The hysterical fear of financial crisis is still looming large on global economy. American government declared yet another $50 Billion rescue aid to ailing insurance company AIG. The insurance giant had previously received $130 Billion that were in vain. The rescue effort didn’t attract investor’s fancy either, with Wall-street hitting record 12 year low on the day of announcement. How far is the rescue effort in Banking system coping with world wide phenomenal crisis.
In U.S.A., a heated discussion is going on whether to ‘ nationalize’ banks. Several economist, management gurus are arguing to go the ‘socialist’ way and to own substantial part of private banks. Naturally, government’s direct involvement will secure banks against toxic assets, boost investor’s confidence and may cause whirlpool of positive changes. On the other side, Obama administration is arguing against nationalization. Since, American banking industry is worth $1.4 Trillion dollars, the sheer size of it, is quite daunting for any intervention. Besides, America is traditionally never been run over by ‘socialist’ attitude and hence there are less chances of nationalizing banks there. So far, American government’s rescue efforts of billions of dollars have been mostly via loan guarantees and it is likely to stay that way.
In Europe, the story is not much different. The nationalization of private banks has not been much lucrative, inspite of the fact that Sweden had in 199o taken up that route to save large financial institutions. Sweden’s government cleverly bought controlling stakes in large banks, fired complete boards and regulated all its monetary affairs. With due course of time, it divested its stakes in these institutions and redeemed itself from management. The success story of Sweden has not prompted Germany’s Angela Merkel to actively invest in German banks and prevent further bleeding. So far, Hypo Real estate has received major chunk of Germany’s rettungspacket, bail out sum of over 50 Billion euros and a nationalization is still under consideration.
China, surprisingly has made an ‘about turn’ by going the privatization way. According to a report, more and more national financial institution are being partly privatized. The management structure is shaping up in modern era. By the end of 2007, 24 Chinese banks had 30 foreign strategic investors. The report also claims that about one sixth banking system is foreign controlled. And despite of gruesome situation of global banking system, Chinese banks have shown superior performance. China’s massive 4 Trillion Yuan rescue packet is largely aimed at construction industry to keep the growth engine running. It will undertake several low-income housing, rural infrastructure, irrigation, electricity projects funded from the rescue amount.
India pioneered the art of nationalization under the leadership of late Indira Gandhi. Close to 90% of Indian banks are nationalized and come under the umbrella of Reserve Bank of India. On one side, RBI has fathered Indian Banking system through rough times, but government’s priority sectors such as agriculture have always emerged as major beneficiaries instead of industries. Indian government undertook bailing out process in piecemeal fashion. RBI has cut the lending (repo) and deposit (reverse repo) rates from commercial banks at regular intervals. The rate cuts have often seen to ease commercial banks from amending reserve amounts before catering to credit needs. How far the move has helped India to cope with global turmoil, is still a question.
Well, that’s the story so far with global financial system, but I will be back with more updates on manufacturing, IT sectors very soon. Till then, Chao!
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