International banking preparedness for the post-2008 financial crisis era

Introduction
The sub-prime mortgage crisis that led to the 2007-2008 global economic crisis essentially caught banks off guard. Many were overleveraged and ill-prepared to divest of toxic assets (Adrian & Shin, 2010). Nations turned to central banks for intervention and unconventional monetary policies, which were born - (i.e., quantitative easing (QE), which saw a liquidity injection of trillions of dollars all over the world in an effort to keep economies from collapsing into a pile of bad investments) (Heller, 2017). Now, more than ten years later, the U.S. equities market is at an all-time high. By all intents and purposes, it appears that the crisis was averted (Lupton, 2018). However, there is a trade war that is looming between the U.S. and China; and uncertainty of whether the biggest bull run in market history can continue or not weights on markets. The role of the international banking community is important to consider because if, as some believe, a recession is imminent (the inverted yield curve has signaled as much in the past), it is critical that banks not be caught flatfooted again as they were in 2007-2008. The question is: are banks ready-just in case?
The question is important to ask for two very important reasons: 1) global sovereign debt levels have soared since 2007, (Joseph Lupton, 2018) and 2) central banks have signaled that they may need to begin tightening-i.e., reversing their policy of QE-to avoid asset bubbles and a number or range of economic ills, from stagflation to deflation to hyperinflation. (Jamie Dimon, 2017)
When considering the problem that prompted this study-namely, these two points-1) that, as Senior Global Economist Joseph Lupton (2018) at J.P. Morgan pointed out, “Since 2007, the global sovereign debt has ballooned by 26 percentage points of GDP"; and 2), as J. P. Morgan Chairman and CEO Jamie Dimon (2017) noted, "The effects of its reversal cannot be well known since no QE has ever been done on this scale and no one would completely know the myriad of effects that this would have on asset prices, capital expenditures, confidence, and other factors"- the big problem facing the international banking industry, with debt levels so high and the rates rising, is whether bankers are any better positioned to withstand a similar or worse crisis than that of 2007-2008.
Since the Great Recession is still fresh in the minds of many people and there is a possibility that another, worse recession could be looming it is vital that we have a study that is geared towards addressing this problem. (Mauldin, 2018). In order to determine if there is any need for precautions to be taken at the moment, the positioning and confidence of the international banks should be well understood. This will assist us in developing a sense of whether a default in one part of the world - say China, Italy, or the U.S. - will affect the entire industry. (Bouvatier & Delatte, 2015). During the 2007-2008 crisis, individual banks needed bailouts from the central banking institutions since they were not prepared to handle the fallout. The failure by some of them could have resulted in failures across the board. (Bruno & Shin, 2015). Currently, it is not well known if the international banks are better placed to handle or withstand a similar or worse crisis - and it is nowise clear whether central banking intervention would be able to save them this time if they were not well-positioned to hand a similar crisis. Although there are routine stress tests that are carried out, these tests are not able to always reveal the true degree of how much such a crisis would affect the industry.
Looking back in history, one can see that in the U.S. GDP rose from 2001 to 2004, through excessive/easy credit that was flooded into system (via the housing bubble) (Heller, 2017). That bubble popped in 2007-2008, the global economic recession hit, and the Federal Reserve and other of the world's central banks (ECB, BOJ, BOE et al.) intervened to keep the global economy afloat by spending trillions of dollars and lowering interest rates; the massive liquidity injection went to purchase mortgage-backed securities (holdovers of the housing bubble), bank debt, which was the main outcome of ill-prepared bag-holding banks at the end of the bubble economy, and treasury bonds through the policy of QE (Heller, 2017). This central bank intervention is what helped in tum to fuel the current bubble in asset prices (Heller, 2017).
Were a trade war or a recession or a combination of the two or some other issue to impact the global economy, a bursting equities bubble could trigger a massive problem for leveraged accounts. Though Dodd Frank was introduced in 2010 to bring about greater financial regulation of the banking community, things have taken a tum back towards deregulation in the U.S. under a the Trump Administration, as Reuters (2018) reports: "Regulated banks are underwriting more highly leveraged buyout loans for US companies as the Republican administration relaxes guidelines aimed at reducing risk, which is leveling the playing field with unregulated lenders again." The implications of increased leverage at a time when a crisis could be around the comer may be something that the international banking community should consider. That is why the question of confidence comes into play.
Statement of the Problem
The world seemed to be on the brink of disaster due to the collapse of sub-prime in the United States coupled with the subsequent tidal wave of leveraged defaults across the global banking sector where relief was only found through the intervention of central banking. (Haitsma, Unalmis& de Haan, 2016; Heller, 2017). To some extent it has recovered, though some critics of QE have argued that central banks have merely kicked the can down the road-i.e., they have allowed a bubble economy to form that will be even worse for the global economy when it bursts than 2007-2008.
The aim of this study is to determine if the international banking community feels confident in its abilities to weather another global economic crisis, and specifically, if geo-political awareness does have an impact on their confidence level. Confidence is vital since it determines how money is invested, what markets will do, and where it is placed. (Heller, 2017). Confidence does have an impact on everything from precious metals to equities and even blockchain (Van Lerven, 2016). Banks need to ensure that they have a sense of their confidence in case another economic crisis does hit (Giles, 2017). Knowing that confidence is low will offer banks an opportunity to de-leverage and reduce their risk for them to better survive an economic crisis.
Purpose of the Study
To better understand the level of preparedness for another possible global economic crisis by the international banking sector, it is helpful to address the community directly and gain a sense of real life bankers vulnerability in 2018, especially with the U.S. and China trade war likely to turn into a hot war, and numerous countries across the world voicing their desire to start getting away from the USD due to too many economic sanctions that are flowing from Washington in the recent years. The trade war between the U.S. and China is a big indication that geopolitical and global economic risks are rising-and it would be good to know if these concerns matter to the international banking community and, if so, whether the banks feel confident in meeting them. Were this study not to be conducted, there would be no sense among stakeholders about the degree to which those who work in the industry actually feel confident about their industry 's ability to endure another storm similar to the one experienced between 2007-2008. Just like stakeholders should know when insiders are selling, stakeholders should know whether industry workers feel confident or not about their prospects in the coming years as this can be a good gauge of whether markets have become too complacent.
Considering the impact that the global economic crisis had on the world from 2007-2008 and the role that central banking intervention played (Heller, 2017), it is important to know whether banks are prepared should another similar event occur in which liquidity dries up in the markets and over-leveraged institutions are forced to divest. Part of the problem for investors today is that they are unsure of whether the financial industry is prepared for another black swan type of event (Giles, 2017). The purpose of this study is to evaluate how confident the members of the international banking community are regarding whether the sector can be able to safely handle another global economic crisis similar to the one experienced in 2007-2008 plus whether this confidence is impacted by geo-political awareness. This assessment will show whether the industry needs to take stock of its preparedness now in case a recession should hit or whether the industry is ready and able to confront issues similar to those seen in 2008.
Theoretical or Conceptual Framework
The theoretical framework used here is rational choice theory, which posits that individuals or organizations make decisions based on the weighing of costs and benefits. The key concepts in this theory are that in order to effectively make rational choice, one must know the costs and the benefits as they are in reality and not only as they appear in one's mind. If one is not confident about the costs and benefits, one cannot proceed effectively in the decision- making process.
The framework guided the research decisions, including the development of the research problem statement, purpose statement, and questions, by framing the underlying idea at the heart of the specter that is the over-leveraged industry, as through the concept of weighing the costs and benefits. (Dimon, 2017) and Lupton 2018), When investors put money into equities (risk assets), they do so because they judge the benefit (ROI) to outweigh the cost (price and downside risk). The problem emerges when one inaccurately assesses one, the other or both-i.e., when one does not accurately understand the benefits or does not properly assess the costs. By examining the industry through this perspective, the problem and purpose organically emerged, and the research questions appeared as a natural response to wanting to understand whether those in the industry have an accurate sense of the cost-benefit ratio of investing in markets in today's economic climate.
International banks cannot be confident unless they understand the risks of leveraging and having enough liquidity to meet needs should a situation like 2007-2008 arrive again. Knowing the costs and benefits of any action has become increasingly difficult, however, as the governor of the Bank of England, Mark Carney recently pointed out, noting that global issues a "have made it more difficult for central banks to set policy in order to achieve their objectives" (Giles, 2017). In other words, awareness of what is going on in the global economy has made it challenging for banking leaders in the community to know how to adjust their policies and procedures. Likewise, as Van Lerven (2016) notes in reference to QE: "after more than a year since its initial inception, a review of the program’s impact reveals that policy makers should think twice before further expanding the program-and could benefit from considering more direct ways of increasing spending in the real economy" (p. 237). Here one sees that there are costs to rapidly increasing liquidity-and banks have to bear the brunt of those costs in more ways than one.
Nature of the Study
The nature of the study is rooted in the systematic and empirical investigation of a problem that can be measured quantitatively. The study is not exploratory, as in qualitative research, but rather more direct. It asks specific questions with the intention of measuring the data obtained in a way that promotes validity and reliability within the study as a whole. y surveying the international community members, it is expected that this data can best be obtained.
The sample size will consist of 1000 bankers selected from across the world, all of who are in the international banking sector and from all ranks and levels within the industry. For the purpose of this study, these factors will be considered race, age, gender, ethnicity, nationality, and religion. Therefore, each participants demographic will be requested to assist in providing further input into what variable are impactful in determining confidence levels. This research will have theoretical implications that could be used to raise awareness among the bankers in the international banking community regarding the industry's overall state of preparedness in the face of coming financial and monetary changes.
To ensure generalizability, the study will follow the recommendations of Lincoln and Guba (1985) and Seale (1999). Generalizability can be ensured by carefully describing the methodology used in one 's research and by showing that the research measures what it intended to measure and thus has validity; and that the study 's findings could be duplicated again should another researcher choose to follow the same methodology and use a similar sample, thus showing that the study has reliability (Golfshani, 2003).
Research Questions
This study's research questions will focus on measuring the confidence and knowledge of the bankers in the international banking community. The main goal of these questions is to establish if the international banking community feels confident regarding the prospects of a future recession. The secondary goal is to establish if the confidence levels and knowledge of specific factors about the global economy and or geo-political climate are interrelated.
The research questions for this study are:
Q1) Is the international banking community confident in its ability to handle another global economic crisis like the one experienced from 2007-2008?
Q2) Does geo-political awareness have an impact on the confidence of the members of the international banking community regarding the sectors ability to handle another global economic crisis like the one experienced from 2007-2008?
Q3) Do changes in central bank monetary policy (i.e., going from quantitative easing to quantitative tightening) and the awareness of the rising debt levels around the world affect the confidence levels of the members of the international banking community on the sectors ability to handle another global economic crisis like the one seen from 2007-2008?
Null Hypotheses
For Q1, the null hypothesis is: Bankers in the international banking sector do not have the confidence that they can handle another global economic crisis like the one experienced between 2007-2008.
For Q2, the null hypothesis is: Geo-political awareness causes workers in the sector to doubt the ability of it being able to handle another global economic crisis like the one experienced between 2007-2008.
For Q3, the null hypothesis is: Awareness of how unconventional monetary policy by central banks impacts debt levels causes workers in the industry to doubt that the banking sector is able to handle another global economic similar to the one seen from 2007-2008.
Alternative Hypotheses
For Q1, the alternative hypothesis is: The international banking community is confident that is has the ability to handle another economic crisis similar to the one experienced between 2007-2008.
For Q2, the alternative hypothesis is: Geo-political awareness gives the members of the international banking community confidence that the sector is able to handle another global economic crisis like the one experienced between 2007-2008.
For Q3, the alternative hypothesis is: Awareness of how unconventional monetary policy by central banks impacts debt levels does not cause workers in the industry to doubt that the international banking community sector has the ability to handle another global economic crisis like the one experienced between 2007-2008.
Significance of the Study
This study is vital since it builds on the idea that confidence does play a major role in determining how money is invested, what markets will do, and where money is placed. Confidence does have an impact on everything from precious metals to equities to bonds and even blockchain (Haitsma et al, 2016). It is vital that banks some sense of their confidence levels should another economic crisis hit the industry. Therefore, this study becomes timely since it aims to address this particular concern. Knowing that confidence is low will offer banks an opportunity to de-leverage and reduce their risk for them to better survive an economic crisis. Therefore, this study can contribute tremendously to the field by triggering a self-assessment to determine if measures should be taken aimed at addressing the risk in a timely manner.
The results of this study will advance the guiding framework by indicating whether the banking industry adequately understands the costs and benefits of investments in the age of unconventional monetary policy-an age that has seen debt balloon to truly risky levels (Lupton, 2018) and given Dimon (2017) reason to warn stakeholders about what could be in store in the coming years. The significance of this study can be found in the fact that in the globalized economy, the interconnectedness of the banking industry is a crucial factor in the economic well-being of the nations of the world. By assessing the confidence level of the international banking community members in regards to the banking sectors ability to withstand another global economic crisis like the one experienced from 2007-2008, we can determine if the international banking community did learn from the events of the past or they have all forgotten. The benefits of addressing the research problem are that it can allow stakeholders to better know how to approach markets and it can allow leaders in the industry to understand the industry through the eyes of their own workers.
Definition of Key Terms
Confidence
Confidence is the feeling and knowledge one has in one's own resilience and/or ability to withstand challenges or overcome obstacles without detriment to one's health or well-being. Confidence in the international banking community refers to a sense of preparedness and stability throughout one's organizational structure, so that should a downturn in the economy strike or a crisis in one form or another, such as in credit, the organization would not be profoundly impacted one way or the other but would be able to weather the financial storm quite safely and without incident or requirement of bailout from a central bank (Ordonez, 2018).
Debt Awareness
An awareness of the rapidly increased amount of debt held by governments, public and private institutions, and individuals since the 2007-2008 global economic crisis is what is known as debt awareness for the purposes of this research study. Debt awareness can take the form of a general awareness of this increase or a more detailed awareness of precise figures and amounts (Lupton, 2018). It excludes aloofness and/or indifference and thus should include a modicum of concern, regardless of whether that concern is great or small.
Geo-Political Awareness
An awareness of geopolitical forces and maneuverings throughout the world is what is meant by geopolitical awareness for the purposes of this research study. It should include a sense of tensions and political positioning behind events such as the trade war, economic sanctions on Russia or Iran; an attempted coup in Venezuela and so on. It should exclude a general indifference towards or aloofness of the various geopolitical factors that underscore international relations (Dijink, 2002)
Global Economic Crisis
This is a reference to the 2007-2008 financial crisis that erupted as a result of sub-prime borrowing and the sale of those loans as AAA-rated bonds to investors who ultimately blew up when the bonds went bust. As many banks from Lehman to Deutsche were buying and selling these bonds, they were faced were severe losses and had to be bailed out by their respective governments just to stay solvent. The crisis caused nations around the world to go into crisis mode as liquidity dried up and markets needed backstopping in order to keep from falling too far too fast and upsetting the entire global order, which depends so heavily upon both fixed rates of return and ROI of risk assets (Bennett & Segerberg, 2011).
Quantitative Easing
Quantitative Easing (QE) refers to unconventional monetary policy implemented by the Federal Reserve, the European Central Bank and other central banks in response to the 2007-2008 global economic crisis. QE saw central banks purchase bonds to the tune of trillions of dollars to shore up the markets. The general effect was bubble creation across a range of asset classes (Heller, 20l7)
Quantitative Tightening
Qualitative Tightening (QT) refers to a reverse policy by the central banks as they seek to run off their balance sheets and reduce them to a normal size. This means that the central banks would no longer be the buyer of last resort. QT can shake the faith in the market, which is why the central banks, including the Federal Reserve have been very cautious in implementing it (Armas, Castillo & Vega, 2014).
Summary
This is a quantitative study that aims at assessing the international banking community confidence levels in order to establish if they are capable of or prepared to withstand another crisis similar to the one experienced in 2007-2008. If the community is not confident, this study may reveal the steps that need to be taken to improve confidence. If it is confident, this study may reveal whether it is real or misplaced. The benefits of conducting this study are that it will help to give both stakeholders and leaders in the industry a better sense of how those who work in the industry see the situation. By understanding whether those directly involved in the weighing of costs and benefits of transactions are fully cognizant of the facts, the risks and the potential returns, a good determination about whether complacency in the industry is a problem needing to be addressed or not. Clearly there is a need for this study as Dimon (2017) and Lupton (2018) have both shown that there is reason to be concerned. The question is: are workers at various levels in the industry as concerned as these two seem to think they should be? The next section of this study will provide a literature review of relevant literature on the topic.


References
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Armas A. Castillo P. & Vega M. (2014). Inflation targeting and quantitative tightening: effects of reserve requirements in Peru. Economia, 15(1), 133-175.
Bennett, W. L., & Segerberg, A. (2011). Digital media and the personalization of collective action: Social technology and the organization of protests against the global economic crisis. Information, Communication & Society, 14(6), 770-799.
Bouvatier, V., &Delatte, A. L. (2015). Waves of international banking integration: A tale of regional differences. European Economic Review, 80, 354-373.
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Giles C. (2017). Central bankers face a crisis of confidence as models fail. Retrieved from https://www.ft.com/content/333b3406-acd5-lle7-beba-552lc713abf4
Lupton, J. (2018). 10 years after the financial crisis. Retrieved from https://www.jpmorgan.com/global/research/10-years-after-crisis
Mauldin, J. (2018). The next recession might be worse than the Great Depression. Retrieved from https://www.forbes.com/sites/johnmauldin/2018/03/20/the-next-recession-might-be-worse-than-the-great-depression/#6df9e2469b97
Ordonez, G. (20l8). Confidence banking and strategic default. Journal of Monetary Economics, 100, 101-113.
Reuters. (2018). Regulated banks soften stance on leveraged lending guidance. Retrieved from https://www.reuters.com/article/us-lev-regulation/regulated-banks-soften-stance-on-leveraged-lending-guidance-idUSKBN1HQ2XV
Van Lerven, F. (2016). Quantitative easing in the Eurozone: A one-year assessment. lntereconomics, 51(4), 237-242.