Is Our Money Safe? - Part II

Written by Sam Vaknin


Continued from page 1

Ofrepparttar two sides ofrepparttar 106717 balance sheet,repparttar 106718 assets side isrepparttar 106719 more critical. Within it,repparttar 106720 interest earning assets deserverepparttar 106721 greatest attention. What percentage ofrepparttar 106722 loans is commercial and what percentage given to individuals? How many borrowers are there (risk diversification is inversely proportional to exposure to single or large borrowers)? How many ofrepparttar 106723 transactions are with "related parties"? How much is in local currency and how much in foreign currencies (and in which)? A large exposure to foreign currency lending is not necessarily healthy. A sharp, unexpected devaluation could move a lot ofrepparttar 106724 borrowers into non-performance and default and, thus, adversely affectrepparttar 106725 quality ofrepparttar 106726 asset base. In which financial vehicles and instruments isrepparttar 106727 bank invested? How risky are they? And so on.

No less important isrepparttar 106728 maturity structure ofrepparttar 106729 assets. It is an integral part ofrepparttar 106730 liquidity (risk) management ofrepparttar 106731 bank. The crucial question is: what arerepparttar 106732 cash flows projected fromrepparttar 106733 maturity dates ofrepparttar 106734 different assets and liabilities – and how likely are they to materialize. A rough matching has to exist betweenrepparttar 106735 various maturities ofrepparttar 106736 assets andrepparttar 106737 liabilities. The cash flows generated byrepparttar 106738 assets ofrepparttar 106739 bank must be used to financerepparttar 106740 cash flows resulting fromrepparttar 106741 banks' liabilities. A distinction has to be made between stable and hot funds (the latter in constant pursuit of higher yields). Liquidity indicators and alerts have to be set in place and calculated a few times daily.

Gaps (especially inrepparttar 106742 short term category) betweenrepparttar 106743 bank's assets and its liabilities are a very worrisome sign. Butrepparttar 106744 bank's macroeconomic environment is as important torepparttar 106745 determination of its financial health and of its creditworthiness as any ratio or micro-analysis. The state ofrepparttar 106746 financial markets sometimes has a larger bearing onrepparttar 106747 bank's soundness than other factors. A fine example isrepparttar 106748 effect that interest rates or a devaluation have on a bank's profitability and capitalization. The implied (not to mentionrepparttar 106749 explicit) support ofrepparttar 106750 authorities, of other banks and of investors (domestic as well as international) setsrepparttar 106751 psychological background to any future developments. This is only too logical. In an unstable financial environment, knock-on effects are more likely. Banks deposit money with other banks on a security basis. Still,repparttar 106752 value of securities and collaterals is as good as their liquidity and asrepparttar 106753 market itself. The very ability to do business (for instance, inrepparttar 106754 syndicated loan market) is influenced byrepparttar 106755 larger picture. Falling equity markets herald trading losses and loss of income from trading operations and so on.

Perhapsrepparttar 106756 single most important factor isrepparttar 106757 general level of interest rates inrepparttar 106758 economy. It determinesrepparttar 106759 present value of foreign exchange and local currency denominated government debt. It influencesrepparttar 106760 balance between realized and unrealized losses on longer-term (commercial or other) paper. One ofrepparttar 106761 most important liquidity generation instruments isrepparttar 106762 repurchase agreement (repo). Banks sell their portfolios of government debt with an obligation to buy it back at a later date. If interest rates shoot up –repparttar 106763 losses on these repos can trigger margin calls (demands to immediately payrepparttar 106764 losses or else materialize them by buyingrepparttar 106765 securities back).

Margin calls are a drain on liquidity. Thus, in an environment of rising interest rates, repos could absorb liquidity fromrepparttar 106766 banks, deflate rather than inflate. The same principle applies to leverage investment vehicles used byrepparttar 106767 bank to improverepparttar 106768 returns of its securities trading operations. High interest rates here can have an even more painful outcome. As liquidity is crunched,repparttar 106769 banks are forced to materialize their trading losses. This is bound to put added pressure onrepparttar 106770 prices of financial assets, trigger more margin calls and squeeze liquidity further. It is a vicious circle of a monstrous momentum once commenced.

But high interest rates, as we mentioned, also strainrepparttar 106771 asset side ofrepparttar 106772 balance sheet by applying pressure to borrowers. The same goes for a devaluation. Liabilities connected to foreign exchange grow with a devaluation with no (immediate) corresponding increase in local prices to compensaterepparttar 106773 borrower. Market risk is thus rapidly transformed to credit risk. Borrowers default on their obligations. Loan loss provisions need to be increased, eating intorepparttar 106774 bank's liquidity (and profitability) even further. Banks are then tempted to play with their reserve coverage levels in order to increase their reported profits and this, in turn, raises a real concern regardingrepparttar 106775 adequacy ofrepparttar 106776 levels of loan loss reserves. Only an increase inrepparttar 106777 equity base can then assuagerepparttar 106778 (justified) fears ofrepparttar 106779 market but such an increase can come only through foreign investment, in most cases. And foreign investment is usually a last resort, pariah, solution (see Southeast Asia andrepparttar 106780 Czech Republic for fresh examples in an endless supply of them. Japan and China are, probably, next).

Inrepparttar 106781 past,repparttar 106782 thinking was that some ofrepparttar 106783 risk could be ameliorated by hedging in forward markets (=by selling it to willing risk buyers). But a hedge is only as good asrepparttar 106784 counterparty that provides it and in a market besieged by knock-on insolvencies,repparttar 106785 comfort is dubious. In most emerging markets, for instance, there are no natural sellers of foreign exchange (companies prefer to hoardrepparttar 106786 stuff). So forwards are considered to be a variety of gambling with a default in case of substantial losses a very plausible way out.

Banks depend on lending for their survival. The lending base, in turn, depends onrepparttar 106787 quality of lending opportunities. In high-risk markets, this depends onrepparttar 106788 possibility of connected lending and onrepparttar 106789 quality ofrepparttar 106790 collaterals offered byrepparttar 106791 borrowers. Whetherrepparttar 106792 borrowers have qualitative collaterals to offer is a direct outcome ofrepparttar 106793 liquidity ofrepparttar 106794 market and on how they userepparttar 106795 proceeds ofrepparttar 106796 lending. These two elements are intimately linked withrepparttar 106797 banking system. Hencerepparttar 106798 penultimate vicious circle: where no functioning and professional banking system exists – no good borrowers will emerge.



Sam Vaknin is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He is a columnist for Central Europe Review, United Press International (UPI) and eBookWeb and the editor of mental health and Central East Europe categories in The Open Directory and Suite101.

Web site:

http://samvak.tripod.com/


Ten tips to ignore when starting a business

Written by Cathy Goodwin, Ph.D.


Continued from page 1

Unless you strongly resemble those "other people," they're irrelevant.

6. "You will probably fail." Your advisor may be using fear to motivate you to work harder or sign up for his success course.

Here's a legend: "Maestro," saysrepparttar surgeon torepparttar 106716 famous musician, "I played for you at a master class. You advised me to stop playing professionally. You said I would never be great. I want to thank you. I listened to your advice and became a doctor." The maetro peers atrepparttar 106717 surgeon: "I do not remember you. I tell all my students that. The great ones ignore my advice and continue anyway."

7." If you feel energized about your goal, you will be successful." Feeling energized just means you enjoy some aspect of what you are doing. Figure out what you enjoy and design a life to include more of it.

My old friend Richard was energized about his failing business for ten years of negative income. Last I heard he was with a temporary agency, paid hourly, holding on torepparttar 106718 title of "independent contractor."å

8. "You can always go back to what you were doing before." After months or years of trying to start a business, you and your former career will be different and your former colleagues will view you differently. Better to begin with a job that you can leave if you become successful. Stay in a position of power. 9." You have had a successful career so far and you'll figure out how to be successful now." Basketball players do not always thrive on football teams and baseball is a different game altogether. Enough said.

10. "You will be fine; you just need more confidence." If you lack self-confidence in several areas of your life, see a clinician. Otherwise your lack of confidence in your entrepreneurial skills is probably reality-based and should be viewed as a signal to find another advisor.

Cathy Goodwin, PhD, is an author, career consultant and speaker, who combines solid expertise with humor, commonsense and intuition. Read more at http://www.movinglady.com/ebooks.html and subscribe to her ezine by emailing subscribe@movinglady.com.




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