France Provide a Statistical Profile Case Study
- Length: 5 pages
- Sources: 5
- Subject: Economics
- Type: Case Study
- Paper: #78022633
Excerpt from Case Study :
Undoubtedly, France, much like Greece will need a bailout if it escalates to that point.
The ECB has also elected to provide unlimited 3-year loans to risky nations. This in essense, takes liquidity risk off the table in regards to investor concerns. With unlimited loands for the ECB and financial backing from the IMF, France will have a great possibility of avoiding calapse as long as it institutes austerity measures.
The U.S. is currently in a gridlock in Congress in an effort to raise the debt ceiling and to reduce government spending. There is the possible default on the debt and subsequent possible downgrade of the United States credit rating. This is very similar to the situation that was facing France. They also have to reduce their spending to address the growing deficit or increasing the debt ceiling will be a conversation that will have to be repeated.
In addition, French banks are required to increase their capital reserves in the event of a collapse. Capital Requirement is by the most basic definition the amount of money that a business needs to pay for its normal operations. In the banking industry, capital requirements is the amount of cash a bank needs to keep on hand based on a percentage of risk weighted assets that they hold in an effort to ensure the safety and strength of the financial system (Dowd, Hutchinson, & Hinchliffe, 2011). These guidelines were originally created in 1988 under the Basel Accord, or Basel I, which was created by the Basel Committee, which is a group of international central bankers (Dowd, Hutchinson, & Hinchliffe, 2011). More recently, Basel III has been introduced and is set to be implemented by member countries, which includes the United States, on January 1, 2013 (Group of Governors and Heads of Supervision announces higher global minimum capital standards, 2010). Basel III will increase the common equity requirement to a total of 7%, the "Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4% to 6% over the same period" and "A countercyclical buffer within a range of 0% - 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances" (Group of Governors and Heads of Supervision announces higher global minimum capital standards, 2010).
Basel III also does something in regard to Collateralized Debt Obligations (CDO). Most banks utilized Special Investment Vehicles or other off -- balance sheets conduits, to move the CDOs from their balance sheet. In Basel III it was found that "off-balance-sheet risks cannot and should not be analysed [sic] separately from the risks arising from on-balance-sheet business, but should be regarded as an integral part of banks' overall risk profiles" (Basel Committee: The management of banks' off-balance-sheet exposures: a supervisory perspective ). This basically translates to higher information requirements about the underlying risk and, depending on the information or if it is not provided, there will be a higher capital requirement for these asset backed securities (Proposed enhancements to the Basel II framework).
Economists Reinhart and Rogoff completed a GDP study based on two hundred years of data, different countries and circumstances in 2010 (Reinhart & Rogoff, 2010). The study found that above the gross debt to GDP of 90% "median growth rates fall by 1%, and average growth falls considerably more" and it was found that the French have a higher than expected inflation when the debt to GDP ratio is high (Reinhart & Rogoff, 2010). As of May 2011, economic growth has slowed to 1.8% and inflation is currently 3.1% (Arends, 2011).
The an economic body that represents more than thirty countries, and the Institute of International Finance (IIF), a global association of commercial and investment banks, have both made predictions on the effect of Basel III on the GDP. The OECD predicted that the new requirements would decrease the Frances GDP "by .07% per year between 2011 and 2019, while the IIF estimated a higher "0.5% per year between 2011 and 2015" (Vaughan, 2010).
At this point, prior to any change in capital requirements, France is facing a probably further decrease in the GDP with growing inflation due to the growing deficit. The current government budgetary landscape does not seem to indicate that this will improve anytime soon. The GDP would then be further affected by this change anywhere from .07%-.5% per year. This will not help the economic situation in France. I believe that the rates should be increased to the rates indicated in Basel III for the purpose of financial stability of French banks, which would hopefully decrease the possibility of another bank financial crisis bank failure and perhaps it will have a positive impact on consumer confidence. This is doubtful as the average consumer does not have a clear understanding of the cause of the financial crisis or even capital requirements. In the past, professionals in the financial sector of the French have found loopholes and found ways to stay within the letter of the law. I believe that there will have to be addition legislation, regulations or requirements regarding ethics, oversight and clarity to would have a better overall impact on consumer confidence.
1) Arends, B. (2011, May 23). QE2 was a bust. Retrieved July 31, 2011, from Market Watch: http://www.marketwatch.com/story/qe2-was-a-bust-2011-05-21
2) Capital Requirements. (n.d.). Retrieved July 31, 2011, from…