FINANCIAL CRISES AND

FIRM PERFORMANCE
Business Economics - MBA ITB 42A

Fitri P. - Krisna P. - Marshal M. - Melvina P.

Rully S. - Surya W. - Yudhawijaya I - Y. Ryan K.
World Bank Research
World Bank Research
 World Bank Research

117 systemic banking crisis in 93 countries

51 borderline crises in 45 countries
Types of Financial Crises
Currency crises

Banking crises

Foreign debt crises

Systemic financial crises

Causes of Financial Crise
Unsustainable economic imbalances

Global financial fluctuations

Structural economic problems

Poor financial market and market supervision

Inappropriate behavior within financial sector

Unsustainable macroeconomic policies

THE ASIAN CRISIS (1997-1998)

Problems occurred:
Balance of payment
Poor corporate governance
Non-performing loans
Asset price bubbles
Result:
Some foreign lenders began to pull back from markets
Stock market and currencies plummeted
 Stock market and currencies plummeted
90%
81%
72%
63%
54%
45%
36%
27%
18%
9%
0%

Singapore Dollar
Phillipine Peson
Malaysia Ringgit
Korean Won
Thai Baht
Indonesian Rupiah
GNP Fell
 GNP Fell
90%
81%
72%
63%
54%
45%
36%
27%
18%
9%
0%

South Korea
Phillipines
Malaysia
Thailand
Indonesia
THE IMPACT
Decreased the wealth

Companies throughout the region were hit hard

Investment banking opportunities dwindled

Foreign multinationals decided to slow down their decisions

THE RUSSIAN CRISIS (1998)

Problem occurred:
Doubt among investors about whether the Russian
government and companies could pay back the country
enormous debts
Result:
The stock market began to fall
THE IMPACT
Drastic financial measures
The jobs either liquidated or in limbo
Credits from foreign sources became very hard to get
Accounts / money going through bank transaction ran the risk
of being frozen
The debt moratorium hit Western financial institutions
Non-bank Western companies were hurt
THE ARGENTINE CRISIS (2001-2002)

Problems occurred:
The effect of Asian and Russian crises
A budget deficits
Result:
Less and less likely that the government could payback its
international debts
The peso came under devaluation pressure
THE IMPACT
The crisis sparked violence, looting, and mass protest
They cashed their salary pay
Thousands of Argentines looked for emigration opportunities
Decrease in purchasing power of people’s salaries
Unemployment was 30% and rising
Hurt the Business
Many foreign companies also suffered
Foreign bank dominated the devastated banking sector
SURVIVING THE CRISES
Local Firms
Ramayana (Indonesia)
The strategy:
Quickly fixed the exchange rates
Had very little debt
Cutting costs and not raising prices
Offering cheaper goods and more affordable
packages
Exporter
SURVIVING THE CRISES
Local Firms
Roust (Russia)
The strategy:
Mobilized its sales force and retrieve most of its stock
Re-supplied goods in limited quantities
Preventing defaults on account receivables
SURVIVING THE CRISES
Foreign Firms
“Mini-branches” strategy
Benefiting from customer concern
“Fire-sale”
Devalued of local currency
Warning Signs of Financial Crises
Value destruction in the private sector
ROIC < WACC

Interest Coverage Ratio (ICR)

ICE < 2

Profitability of banks
ROA < 1% and/or Net Interest Margins <2%

Rapid growth in lending portfolio

Growth of loan portfolios faster than 20% per year for more then 2 years
Warning Signs of Financial Crises
Shrinking deposits or rapidly rising deposit rates
Depositors consistently pull money out for 2 consecutive quarters
or
Banks pushing rates above competitor to attract risky lending

Non-Performing Loans (NPLs)

True NPL > 5% of total bank assets
* Banks do not disclose this until in deep trouble

Interbank and money market borrowing rates

When bank is chronically: short of funds, borrowing in the
interbank market, offering rate higher than the market.
How to prevent in the private sector?
Establish sound corporate governance and transparent accounting
standards

Promote capital market development so that bank funding do not

dominate the funding channel

Strengthen government supervision and surveillance of the

financial sector by collaborating with regulators
IMF Indicators
If caused by Financial Problems:
Fiscal deficit, government spending and public sector credit

If caused by Weakness in the Financial Sector:

Private-sector credit growth, bank indebtedness, interest rates,
changes in stock prices, and the quality of bank assets

If caused by External Factors:

Real exchange rates, current account balances, terms of trade,
changes in international capital flows, and interest rate
developments
IMF Indicators
The Financial crises in Asian and Latin American countries:
Real exchange rate appreciation
Domestic credit expansion
Monetary expansion
Stock price declines
Low domestic real interest rates
Financial Crises and Firm Strategy
Follow early warning indicators
Manage exposure to developing countries
Sophisticated risk management
Hedging, etc