Many Banks Still Vulnerable to Crises - Article Example

 Many Banks Still Vulnerable to Crises Article Brief The Bank for International Settlements, an organization consolidating central banks around the world, cautioned that most banks are still susceptible to breakdown. Most banks around the United States and Europe are reliant mainly on central banks. To avoid inflation and discourage banks overreliance, B.I.S. General Manager Jaime Caruna suggests that policymakers should abolish low interest rates and should start setting higher official rates; government and the central banks should withdraw unnecessary support to banks; and banks should subject to ‘stress tests’.

With such a scheme, banks will have to expose deficiencies caused by toxic mortgages or sub-prime loans and rely on markets for financing. Adequate liquid assets and higher working capital may suffice during a short-term economic contraction and improve flexibility, respectively (Ewing, 2010). As quoted in the report, short-term financing is only treacherous in times of crisis. B.I.S. has been calling for banks to reduce risky practices and provide a more transparent trading and holdings activity.

It sends this message especially to emerging markets, like India, China and Brazil, which have been more resilient during the crisis. With easy money, such markets are vulnerable to higher inflation rates. Together with the G-20, B.I.S. likewise promotes for a firm public finance to gradually heal an economy, as an effect from reducing the government deficits. Caruna said that to prevent an eventual global financial meltdown, there should be new standards for fiscal consolidation by the end of 2012. B.I.S. Chairman, Christian Noyer said that it is a high time for government intervention to stabilize the financial system (Ewing, 2010).

Emphasis to Global Financing In Jack Ewing’s article, a substantial plan to help defuse the crisis bubble spanning globally had just been laid out. Markets (developed and underdeveloped) have mostly resorted to banks for any term of financing especially when depression incepted by the end of 2007. However, banks which also form part of the market itself are still defenseless against the wrath of the economic onslaught. Financial institutions which mostly provide easy money have depended greatly from central banks.

So there goes the proposition of the B.I.S. - high interest rates through government intervention to prevent inflation. Around the fall of 2008, Wall Street underwent the biggest crisis ever due to mortgage-related investments (“Credit Crisis,” 2010). Most banks around the world still practice the same risky procedures of putting constant value to their toxic assets. Some banks, adhering to a more conventional scheme, steer clear of acquiring toxic assets. The underlying message perhaps is that depending from low interest rates add up to the economic contraction.

To cease this latent contribution as suggested by the B.I.S., public sectors should do the job of making new policies according to a global standard, thus a global “fiscal consolidation.” Aside from government intervention, bank ‘stress tests’ are also a reliable procedure to prevent a market downturn. Stress tests would decrease the insecurities causing a wobbly banking system. Such tests allow banks to forecast risks by knowing whether they have enough working capital to sustain particularly amidst the recent global financial crisis (“Bank Stress,” 2009).

References Ewing, J. (June 28, 2010). Report warns that many banks still vulnerable to crises. New York Times. Retrieved July 22, 2010, from http://www.nytimes.com/2010/06/29/business/ global/29bis.html?pagewanted=1&sq=long%20or%20short%20term%20financing&st=cse&scp=11 Bank stress tests: Supervisory capital assessment program. (May 8, 2009). New York Times. Retrieved July 22, 2010, from http://topics.nytimes.com/topics/reference/timestopics/ organizations/f/federal_reserve_system/supervisory_capital_assessment_program/index.html?inline=nyt-classifier Credit crisis: The essentials.

(July 12, 2010). New York Times. Retrieved July 22, 2010, from http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/ index.html?inline=nyt-classifier