Reasons for Implementing Basel III and Its Costs
On Developed and Developing Countries
The global financial crisis (GFC) was a painful wound that marked the twentieth century. It was the greatest crisis the humanity has witnessed since 1930 (the great depression). It first started in the United States and spread then to the entire world and caused a considerable slowdown in most developed countries and has affected the financial markets and the growth prospects in developing countries. It is called the doubled jeopardy crisis as it spread rapidly with a contagious effect to the other countries of the world. Despite the efforts exerted by governments and central banks to rescue the economy from this huge recession through aggressive fiscal and monetary policies, demand in the macroeconomic level dropped. This huge crisis wasn’t the result of a person’s mistake but it was the result of cumulative effect of poor regulations from the financial institutions and from central banks, unregulated hedge funds, multilayered mortgages and the overrating by the credit firms. It first started by the bankruptcy of Lehman Brothers in September 2008 due to the large losses they sustained on the US subprime mortgage market and was followed by the failure of the seventeen largest banks in the US “the too big to fail” and six hundred other banks in the US. The federal bank was urged to rescue the too big to fail as their failure would have destroyed the whole world economy. The strong interconnectedness between the world countries through the stock market, foreign exchange and international trade led to a contagious crisis in the other countries. Houses prices in USA collapsed with a loss of $2.4 trillion during eight months hitting the balance sheets of banks exposed to the housing sector, which affected the entire US financial sector, and then, in turn, other developed and developing countries. A sharp decrease in the international trade and in the international stock markets by 50% to 75% from their peaks occurred which resulted in a decrease in the rate of investment and an increase in the rate of unemployment. The USA lost equities worth $16.2 trillion in 2008. Investment banks collapsed and the IMF began to support countries such as Hungary, Iceland and Ukraine. However the impact of the crisis on developing countries varied depending on their direct or indirect trade links to crisis affected countries. Although governors claim that the global financial crisis didn’t affect Egypt, we discovered that it affected the emerging markets heavily as exports and capital flow have been lower than expected. The real GDP growth of the emerging economies fell from 8.3% in 2007 to 6.1% in 2008 and just 2.4% in 2009. As we can see in the graph, Egypt’s GDP has witnessed a drop of 2.5% after the global financial crisis. Also the weak financial systems of the emerging markets will take years and years to restore and fewer funds would be available for investment and innovation. In addition the aid that these countries used to get from the large donors set to fall as well as exports who decreased by 20% which explains the decrease of the GDP. This financial crisis is not a shock that damaged banks and financial institutions but actually it damaged many people’s lives. Although the worst of it appeared to happen in the past, its effects are sustainable and long lasting. Employment rate decreased sharply which reflected in an increase in the percentage of people living under the poverty line. Around 120 million people are living on less than $2 a day and 89 million more on less than $1.25 a day. Same scenario applies for Egypt; we can see in the graph that the unemployment rose from 8.9% in 2007 to 9.4% in 2009. This high poverty rate led to higher mortality rates, higher number of depressed and ill people. Another result of this high unemployment rate is a decrease in consumption, businesses will downsize and more unemployed people will be. It is a...
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