The global banking industry is going through credit crunch and to overcome the situation, integrated efforts from both private and central banks are required.
The Governor of the Bank of England, Mervyn King, cautioned the Treasury Select Committee against the grim situation, which global banking sector would face in coming months due to heavy credit crunch, to, as per the news published by Timesonline.
The industry experts opine that the most influential factors of this credit crunch is the probability that insufficient liquidity would result in a self-reinforcing slump in the credit markets and on the bigger economy.
Mervyn King stated that, “The issue is not whether they have enough cash. The issue is whether they are willing to lend. Banks are concerned about the capital positions of the other banks”, as published by Timesonline.
Experts have attributed several reasons to this forecast but the most important among these is a further increase in interbank lending rates. However, experts have been thinking that there would be an increase in official interest rates owing to uncertainty about distribution losses. The effect of this forecast is almost same on the sterling, euro and dollar market, aggravating concerns of credit crisis in the big industrialized economies.
To cope with the drastic downturn in the credit crunch, integrated efforts are required by private banks to review and restructure their financial instruments. At the same time, central banks are expected to be vigilant that the restructuring does not influence the wider banking industry.
Experts also think that central banks have a crucial role to play in order to nullify the impact of credit crunch on the banking sector. If the central banks need to channel more money than required by the banks, there would be more money flowing in the banking system and interest rates would slump quickly.
According to a Research Analyst at RNCOS, “Presently, the global banking industry is facing heavy credit crunch along with downfall in the international housing market that is resulting in declining mortgages in global banks. To overcome this situation, banks need to continue to selling debts using complicated financial instruments via the money markets. Besides, the banks should bring more transparency in their procedures so that the confidence of customers maintains. Minor looses should not matter to the banks.”
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