This sample paper on Non Performing Loan offers a framework of relevant facts based on the recent research in the field. Read the introductory part, body and conclusion of the paper below.
Most of the financial institutions have the problem of non-performing loans. Basically, the non-performing loans (Naps) mean that the loans in default, or is close to being in default according to Investigated. In the contract terms, Naps indicates the failure to promptly pay Interest or principal when due. When the borrowers are unable to meet the legal obligation on making the required payment or are unwilling to honor the debt, the default will be taken place.
With the Increase of Naps, the level of market confidence will be affected.
The effect of the banks’ bad-loan problems can be seen at the East Aslant crisis which occurred n July 1997. During the crisis, banks’ balance sheets were deterioration due to the increasing of Naps which showed in the Figure 1 below (Deteriorate & Guppy).
The problem was started as the deregulation was exercised In the financial markets. A lot of loan borrowings from the private nonofficial business sector were easily being approved. But, the bank regulators failed to supervise the borrowers as there was a lack of expertise in screening and monitoring the borrowers at banking institutions.
Hence, the default loans started to Increase and the banks’ net worth (capital) became lesser. The bank would have lesser fund to lend. Then, the economic activity would be reduced due to the lack of funds (Munchkins and Sneaking, 2000).
Figure 1: Changes of Non-performing Loans ( Source: Van Dick and Fitch ABACA database) In additions, the Increase In uncertainty and a decrease In net worth caused a stock market declines. Then, the asymmetric information problems increased. It would become difficult to screen out good borrowers.
The adverse selection and moral hazard problems Increased seriously. With the Increase of these problems, lenders were unlikely to lend out money and led to the decline of Investment and the crease of aggregate economic activity. Due to the poor business situations and uncertainty about their bank’s health which the bank could go broke. Depositors began to withdraw their funds from banks. The massive withdrawal of depositors would bring the bank failures. If they snowballed, bank panic would take place. The number of banks could decline.
It was able to raise the interest rate even further and decreased the financial intermediation by banks. Deterioration of problems created by adverse selection and moral hazard could lead to the further economic contraction (Munchkins and Sneaking, 2000). Ultimately, market would have a stroke which was hardly recovered. Thus, market confidence wouldn’t be optimistic. The stability of financial system in Malaysia could affect as well. After the Aslant crisis, governments In South-East Asian countries have taken action on solving the problems.
Many rescue activities such as insertion of huge amount of government capital Into problematic Tanks, moving non-performing loans out AT banks, and setting up special government organizations to deal with non-performing loans, etc. (Ho, n. D. ). To deal with the impact of the Asian financial crisis in 1997-98, Penguins Attendant National Bertha has been set up by Bank Engage Malaysia to buy bad loans from financial institutions. Meanwhile, Adenoidal National Bertha has also been set up to recapitulate banking institutions. And the Corporate Debt Restructuring Committee was set up to reorganize large corporate debts.
Other than that, Bank Engage Malaysia was also instrumental in designing and applying the selective exchange control measures introduced in September 1998 (Bank Engage Malaysia, 2003). To sustain full stability in the financial sector during the recent crisis, strong overspent commitment and support are important. It has contributed to the strength and thus returns of confidence in the industry. The support includes the timely government intervention to re-capitalist weak banks and remove non- performing loans from the banking system as well as the consolidation exercise (Public Bertha, 2000).
As a conclusion, bad-loan problems should be faced seriously as they have a significant impact to a development of a country. Proper loan ad project monitoring system should be implemented in better manners. So, the asymmetric information can be avoided and then the Naps can be controlled. Question 2 The Federal Reserve System is the central bank of United State. Unlike central bank in other countries, Federal Reserve is not owned by government, it is owned by commercial banks in the district. Three of the directors are appointed by government, and government has the right to set and control salaries of high level employees.
It is not a profit making institution, while Federal Reserve makes profits, member banks get 6% of investment capital as a dividend, and the rest will keep in capital account. The current chairman of Federal Reserve is Ben Aberrant. Federal Reserve controls U. S economy and it can influence world economy too. Its role and duties all into four general areas: 1 . Conducting the nation’s monetary policy by influencing monetary and credit condition in the economy in pursuit of maximum employment, stables price, and moderate long-term interest rates. 2.
Supervising and regulating banking institution to ensure the safety and soundness of the nation’s banking and financial system, and protect the credit rights of consumers. 3. Maintaining stabilities of the financial system and containing systemic risk that may arise in financial markets. 4. Providing financial services to depository institutions, the U. S government, and foreign official institutions, including playing a major role in operating the nation’s payments system. Federal Reserve is consider an independence central bank, it has goal Independence, to set own Notation target, control AT money supply Ana exchange rate.
It has the legal independence also, it is enshrined in law. It also has management independence and operation independence, to determine the best way to achieve the goal and run its operation, such as appointing staff and set budget. Public encourage central bank to be independence; the main reason is avoid Laotian take advantage in election by using monetary policy tools. When high unemployment is occur, one of the method to solve it is expansionary monetary. Compare with reeducation and retrain, expansionary monetary policy can help national output grow faster.
But it is also create high inflation rate, due to money supply over in the market. To control inflation rate, government and central bank will increase interest rate to lower the inflation rate, government will increase interest rate to control it. It will finally occur high interest rate(low output) and high unemployment rate. If central bank could work independence, it could control inflation rate better cause it does not need to rush under political pressure. Monetary policy might be miss use by politician, to be their election tools. Politician can get advantage in reelection.
Politician can increase money supply to make the growth of national output and consuming in short term. It creates a phenomenon that economy going very well. The after election, politician can reduce the money supply, to avoid the inflation problems. But the output peaked in the month of election, and falling ever since, due to money supply has been cut. In this situation, politician can either maintain the high output but high inflation, or cut down money supply to solve inflation problem but low output. Whatever decision government make, damage of economy system is definitely occur.
To avoid politician take advantage I election and make problem to economy system by monetary policy, Federal Reserve should work independence. When Government increase annual budget, to purchase goods and services, they must finance by 3 ways-raising taxes, increase government debt, or printing new money. Public definitely not willing to pay higher taxes, raising taxes will bring bad influence to next election. Issue new government bond also not a good method, high government debt also make public unsatisfied. Hence, politician prefers print new notes for spending.
And the result is, it increase inflation rate in long term (Thomas Mark, 2009). There is some argument against Federal Reserve independence. Monetary policy must be coordinate with fiscal policy, to ensure economy system working well. For example, if government increase annual budget and Federal Reserve decrease interest rate in the same period, they will create terrible inflation rate. Central bank loud never manage to control fiscal policy, so, only by placing monetary policy under control of federal government can these two policies be coordinate.
Another argument against really Reserve Independence Is Tanat Independence He has failed to manage the inflation rate. For example, in sass-sass, Fed has overly expansionary monetary policy and create high inflation rate ever (Thomas Mark, 2007). Independence Federal Reserve bank has both advantages and disadvantages. Advantages of Federal Reserve being independence is ensure the Federal Reserve run without controlling of government, to avoid monetary become election tools of Laotians. An independence central bank will not create inflation problem under political pressure.
Advantage of Federal Reserve being independence is, if central bank work closely with government, monetary policy can be more coordinate with fiscal policy, economy system can have stable and stronger growth. In our opinion, independence central bank is more suitable for a democratic country, like United State. In a freedom and democratic country, political manipulate to financial system are not allowed, if the incident is explore, the bad influence is deeper than Just a mistake of maintaining interest rate.
We had also discussed if politician control in central banks actions, it will finally brings Inflation problem, unemployment problem and low output problems, and so on. Hence, we are strongly support Federal Reserve keep its independence and have more freedom even. Question 3 Insurance Companies are the financial intermediaries, which use the premium is paid on policies to invest on bonds, stock, mortgages and other loans. Asymmetric information occurred because of insured person has an incentive to cheat and seek for a claim from insurance companies (Munchkins and Sneaking, 2009).
Insured person can lain the losses on the policies that they bought from the insurance companies, such as life, property, casualty or health insurance. Asymmetric information means lack of information is provided by the second party. There are two kind of asymmetric information, which is adverse selection and moral hazard. Adverse selection occurred before the transaction. Adverse selection means that someone is providing the fault information that affects the decision of insurance companies whether to accept or reject the insurance policies.
Moral hazard occurred after the transaction. Insurance companies could not predict the ensured person will be engaged in any risky activities after buying the insurance policies (Munchkins and Sneaking, 2009). Based on the article is given, it shows the insurance companies refuse to pay medical bills to the insured person, who do not qualify for the claim. To protect the insurance industry, government proposed “Medical Examination a Must for Insurance Purposes” It is important to have a proper understanding of the asymmetric information in insurance industry.
A proper understanding of asymmetric information is important to prevent any Truculent occurred, wanly could Drill a nudge amount AT losses to ten Insurance impasses. Refer to an article (Appendices 1) from The Star 2009, Singapore police recover 30 stolen Malaysian luxury cars. Some cars owners are forced to surrender their cars after they lost in gambling session in Singapore and reported the car have been stolen when they returned to Malaysia. The car owners are trying to cheat for a claim from their losses. Insurance companies will be suffered a huge losses if the police did not reveal the truth.
Refer to the insurance industry statistic on stolen vehicles in Malaysia (Appendices 2), it shows the overall vehicle theft in 1997-2008. Number of theft was reached 46,330 cases in 2008. Claim incurred have been raised from REARM million to REARM million from 2007-2008. There is a significant increased by 1 billion in a year. If the amount of claim continuing increased in future, the insurance companies will not able to pay all the losses of policyholder. It is important for insurance companies to have a proper understanding about asymmetric information and come out with a good solution.
To counter the asymmetric information, insurance companies overcome with some kind of solutions, which could reduce the adverse selection and moral hazard problems. Screening is an effective procedure to collect customer profile and allocate the risk class of policyholder (Munchkins and Sneaking, 2009). Screening is effective to reduce the adverse selection problems. There is an auto insurance rating system (Appendices 3) in US. It explained 6 factors that the driver insurance rate is determined:- 1 . Type of vehicles. (Safer car, less insured cost) 2.