Report on Financial Management of the phenomenon

Table of Contents

Task 1: International Financial Integration. 3

Introduction 3

Benefits of Financial Integration 3

Consumption Smoothing 3

Domestic Investment and Growth 4

Enhanced Macroeconomic Discipline 4

Increased Banking System Efficiency and Financial Stability 4

Better Allocation of Capital 4

The limitations of financial integration 5

The concentration of Capital Flows and Lack of Access 5

Domestic Misallocation of Capital Flows 5

Loss of Macroeconomic Stability 5

Herding, Contagion, and Volatility of Capital Flows 6

Risk of entry by foreign banks 6

Conclusion 6

Task 2: Financial Crisis 7

Introduction 7

Causes of the financial crisis of 2007 and 2008 7

Leverage 7

Infighting among the financial regulators 7

Securitization of loans 7

Credit Default Swaps 8

Greed 8

Fraud 8

Politics 8

Impact of Financial Crisis on Different Countries 9

Impact on America 9

Impact on Australia 9

Impact on Canada 9

Impact on China 10

Impact on the UK 10

Conclusion 10

References 11

Financial Management

Task 1: International Financial Integration.

Introduction of Financial Management

It is the phenomenon by which the neighboring and regional financial markets and international economies are connected with each other. This integration is used in the sharing of information between the different institution that are transferring the information, etc. It takes place via various contracts, which is an agreement among the governing bodies of those economies to solve the financial disputes and disturbances through cooperation. There have been debates about the price and benefits of financial amalgamation. Through this integration, there can be better governance, proficient allotment of capital, and higher investments and growth. But where this integration becomes of a higher degree, it could become the cause of a severe financial contagion in the times of crisis, in those economies that were linked through this integration. It has the potential of making immense positive impacts on the world too. It can make improvements in the allocative efficiency of the capital and can also help in diversification of risks(Tayebi, n.d.). 

Advantages of Financial Integration of Financial Management

The advantages that can be gained from financial integration could be seen moreover from the individual investors or from the perspective of those countries that initiated the process of integration. The second perspective has a broader scope so we will focus on its benefits. There are four possible advantages of financial amalgamation that are discussed below;

Consumption Smoothing of Financial Management

The access to the capital markets through financial integration among the economies around the world will allow the company to engage in the sharing of risk and smoothing out the consumption. It will allow the company to borrow when the times are bad and to lend to others when it is in a position to do so. This will help in smoothing out the patterns of consumption overtime, in this way the flows of capital will increase welfare(Croce., Colacito., R and Mariano M., 2010). 

Domestic Investment and Growth of Financial Management

The portfolio of international capital that opens through financial integration will eventually befit the domestic market. The domestic market will grow and flourish. In many of the countries that are still in the developing stage, they are unable to make savings because they have very low levels of income. The inflows from foreign resources can be supplemental in household savings, that could enhance the level of capital efficiency can assist the beneficiary countries to make raises in the charge of monetary development and make improvements in the standards of living, as long as the subsidiary return from investments is minimum cost of loan invested in the capital. In some types of capital inflows, these possible advantages could be in large portion, especially in case of foreign direct investment. FDI might also give some important indirect long-term benefits, in adding to the direct effects on development. FDI may also give facilitation in the diffusion or transfer of technological and managerial know-how, specifically in various kinds of capital units. By financial integration among the economies, the expertise of workers can be improved by the way of “learning by doing” especially in recognized learning and by the on-job training. By the introduction of FDI, there is a chance that the profit of the local firms will be reduced(Edison, H.J., Levine, R., Ricci, L. and Sløk, T.,, 2002). 

Enhanced Macroeconomic Discipline of Financial Management

Through financial integration in the world economies, there will be the free flow of capital across the borders, and in that way, the countries will be encouraged to work according to the policies and regulations in the different mistakes in policies will be reduced. The more disciplined policies there will be greater stability in macroeconomics there will be. 

Increased Banking System Efficiency and Financial Stability

This perspective is widespread in working with open mind that it will help in increasing the integrity of the household financial market, and will enhance the effectiveness of the process of financial intermediation by decreasing expenditure and any unnecessary profits that are connected with monopolistic or cartelized markets. The improvements in effectiveness will help in lowering costs and will lead to lower markup rates of banks, lower costs of investments, and upper rates of growth (Gordon, 2017). 

Better Allocation of Capital of Financial Management

Greater financial amalgamation will permit an improved allotment of capital, which is a generally accepted view. By financially integrating the barriers of trading are eliminated, the payment and settlement raised area will give the firms the independence to choose the most competent trading and clearing and settlement platforms. The shareholders will have the freedom to invest their money at any place they think is the most suitable for generating returns. 

The limitations of financial integration of Financial Management

In adding together to the advantages, there are also some limitations associated with financial integration. The policymakers are aware of the fact that financial integration does not only generate potential benefits but also produce major costs. There is high degree of the distribution of the capital flow and lack of funds for the small businesses, either in permanent terms or when they are in the most need of it, are some of the potential costs of financial integration(Mendoza, E.G., Quadrini, V. and Rios-Rull, J.V., 2009). 

The concentration of Capital Flows and Lack of Access

It is evidenced that phase of a surge in the cross-border flows of capital are extremely concerted on a small units of nations only. In the 1990s there was a dramatic increase in the inflow of capital and that was only limited to the miniature number of large and middle-income countries. The share of income that was attributed to low-income generating countries fell in the 90s. In the same 90s the share of income that was being attributed to the top ten high-income countries increased. This is a drawback of financial integration(Morrison, 2009).

Domestic Misallocation of Capital Flows

It is said that though the capital inflows that have an association with an open capital might be enhanced the household investment their impact on the growth in the long-run may be of a partial nature only.  The misallocations of the capital inflows may to some extent be part of the outcomes are exist in misrepresentation in the local financial organization. The nations that have weak banks and the supervision of the financial system are poor, the straight and indirect intermediation of funds of mega system in the financial intuition may increase the problem of moral hazards that are connected with put down insurance. That means that the lenders may be engaging in riskier and concentrated loan operations.

Loss of Macroeconomic Stability of Financial Management

The undesirable macroeconomic effects can result from financial openness, together with rapid financial expansion, inflationary pressure, and real appreciation in exchange rates, and widening in the deficits of the current account. When the exchange rate is flexible, currency depreciation can result from growing external deficits, and that may ultimately direct to the rearrangement of relative prices and the induction of a self-correcting movement in the flows of trade. Contrastingly, under a regime of fixed rate of exchange, the loss in the competitiveness and a rate of growing external imbalances can affect the reliability and value of the business (Croce., Colacito., R and Mariano M., 2010). 

Herding, Contagion, and Volatility of Capital Flows

A higher quantity of fiscal freedom may also be favorable to a higher level of change or instability in the capital activities. The option of large reversals of short-term flows of capital raises the risk that the borrowers may have to deal with costly liquidity runs. There will be a greater risk of such runs, relative to the higher levels of short-term debt which is comparative to the international reserves of the borrow country. In general, the level of instability of the flows of capital is related to both the actual movements and the apparent activities in the household economic essentials, also the outside factors like the interest rate movements around the world(Edison, H.J., Levine, R., Ricci, L. and Sløk, T.,, 2002). 

Risk of entry by foreign banks of Financial Management

Through financial integration, there is a risk of penetration by the overseas banks, and though this dispersion can reap more than a few types of benefits it also has some disadvantages. The first disadvantage is that the overseas banks may give credit to small-sized firms most of the time and domestic banks would not be their preference. If these foreign banks only give credits to the strong and trustworthy companies and include it in their strategy then they would not be able to make much impact on the domestic economy. It is also speculated that by giving a large amount of credit to only small size firms, they would be making a negative impact on employment, output, and the distribution of income(Croce., Colacito., R and Mariano M., 2010). 

Conclusion of Financial Management

We have seen the positives and negatives of financial amalgamation in the above discussion. There is no doubt that financial integration helps in bridging the gaps between economies and it also has contributed a lot to globalization. At the same time, it also has some adverse impacts on domestic economies. Just for the sake of avoiding these negative impacts, we cannot refrain from using financial integration, for taking the maximum benefits from the international economies we have to strike a balance about how much to use it and where to limit its use. So financial integration provides lots of benefits to the business with its adverse effects. No business can get success without the financial integration strategies in its financial operations. Every business tries to get maximum benefits by overcoming all the threats and manage its operations most effectively. Financial integration acts as a key point of every organization.

Task 2: Financial Crisis of Financial Management

Introduction of Financial Management

A state in which the prices of assets are declined, the businesses and consumers face difficulty in paying their debts and liquidity shortages are faced by the financial institutions is termed as a state of crisis. A financial crisis is most of the time associated with a bank run, in this time the investors sell their assets off and take out their money from the investments accounts because they are having the panic that those assets will get devalued if stay same in any financial organization. The bursting of a financial bubble that was speculated, a smash into the stock market, a default in a sovereign, or a crisis related to currency are some of the situations that are can be termed as the financial crisis(rba, n.d.).

Causes of the financial crisis of 2007 and 2008

The crisis of 2008 and 2007 was a major one, the root causes of them are discussed below;

Leverage of Financial Management

An excess in leveraging is the center of all the crises related to banking. This was what happened in the crisis of 2008. The leverage when it increases beyond the balance sheets it gives rise to a crisis. The leverage was hidden in the instruments that are not visible on the balance sheet, such as the derivate. Any dangerous leverage is hidden in structured securities. There are no transparent methods of accounting for the leverage, so the limitation of it is complex and they can also not be written y any legislators as well. The only way out of it is to impose the requirements of capital that are radically high, intentional overkill, the recognition and acceptance of consequences that do way less harm than the financial crisis itself. The industry needs to find ways to improve the accounting and transparency, which would enable efficient and more adequate requirements of capital(Tayebi, n.d.). 

Infighting among the financial regulators

FDIC has been among the majority efficient bank regulators in the state, but due to the internal strife among the controller. The FDIC was efficiently removed from the list of regulators and so it became unable to manage savings, and so huge havoc took place. 

Securitization of loans

Conventionally most of the loans that were originated by the banks were retained by them. By doing this, an incentive is given to the lenders, though imperfectly to guarantee loans that only had a small chance of making any default. This approach was, taken to a side with the introduction of the concept of the proliferation of securitization. For the reason that the securitized loans are not held by the originating banks, to monitor the quality of standards of underwriting gives less incentive(Morrison, 2009).

Credit Default Swaps of Financial Management

The swaps are a kind of fancy instruments of finance, they allowed the banks and other institutional shareholder to get insurance beside the defaults of loans. There are several financial companies claimed an end to the credit risk due to this situation. The replacement of credit risk could just be done by the risk of the counterparty and the only problem was that. Such as the American International Group, collected way more liabilities than they could handle (Richards, 2020). 

Greed

From an economic stand, point to have a desire of money is not worse thing at all. Even the desire to get rich is essential to energy economic growth. But when this desire is taken to extremes the problem starts, and this is accurately what happened in the crisis of 2008 and 2007. The homeowners required to be rich by flipping in the real estate, credit originators did whatever was in their power, did not matter legal or not to maximize loan volumes. An absurd quantity of cash was handed over to banks to check the lethal subprime mortgages. In the private sector, the focus of the regulators was on getting a bigger paycheck. And by forcing banks to lend money to clients that were not even worthy of it the politicians did their effort to gain popularity(Richards, 2020). 

Fraud of Financial Management

Only a few financiers have been interrogated for their role in the crisis, but that cannot be taken as a means to interpret that they did not commit fraud. The securitized and lethal mortgage-backed securities were sold to institutional investors, knowingly, that also includes the insurance companies, funds of pensions, endowments of universities, and sovereign wealth funds, as well.

Politics of Financial Management

There have been formed an uneasy kind of alliance among the bankers and the politicians. The politicians did whatever they could to gain popularity and that includes giving undeserved rewards and recruiting those people who were not even eligible for big posts but only on the basis that they will support them. The politicians selected corrupt people for big posts and that eventually became a crisis due to corruption and mishandling(Morrison, 2009).

Impact of Financial Crisis on Different Countries

Almost all the economies around the world suffered more or less in the crisis of 2007 and 2008. We are discussing it in detail in the following;

Impact on America of Financial Management

To exaggerate the cost of the pure economic crisis of 2008 is hard. The cost of the crisis is two times the price of the 17 years long war in Afghanistan; it is almost over $2 trillion. It is just the raw estimate; the in-depth research is even more damning. By 2016, the cost of the crisis to the country is 15% of GDP or $4.6 trillion, calculated by a decline in per capita GDP of the United States in comparison to the pre-crisis trend. A study done by the Federal Reserve Board in 2018, establish that the price that every single American is paying is $70,000. Just in the terms of the dollar, the crisis was one of the most significant events of the century, and also since the Great Depression the largest single downturn of the economy(Mukunda, 2018).

Impact on Australia of Financial Management

Austral did not suffer a significant impact due to the crisis, however, it did turn down the growth of the economy. The rate of unemployment also increased and the period is marked by a huge amount of uncertainty. The relatively, stronger and stable performance of the economy of Australia in comparison to the other countries was due to a large number of factors, that includes;

• The banks of Australia had only a small link to the housing market of America and the banks of the US, this was because it was very profitable to lend domestically. 

• High-risk loans and subprime constitute only a small share of lending in the Australian markets, this was in part due to the historical focus on the standards of lending by the Australian banking regulator(Tayebi, n.d.). 

Impact on Canada

Much of the economy of the world was dragged in the global financial crisis and Canada was no exception. Though Canada suffered less as compared to other European countries, still it was so strong that it increased the rates of unemployment, sharp declines were experienced in output. While the causes behind it are still not confirmed but it is a speculation that the main cause was the collapse of housing prices of the US. The prices of oil continued to surge during the starting months of the year 2008.  At first, Canada suffered a little due to the US recession, this crisis affected the markets globally in 2008 fall and then Canada also suffered. The turbulence in the oil prices and other commodities of Canadacompounded the effects of this crisis and that made the economy of Canada fell into recession(Richards, 2020). 

Impact on China of Financial Management

China has enjoyed one of the most stable growths in the economy. Though it has contributed greatly to other economies as well, the financial crisis also affected it. It slowed down the economic progress of China, several industries of China, in particular, the export industry was largely impacted by it. it has been in reports that China had to lay off many of its workers in the export industry due to the 2008 crisis. The government of china became greatly concerned over it because for them a stably growing economy was significant for the maintenance of social stability. 

Impact on the UK

The crisis of 2008 greatly upset the economy of the UK, the impacts were so huge that they can still be seen. The impact on the UK was more than other countries and that was due to some unique factors of the UK. The reason being that the UK lacked a base of manufacturing, and there was dependence on financial services, retail sales, and real estate for growth. The growth of the UK was lacking a substance highly and it was relying on a risky bubble of credit borrowing and lending and that finally was busted in 2008(Tayebi, n.d.).

Conclusion of Financial Management

The crisis of 2008 and 2007 impacted the entire world, though some of the countries were more affected and some a bit less, overall no one was saved from its impact. We have seen in the above conversation that some of the highly developed economies were suffered the most impact, however, the mistakes that became the reason for the crisis were common. To avoid any such incident in the future the economies have to take precautionary measures and learn from the past mistakes that led to the crisis. The financial information helps the organizations to manage their issues that also occur in the past working. So many companies face lots of issues but they can find a better solution with their experience and past information. The financial crisis is part of every business but the main target is to manage all issues according to changing requirements of the business.

References of Financial Management

Agénor*, P.-R., 2001. Benefits and Costs of financial integration. The World Bank.

Croce., Colacito., R and Mariano M., 2010. American Economic Review: Papers & Proceedings 100. The Short and Long Run Benefits of Financial Integration, p. 527–531.

Edison, H.J., Levine, R., Ricci, L. and Sløk, T.,, 2002. nternational financial integration and economic growth.. journal of international money and finance,, pp. 749-776.

Gordon, S., 2017. Recession of 2008–09 in Canada. [Online] 

Available at: https://www.thecanadianencyclopedia.ca/en/article/recession-of-200809-in-canada

Lane, P. a. M.-F. G., 2003. International financial integration. pp. 82-113.

Mendoza, E.G., Quadrini, V. and Rios-Rull, J.V., 2009. Financial integration, financial development, and global imbalances. Journal of Political economy, pp. 371-416.

Morrison, W. M., 2009. China and the Global Financial Crisis:, s.l.: congressional research service.

Mukunda, G., 2018. The Social and Political Costs of the Financial Crisis, 10 Years Later. [Online] 

Available at: https://hbr.org/2018/09/the-social-and-political-costs-of-the-financial-crisis-10-years-later

rba, n.d. The Global Financial Crisis. [Online] 

Available at: rba.gov.au/education/resources/explainers/the-global-financial-crisis.html

Richards, K., 2020. The Financial Crisis – Impact on the UK Economy. [Online] 

Available at: https://www.cashfloat.co.uk/blog/money-borrowing/crisis-impact-uk-economy/

Tayebi, S. K., n.d. Determinants of Financial Integration in the asia pacific region, iran: University of Isfahan, Iran,.