, 2011). The article could have turned out much differently if the FED did not step up and take action. In addition the FED has the authority to adjust interest rates in accordance with the current economic condition. Currently the FED is willing to curb inflation by adjusting the interest rates at a moment’s notice (Hauser, 2011). The FED’s invisible hand can sometimes help prevent major economic disasters.

Kumar (1996) compares trends/fluctuations in key macro-economic variables in India pre and post 1991, both before and after initiation of new Indian economic policy in '91. These reforms included, amongst other things, the opening up of the Indian economy for international trade (prior to this India was a socialist state not involved in these markets) plus investment and heavy de-regulation processes. These particular changes to this policy allow for great insight into the impact of de-regulated, international capital trade on previously effective macro-management. He observes that this new economic policy increased economic instability which facilitates speculative activity, particularly resulting from financial sector liberalisation and the opening up of the economy. He adds that the observed increased volatility in economic fluctuations is a result from state intervention under these new economic policies that have reduced policy effectiveness. To quote: "The NEP not only lay greater stress on market forces but on opening up of the economy to foreign capital. This imposes constraints on policies since government cannot control the external environment which is governed by international finance capital- a force far more powerful than the Indian state hence able to dictate to it". He argues that since the interest of

This focus on resiliency also included stress tests that the American banks undergo to determine their ability to deal with things such as, “a sudden jump in the unemployment rate of 4 percentage points, or, a sudden decrease in GDP of more than 6 percentage points, and an abrupt rise in the BBB corporate bond spread” (The State of American Banking). Through these stress tests, it can be concluded whether or not the individual banks are making the correct decisions in the challenging financial circumstances, or whether the government needs to step in and alter legislations or practices.

In September 2015, Donnan and Flemin (2015) made a statement: “Fed urged to hold fire on rates or risk sparking emerging market panic”. The main purpose of this essay is to discuss and analyse the potential implications that an interest rate rise by the Federal Reserve would pose upon emerging markets, while capturing the wider issues associated with interest rates, macro factors and the welfare of the world economy.

This gathering of governor was joined by leading academics, thought leaders, and commentators on monetary policy. The world of modern central banking and global finance had now entered a new phase of even more obvious artificiality and distortions. According to the author, Mohamed. El-Erian, “Ones whose skillful management of the price and quantity of money in an economy was key to containing inflation, promoting economic growth, and avoiding financial crises.” Since the global financial crisis of 2008, central bank has ventured, by necessity but not by the choice. They set the interest rates higher. For an unusually prolonged period, the central bank was bold policy experimentation. During that time, many of the economists thought that central banks had been forced to operate, and many of them wondered about it consequences. From the beginning of the financial crisis, there was the hope that courageous and responsive central banks would succeed in handing off the baton to high growth, robust job creation, price stability, and financial system. The world was in the process of grow out of its debts problems avoiding the debt defaults because the policy making entities were finally in the economic governance responsibilities and with the job returning and economic prosperity. The world changed in two important ways: one had to do with the analytics of central banking,

The Federal Reserve went into action in response to the 2008 recession by rapidly reducing interest rates with the hopes of encouraging economic growth. The federal funds target rate was decreased to between zero and .25 percent. The results of the rate changes caused what is called “zero bound”, this reduced the effectiveness of monetary policy with the near non-existence of interest rates.

At the last FOMC meeting, the Committee found the economy has continued to expand at a moderate pace and it reaffirmed its commitment to “maintain a stable price level, economic growth, and full employment” (Focus, 2012, p. 1). However, the FOMC also knows that “without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions” and that “strains in global financial markets continue to pose significant downside risks to the economic outlook” (p. 1). To promote continued economic recovery and to keep a check on inflation, the

Extensive research has determined that the banking industry is in an unstable state. The industry’s profits have

The banking industry is highly competitive. The financial services industry has beenaround for hundreds of years and just about everyone who needs banking servicesalready has them. Because of this, banks must attempt to lure clients away fromcompetitor banks. They do this by offering lower financing, preferred rates andinvestment services. The banking sector is in a race to see who can offer both the

In an economy where there are financial ups and downs it is hard for companies to strategize a successful long lasting plan. There are many companies that have had great successes while others have had and lost. For those companies, a loss usually meant riding the wave to bankruptcy, a stigma which meant death in the financial world. Today, bankruptcy is sometimes used as a strategic move within the business world breaking free from financial burdens to start anew. This financial “get out of jail free card” has taken on a few changes over the years. Along with the history of bankruptcy there are different approaches or chapters with each method of filing, reasons for bankruptcy, and affects associated with both the debtor as well as the creditor.

Regression analysis seems to be extremely useful in determining financial distress and the bankruptcy of firms. In fact, in a particular study conducted by Bredart in 2014, it was presented that regression analysis was able to show an 84% prediction accuracy rate in determining bankruptcy of 870 firms between the years of 2000 and 2012 (Bredart, 2014). The independent variables used in Bredart study included profitability (net income/total assets), liquidity (current assets/current liabilities), and solvency (equity/total assets) while the dependent variable included financial distress.

This means that this is a high time for the ECB to take the action and adopt this policy rather than waiting for the other monetary policies to be failed and the economy is near its destruction. Since the ECB is working as a hub for the many nations which are connected and under the influence of the decisions which are taken by this central bank, here by, the ECB is required to be taking the decisions by considering all the nations, their issues and their priorities (Chong & Phillips,

Since The Altman’s model widely used among the investors, though it is not an intuitive model, once a firm is predicted having a financial distress next year, it has been treated as it has been financial distress currently (whtaker, 1999).