Economic Instability and Human Error - Coursework Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Course : xxxxxxxxxxx Title : economic instability and human error Tutor : xxxxxxxxxxx @2010 Introduction World Bank was potentially formulated during the colonial era. It faces legitimacy crisis from economic instability and human misjudgments. Bank’s governance structures have not put in place new norms of transparency, accountability and democracy. When burgeoning entrepreneurs in UK are turned down for loans, these affects innovation and frustrate economic growth. When households in UK avoid inserting their savings in banks and instead buy physical commodities, durable goods and foreign currency, this affects banks efficiency. In addition, bank managers in UK may take deposit and pass them along related business or rather friends; thus discourages many business initiative and individuals with innovative ideas from improving and realizing their economic condition. Formal econometric survey shows that banks exert impact on economic growth. For example, if banks direct the flow of capital towards enterprise, for a higher projected social return, it will improve the economic growth. Countries with good banks know-how faces faster decline in poverty as the capital flows best projects. Unluckily, a lot of people live in countries with scantily functioning banks. Bank policies matter since it has the ability to improve individual’s living standards. IMF Supervision was set as a key mitigating factor for the ongoing monetary downturn. International monetary fund supervises all activities carried out within different countries. It controls the outward and inward flow of capital in different countries, such as UK. The reason behind this supervision is to control the level of inflation and fluctuation of prices. During inflation, majority of the banks tend to increase the rate of interest. This is done to reduce the cash in hand thus limiting consumer purchasing power. The vice varsa of this is also correct. Inflation refers to increase in the level of prices of goods and services. It is usually measured by the yearly percentage. As the inflation increase, every Euro an individual own buys a smaller % of goods and services. Most of the time, inflation is associated with CPI (Consumer Price Index). CPI is the total change in price of consumer goods in a country that the national statistics. Most people think inflation is evil, but inflation is ideal. Inflation affects individuals differently within a country. If inflation rate match up to what most of the people are expecting, then the cost isn’t high. The effects of inflation are; creditors lose while debtors gain if a bank does not anticipate the rate of inflation correctly. Uncertainty on what will happen makes corporation less likely to spend. Individual living off a fixed income, such as pension, they tend to see the purchasing power (Frederic 1986). The rate of inflation in UK is greater than that of other EU nations. Additionally, the manifestations of virtual banks have created the possibility of economic growth. Globalization has facilitated diversion of risk in banks, thus enhance development of nonbanks. The initial step to better risk tends to monitor and push for transparency thus enhances market discipline and supervision, the inflexibility of these recommendation, created new markers for derivatives and unprecedented growth in securitization across the banks. This allowed managers to detect risks and engage in regulatory practices. The aim of regulatory practices by managers helped banks to reduce the riskiness. Risk was measured by capital adequacy ratio, the lower the capital the lower the risks faced by banks. Regulatory enhanced by banks reduces capital adequacy as a prudential mechanism. Banks engages in regulatory and supervisory activities in order to detect and avoid problems for example regulatory arbitrage. Regulatory arbitrage is, taking benefit of looser regulations in a certain jurisdiction to different types of institution. Banks regulation have an ideal basis in national law, this means they cannot be transplanted from one country to a different country. For instance, the activities carried out by UK banks are different from what is conducted in US. Therefore administering what is conducted in US by the UK becomes a breach, and it is punishable by the state. The IMF have developed and instituted rules and regulation that all member state had to adheres to. Equally, the core principle for an effective banking supervision has turned out to be a key element of improving banking supervision in UK and internationally (Balbir 2003). These regulatory have made it possible to approach risks within the banks. Some counties such as (Korea and United Kingdom) have addressed this issue by consolidating supervision and regulation in banks. This links helps banks to recognize and promote financial stability through international financial surveillance. In fulfilling this mandate, banks seeks to identify gaps in regulation. Regulatory, inevitably and supervisory system have to adapt different methods so as to remain effective. The growing prominence on risk management, coordination and exchange of information at the intercontinental level is a good evidence to adapt. Adapting regulatory frameworks to speedily changing financial market remain a daunting challenge (Leijonhufvud 2000). The monetary crisis in banks have revealed the need for better align and liquidity with risks. Pre-crisis, certain risks were insufficiently captured –for instance, risks stemming. Furthermore, there was no globally agreed-upon standard for liquidity. The objective of supervisory services within banks is to enhance greater quality and quantity of liquid assets, thus making banks more resilient. On the other hand, not all banks are affected by the upcoming framework. Some suffers from new regulatory environment- for instance when the cost of liquidity increases, interest margin can be compressed. At times, a bank faces pressure from change in economic coverage thus affecting the organization. The quantitative impact helps to reveal challenges faced by the banks in an effort of trying to comply with the current proposal. It should be noted that crucial decision are yet to be finalized with regards to banks. For instance, the definition and understanding of leverage ratio are yet to be agreed. Capital affects banks in various ways, it obliges retain earnings in large amount. Grandfathering clauses gives banks adequate time to adjust. A leverage ratio is not a recipe for disqualifying bank from formulating unhealthy position. Banks are required to present their activities within the scope of work and responsibility and formulate ways to deal with instability in the world economy and from human error. Banks are required to account for the expected loses. Lack of transparency, instability in the world economy and from human error affects investors. It is very essential for banks to hold more capital during good times. The season behind this is to identify sudden increase in assets. Capital proposal regulation gives banks the power to impose rules and regulations in terms of payment and issuing of dividends, bonuses, capital and maintain capital at a minimum requirement possible (Walter 2004). IMF is advancing multiple reform in order promote innovation, effectiveness, accountability and efficiency within the bank and its member state banks. It is broadening cooperation with UN, donors, civil society and other multilateral banks. But the main idea goes further in recognizing the role and responsibilities of the bank, and provides reform for development projects. The bank reforms made are; directing the treasury department in issuing notes in the event of paying off the countries debt. It has also increased reserve ratio for banks, this is done to maintain it from 10%-100%, thereby eliminating the ability to formulate and create money. Paying the national debts would ultimately balance a budget of the country. These acts tend to stabilize the market economy and end tactically the economic boom cycle as a result of fractional banking. The main aim of regulation, supervision and reforming the IMF is to detect national instability in the world economy and from human error that might affect the banks trending activities. With the development and installing good mechanism within the IMF, it facilitates and maintains workers at toes. Each and every stage carried out within the banks helps to combat poverty with professionalism that arises from human defaults. Human error arises when; proper books of accounts have not been maintained, credit note and issuing note has not been kept, there is no records of bank creditors and debtors, poor supervisory tool used in governing all activities carried out within the banks department and the financial statement prepared does not show true and fair view of the bank’s financial position (Frederic 1986). Survey shows that banks matters greatly in human welfare. Most conspicuously, banks matter when they collapse or fail. Indeed, the monetary and fiscal cost of banking as a result of instability in the world economy and from human error has posed a major issue in individual’s life. Inflation is a significant problem in UK’s economy. The inflation was mainly cost push. When the rate of inflation increases the banks issuing rate also increases. Therefore, inflation has a direct impact on the banks. Inflation slows down the activities carried out by the banks and the economic growth. When there is economic instability, banks experiences loses. An increased in loan-loss provision may affect bank capital (Formulate recessions). The cost of giving new securities increases uncertainty of banking in an economy. Survey shows that asymmetric affects bank interest rate. Instability and human error affects loan supply and bank lending activities. During economic booms, demand for bank lending is usually very high, resulting in a high profitable loan, a lot of bank capital, and increasing credit environment in which more banks tends to lend at a lower rate as a result of stiff competition. As the country’s economy slows, some organizations suffers losses or lower income, thus leading to delinquent outright default, tighter credit situation and reduction in bank capital as the banks are projected to give fewer loans at a very high rate. Risks overhang the outstanding loan thus decrease loan supply during an inflective even more than it would be implied by the decrease in bank capital. Reform related in prices must clearly replicate the demand and supply the environmental costs. Deeping economic problems, banks tend to be threatened especially in the process of lending and issuing of money. IMF bank has been forced to spend up to $200 million in order to defend the sliding currency. IMF exchange rate used is the European currency. However, without any additional support from IMF, deflation seems inevitable. Devaluation has a catastrophic effect on population, faced with a sharp increase in recession. UK’s economy is set to suffer more as compared to other EU member country. Unemployment rose to 17% in April, with projecting jobless rate of 20% by the end of 2010. Credit rating organization has threatened to downgrade UK’s debt rating. In order to avoid fluctuation of the country’s currency, which came to exist in this year, IMF has agreed to cut off freezes and public services. The implementation of deep cuts remains unclear whether the International Monetary Fund (IMF) should cut loan during the inflation period. The current cut brings down budget deficit to 9.2% of GDP, but the International Monetary Fund has targeted in providing support to other banks. When the GDP of the country shoots up, banks are also affected in one way or the other. Anxieties are particularly acute in UK. An estimate suggests that UK-based banks have a total of 500 billion of the outstanding credits. Predominantly affected will be UKbank, which have loaned up to 400 billion. The risks of this bank are entailed by the fact that a lot of the outstanding loans were made to UK customer. In the event where UK is forced to devaluate the repayment issues of loans will rise penetratingly (Masciandaro 2004). UK banks therefore reacted with relief to the projected budget cuts. In ancient years, international monetary circles were warning UK banks on the activity to that will affect their flow of activities. IMF stated that economic mayhem there could inflame a “credit crisis” in UK, an outcome that looks livelier. UK banks are subject to police analysis, after reports that “insistent” methods were used to bring together money from borrowers. Ruling circles in UK are increasingly worried on the impacts of recession on banking system. The UK banks have enlarged the number of overseas currency loans to banks ever since the commencement of the economic crisis. It has also entered into a contract with the CB (Central Banks) of troubled state. UK banks have planned to govern the procedure used in borrowing money in order to safeguard financial steadiness. The UK banks have released its expectations for the losses banks are most likely to face in the years to come. Even though suggestion claims that, the actual losses suffered by the UK banks could amount to $16, the actual lose being more than the expected or projected loses. It further states that $16 billion were based on “a number of risk factors” such as instability in the world economy and from human error, which would turn out to be more serious, which included a further weakening of economic condition in UK as well as a longer international recession. Any instability whatsoever in the banking quarter would straight away affect the country’s finances and the population at large. Banks should however take responsibility for reckless leading in poor results (ssStuart 1986). While the UK has received support, the scheme will automatically place full burden of banking crisis to the ordinary people. State finances in UK have suffered tremendously in the past years, with a budget deficit of 100 billion. It is in this event that government is obligated to make funds available to the existing banks, this means cutting down public services as well as social programs. The figures compels that jobless rate in UK was 11.3%, meaning that more than ½ million UK’s will find themselves unemployed. Apprehension over economic and social penalties, economists urges IMF to step in and give credit in order to stabilize the situation. Even if these measures are agreed to remain, it must allow most banks if not all to meet their obligations. Banking systems with large loans denominated in overseas currency have a smaller turning with adoption of official dollarization. Banks in countries that are dollarized economy have internalized all the operating costs.UK banks already has overseas currency in the financial system, the idea is to control liquidity as well as solvency risks. Additionally, a country that experiences banking crisis is more likely to put into practice official dollarization. There are basically three effects of dollarization to an economy, this are; constraint on the central bank, effect of economic constancy on the activities carried out by the banks, as well as promotion of monetary integration with the international economy (Frederic 1986). Central banks tend to provide loan to banks experiencing liquidity problems. Printing currency is no longer practicable source of liquidity and banks must look foe different alternative to episodes of monetary distress. Liabilities of the banking scheme as whole are obligations in worldwide currency. As a result, a bank run is doable if the banking scheme implicit liabilities are greater than liquid assets. Where there is full dollarization, an economy is protected from a BOP (Balance of Payment) crisis, other than the risks of banking crisis is purely real. Monetary instability is prevalent to the procedure. Error is a direct manifestation of banks deficient. Miscalculation occurring in regions prone to risks should be investigated. Despite the fact that most of these errors does not lead to disastrous result they lead to a bank system failure. Errors committed by banks employees indicate the need of recruiting a competent person to investigate the cause of this miscalculation. Banks may be affected by miscalculation by the employees within the organization. These calculation errors add more features for the potential customers. Regrettably, this created error in a way which payments were calculated. Miscalculation reduces the interest rates, which reduces banks BOF below the minimum possible rate that what is initially required (Reason 1990). Human error is the main cause of bank failure. For the reason that, the varying role of human in modern environment as well as lack of understanding has affected the activities carried out within the organization. These errors may be intentionally or unintentionally. Intentionally is where errors are carried out at the discretion of the employees; this is to say that, employees are fully acquainted and aware of the consequences of their actions. They understand the consequences but they still go ahead in carrying out the activities. For example, intentional error may be conducted by both the third parties and the manager. This occurs where both the manager and the third party collude together to act erroneously. On the other hand, unintentionally error is where an employee’s carries out his/her activities erroneously without knowing the risks and consequences. In order to prevent impacts of human error in the banking sector, it is very essential for the managers to identify this errors caused by human and get acquainted to the cause of this errors. It is therefore very important to understand the projected errors and note then down. It is ideal for managers to maintain a safety index. Safety index is mainly used as a checking tool in controlling human error and enhancing safety index. An industrial clause is set to illustrate the suggested approach. Through assessing the existing human error, bank managers get more understanding of the risks. Human error affects banking system in various ways; first it affects potential investors who were willing to invest their money or finance into the organization. Second, customers may be forced to shift from one banking unit to the other, thus affecting the banks system. And lastly, it tends to increase the deficit in the country. Since the world financial crisis erupted in September, MPC (monetary policy committee) had minimal chance to respond to the damaging impacts on UK. Great depression was felt by the banks were affected during the Second World War. The report on the inflation rate experienced throughout the world affected both the local banks as well as the international banks. Official information for the third quarter demonstrated a bigger –than – predictable 0.5 percent shrinkage in economic situation. UK was entering a recession period. However, survey shows that there was a big drop of inflation, to 2 percent target, thereby allowing banks to trade under normal circumstances (Reason 1990). These are clear evidence that the cost of borrowing had fallen, meaning that a customer of a particular bank was not able to borrow money as a result of the high interest rate charged. The echelon of interest rates, 4.5 percent was too high. “Negative aspect risks” had increased, nevertheless the upside peril to inflation and development - the risk of a unexpected reinforcement in spending - had disappeared. Most of the economist in United Kingdom expected ½ point reduction in rates, while some envisaged, full point cut. The capital markets were discounting a decrease of 0.75% points. The lower the interest rates the lower the risks of deep recession. Banks promoted assumption that the EU central bank would slash its rates. Yet with lower rates nourishes into economy, the effect may be silent than in the past. Low interest rate showed that the monetary policy was strangely loose (Masciandaro 2004). From the survey shown on the financial crisis, emerging economies and developing nations appear to be more united in order to create and establish equitable international financial architecture. The effort depends on the technical expertise and coordination of work across the global borders. It is important that the appointed experts look into the factors affecting the banks and advice countries that are prone to these effects, supervision is greatly required. The International Monetary Fund (IMF) has resources necessary skills and knowledge of up to 186 countries to give technical leadership to G-20 as well as UN (Frederic 1986). IMF leadership can rub off pressing issues affecting the world banks: the need to create developmental assistance is effective. Apart from human error and instability in the market economy, other factors affecting banks development is the need for infrastructure development. Good transport and communication system has a greater impact on the banks activities. If the banks are constructed in a region where access to it by the customers would be hectic, minimal customers will be directly involved with the banks as compared to that bank constructed in a region where is access is much easier. IMF must coordinate reforms with other banks. International Monetary Fund recommendations to other banks must be taken into consideration. World Bank reform development was formulated to monitor all the activities carried out by other banks. Through this processes banks are able to determine and identify area of weakness caused by the human beings. When banks suffers from rush, this is called bank run. Since banks lend out cash they receive deposits, it becomes difficult for most of the banks to pay back especially where there is a sudden demand, therefore a run has the ability to leave banks bankrupt, causing depositors to lose more of their savings unless they are insured by the insurance company. A condition in which bank runs are prevalent is referred to as banking panic (Walter 2004). The fall down of Bear stream in the year 2008 is called bank run, although bear stream was an investment bank and not a commercial bank. For example, in the year 1980s, US banks crunch thus resulting to depression. Computerized program instituted in most banks triggered activities carried out within the organization, as a result leading to unprecedented market swing. Most economists think that electronic trading, introduced or managed by an individual has sparked debt crisis. The existing crisis tends to affect both lending, borrowing and issuing of money by the banks. Banking regulation and development are predictors of capital accumulation, productivity growth and economic growth. Other factor does not affect the existing market, which also include banking. Volatility is strongly correlated with growth and development of banks. On the contrary, market size is not robustly associated with capital, productivity, accumulation and growth. To end with, none of the monetary indicators is robustly correlated to private saving. The results have a lot of implications on banking system and the economy at large. There is a strong relationship between stock market liquidity and faster rate of growth, capital accumulation and productivity improvement. Worldwide integrated capital negatively affects growth rates as well as savings of an individual. Other banks are not in support of the stock return volatility hold back investment and resource allocation. To end with, the information suggests that banks offer different services from stock market. Measures of banking development as well as stock market enter regression considerably. Therefore, to understand the affiliation between monetary system and economic growth, we require theories in which stock market as well as banks rise at the same time to provide different package s of financial services. Most of the economist is unable to fully identify empirical correlation between growth and macroeconomics. Macroeconomic is a branch of economy used to study the entire country’s economy at large. Where a counties economy is unstable, this will have a direct impact to the operating banks as well. Stock market liquidity as well as banking development is considered to have a positive and robust link with the past and future rates of economic development even after controlling many other factors connected with economic development. Economic instability and effects of human error determines the stability of a bank (Walter 2004). Even though there is no a clear indication to establish a distinct relationship between financial sector and economic growth, the results exhibits the strong correlation flanked by contemporaneous explanation to stock market and banking progress do not follow economic growth. Economic stability and banking are inexorably linked. The crises are usually accompanied by recession in the macro-economy. The significance of finance and monetary stability on banks development are renowned in the economic literature. Poor banking activities have the ability to impede economic exacerbate, poverty, progress as well as destabilize the economy. A well operating banking system speed long-run economic development. Commercial banks reform, regulatory and supervisory policies affect the social welfare of a community. If the existing policy makers could implement good policies, commercial banks operations may improve, thus promoting economic growth and realization of the likelihood of frustrating crises. In most countries, bank crisis are recognized late when the cost is already too much. Banking crises are related to the output cost. Economic stability is the goal for banking stability. Macroeconomic stability requires both monetary and fiscal policies in order to regulate the activities carried out within the bank department. During macroeconomic instability, banks are more likely to experience weak capital condition from bad loans and lending activities. The cutbacks can result to credit crunches. In a national recession, all sectors of economy suffer total reduction in profitability. The effective and efficiency is not majorly on reducing bank capital but to encourage lending process. Appropriate reform in the banking sector would encourage foreign investors, promoting independent capital economy and simulating growth in order to encourage inflow of capital in the banking sector (Michie 1999). Macroeconomic instability may introduce inappropriate banking policies thereby increasing the macro problems on the banks. When there is a strong government regulation, failure of the banks sectors will also reduce. Introduction of an awful bank structure may cause deterioration in their performance. When bank capital return is measured correctly, it becomes hard to macroshock to the economy. Banking crises are directly correlated to the GDP. Since the introduction of the explicit or implicit safety net introduced by the government, there has been an improvement in the banking sector. The effective reform in the banking sector must be taken into consideration. Without these, there would be no reform at all, thus ineffective. The government regulation cycle in the banking sector is as follows, market regulation to market failure to horror stories to government regulation to market deregulation and finally market failure. It may be debated that in economies where forms of regulation exist, the anxiety between market regulations as well government regulation tends to provide and enhance protection against insufficient market control. This tension is important in the banking sector since it determines credit allocation to be made. The main idea trough deregulation of the banking is desirable and must be carried out correctly. Poorly formulated deregulation is worse than having no deregulation at place. Deregulation must be conducted until a number of preconditions are adhered to. Many are those cited are done in order to enhance bank safety. This includes; formulation of a well trained and independent bank reformer, regulators and supervisors, private bankers must be willing to do other risks evaluation in order to detect and combat those risks in those areas and there must be a legal and viable process, including regulation enforceability, bankruptcy of laws (Michie 1999) IMF bank exposure to products is still manageable. Balance sheet of the IMF banks is straight forward especially with assets. IMF banks maintain a 70% loan ratio by the supervisors. Most banks if not all are insulated against a squeeze in the monetary market that tripped most of the other existing banks elsewhere. An IMF bank at time feels the pressure exerted by its member state in different ways. Tightening rules and regulation posed challenge for the banks profit as well as real estate. If the existing price falls, this would leave most of the banks with more defaults in the loan, which is a mortgage loan. References Anthony. 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Masciandaro, D, 2004, Financial intermediation in the new Europe: banks, markets and regulation in EU accession countries, Edward Elgar Publishing. Michie . J, 1999, Global instability: the political economy of world economic governance Organisation for Economic Co-operation and Development. Rasmussen. J, 19987, new technology and human error new technologies and work, J. Wiley; New York. Reason. T, 1990, Human error, Cambridge University Press. Stuart. J, 1986, Banking policy and structure: a comparative analysis, Taylor & Francis; New York Walter, I, 2004, Mergers and acquisitions in banking and finance: what works, what fails, and why Read More