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INDIVIDUAL ASSESSMENTSEMESTER 1, 2020 Will COVID 19 pandemic trigger another global banking crisis?. CHAPTER TWO: LITERATURE REVIEW 2.1 INTRODUCTION The objective of this chapter is to

INDIVIDUAL ASSESSMENT

SEMESTER 1, 2020

Will COVID 19 pandemic trigger another global

banking crisis?

A lesson from previous global financial crisis

Student’s name ……….

Student’s ID ………

Course ………

Group number ………

Lecturer’s name ………

, 2020

Contents

Nations that the disaster had been most seriously and burdensomeassociated with international trading activities, tourism, export – import and globalfinancing chains may be hardest hit Although the level of impacts would vary amongnations and regions, all developing and emerging economies got hurt; furthermore,those injuries were even more severe due to external shocks and no sign ofstopping.

Therefore, the operation of commercial banking systems is one of the mostseriously affected areas There had been many opinions that this can be considered

as a new economic recession since the 2008 crisis stemming from the real estateindustry This research was conducted to consider whether this disaster may raiseanother global financial crisis or not based on the previous financial crises

1.2 AIMS AND OBJECTIVES OF THE RESEARCH

- This research described the effects and devastation of the epidemic on theglobal economy, focusing on analysing the impacts on the international financialbanking system

- The research also fully analysed the prospects for the recovery of theinternational banking market in general, and the development opportunities from thatrecovery.

- The study also investigated the depth and breadth of the global recessionstorm impacting on the global financial system The new global economic downturnwas the first since 1870 that originated from a pandemic; leading nationalpolicymakers had to consider implementing additional powerful interventions, ratherthan letting the economy recover itself after the recession through bailout packagesand fiscal policies

- The study assessed the long-term effects of the recession on the prospectsfor long-term economic development, a serious decline in human resources and thefissure of trade and supply links by focusing on three factor groups: black swan,macroeconomic and banking factors

- Finally, the study offers solutions to promote the recovery and development ofthe global economy based on the strength of the international banking system;including scientific and technological advances in digital connectivity, e-financialservice packages, as well as recommendations for appropriate business policies anddecisions

1.3 METHODOLOGY AND DATA

The main methodologies were conducted based on both qualitative researchwhile data resources were from economic reports and research papers from reliablesources Qualitative research: via case studies and practical observations thatfinancial institutions and countries performed policies to prevent an increase ineconomic disaster; simultaneously analysing the developments and situations thatfinancial institutions have applied to recover from previous economic recessions

1.4 STRUCTURAL SUMMARY OF THE DISSERTATION

The research included five chapters While the first chapter had introducedthe aims – objectives, methodology and data resources of the research The secondchapter focused on previous research documents assessing the impacts of thedisaster to the global economies and international banking sectors; and the ways torespond to the disaster; then summary findings and critical review of those researchdocuments The third chapter made a description of methodology (qualitativemethod) and data resources of the research From those methodology and data, theresearch carried out analysis of economic indicators and qualitative data in the nextchapter The final chapter summarizes the findings and recommendations of thisresearch, also pointing to the limitations and suggestions for the further research  

CHAPTER TWO: LITERATURE REVIEW

2.1 INTRODUCTION

The objective of this chapter is to synthesize theoretical reviews related to theeffects that the Covid-19 pandemic has caused to the banking industry in generalthrough research articles, reports, etc In addition, the author also tended to analyseand evaluate the content of previous studies on this issue, thereby forming aframework and theoretical foundation to analyze the impact of Covid-19 to thebanking crisis in a specific context of Bloomberg

In this chapter, there are three main parts including the introduction part, literaturereview part and the conclusion part

First, the parts of introduction will describe the purpose of literature review forthe entire study In addition, this introduction part will cover the main content of eachsection in this chapter, what issues the sections will deal with

The second part of this chapter consists of main theories from literature thatwill be used for analysis This part is considered as the most important part of thischapter because it deals with the whole theory from previous relevant studies, whichincludes analysing from the situation of bank crisis due to the pandemic, theproblems that firms in banking industry have faced during the epidemic as well asthe solutions that they have come up with Then, the author came to some personalevaluations about these measures that were really effective or not.

The third part is the conclusion for the chapter In this section, the author willconclude through summarizing all literature, analysis Moreover, achievements abouttheory and framework were also displayed in this part, which will be used to apply foranalysis into specific contexts of the study

2.2 LITERATURE REVIEW

2.2.1 Lessons from previous financial crises

“The Great Depression of 1929-1933 and 2007-2009? Parallels, Differences and Policy Lessons” of Peter Eigner and Thomas S Umlauft, 2015

These articles made a comparison of the causes and developments of twomajor world financial crises, the Great Depression from 1929 to 1933 and the globalfinancial crisis in the 2007-2009 period After that, the articles gave many lessonsrelated to financial system instability (real estate bubbles, subprime debt, economicinequality problems, financial products causing systematic risks) These two globalfinancial crises were the worst since World War I In both crises, the US bankingsystem has always played a key role in letting the crisis spread around the globewhen the banking system is mis-constructed and loosely managed to cause chaos.finance increase

While during the Great Depression, the US’s nominal gross domestic productfell 29%, pricing level also fell 25%, unemployment rate stretched out more 20%,approximately 9,000 bankers stopped common operations In the 2008 crisis, theglobal GDP in 2009 had the strongest drop in the past 60 years At the same time,there was a great decline in economic resources from other countries until now, likeBrexit, European government debts The intervention of governments of thecountries is the main difference between the two crises During the GreatDepression, the governments became more passive when it came to policy toprevent crises developing However, the role of the government in the economicrecovery in the 2008 crisis became more pronounced.

Finally, Peter Eigner and Thomas S Umlauft pointed out some lessons fromthose crises:

- Real estate bubbles leading to a series of defaults, and then bank run

- A loose legal framework that includes regulations on risk managementand equity-debt structure

- Banking institutions had been granted too much power than allowedleading to bad decisions

- Legal intervention was needed to prevent the crisis spreading

However, the 2020 recession bore different characteristics from the twoprevious great crises The aforementioned lessons whether happen or not happen inthe immediate recession will be the focus of this research

COVID-19 and non-performing loans: Lessons from past crises (Anil Ari,

Sophia Chen, Lev Ratnovsk, 2020) is a fairly detailed research on the problem ofsolving bad debts from the banking crisis COVID-19 followed the global economiccrisis This leads to an increase in NPL The sustainability of bank reporting isreduced, the economic recovery is stagnant, and bank credit is significantly affected

by high debt (Aiyar et al 2015, Kalemli-Ozcan et al 2015) It can be seen that highdebt is one of the typical characteristics when the bank is in crisis and this problem isstudied a lot This paper has been collecting data on banking crises since 1990

Economists say this is a crisis that has caused large public debt, which hasled to an increase in many bad debts, and the problem of resolving bad debts will beeven more difficult First of all, the article shows the status of NPL Normally, baddebt accounts for 20% of loans, but in many cases, the ratio will vary in countries(sometimes up to 50% in developing countries) The probability of a bank avoidingbad debt is high below 0.25% The crisis has left a lot of consequences, the bad debtratio often increases sharply by 3.4 times, and even up to 10 times Thus, the NPL isincreasingly high in the case of a crisis bank Next is solving the bad debt after covi.

19 Solving the bad debt is always a difficult problem for economists, but it isnecessary to help the economy recover.The article shows some useful measuressuch as:Reassessment of financial statements to review capital structure.Divideassets into 2 types of good and bad assets This will make the bank's financialproblem more transparent, giving the bank many loan opportunities

In summary, the paper summarizes the measures that can solve bad debts Ifthe recession is short-term, the reason may be because the company is illiquid.Besides, the report also compares the solution of NPL in 2020 compared with 2008

In 2020, the public debt ratio will increase, in addition, the slow economic recoveryrate after the epidemic will make the bad debt ratio higher Thus, the introduction ofpolicies to resolve bad debts is the situation that needs to be resolved as soon aspossible to avoid causing a crisis for the economy

Through assessment, we can see that this article gives quite detailedinformation about the status as well as solutions for the NPL The article has manymodels and tables to compare the fluctuations in bank debt before and after thepandemic That article is really necessary for this research article, because NPL isone of the most fundamental features for the banking crisis

2.2.2 How banking system over the world responded to the impacts of COVID 19

“Banking system resilience in the time of COVID-19” of McKensey

In July 2020, McKensey - a global financial consulting company - released adescription report about the ways banking systems over the world responded to theimpacts of the COVID 19 disaster based on capital cushions First, the reportconducted a review of the 2008 financial crisis, which was triggered by a direct shockfrom the banking industry; meanwhile, the current shock originated from a worldpandemic and the banking system just was an affected object However, the bankingsystem plays an important role in the process of supporting economic recoverythrough supplying many loans to organizations affected by the disease

Unlike the financial crisis in 2008, the world banking system entered theglobal economic recession in 2020 by the pandemic with a more dominant position

By applying Basel III - a comprehensive standard set of reform measures built toimprove regulations, supervision process and risk management of the bankingsector, Europe’s CET1 ratios were 13%, this number in the UK reached 14% while12% was in the US As a result, the global banking system could absorb $100 bil to

$400 bil loss in CET1 and be ready to decrease CET1 ratios to 6 – 8% Furthermore,banks all over the world can continue to resist the expansion of the global economicrecession based on a capital conservation buffer with the value of 2.5% total riskweighted assets After that, McKensey had built scenarios for resilience to the worldeconomy after the pandemic:

(Resource: McKensey)

In which, there are three most likely scenarios: the global economy canrecover successfully by 2023 compared with before the time of the outbreak based

on scenario A1; while scenario A3 made the forecast in 2021, scenario B2 gave anegative assessment of the effectiveness of public health

McKensey forecasted that capital reserves of many banks in the US will getthe lowest reduction in 2021 if the pandemic is successfully controlled; while banks

in the EU will reach the lowest in the 2022-2023 period In the worst case, CET1 ofalmost all banks may be lowest at 5.5% In each zone, banking managers andgovernment agencies must know their position to make the right decisions becauseraising additional capital will be impossible

Finally, McKensey suggested government intervention in the banking system.The government should put in place policies to support socially vulnerable people,small and medium companies, and other special sectors such as sustainable energyindustry, medical services and even aviation via national and international bankingsystems

Report of SRS "COVID-19 and the Banking Industry: Risks and Policy

Responses", 2020 only produced a report analyzing the impact of the global

pandemic on the world economy, and specifically on the banking industry In fact, thebank operates on the savings of individuals and households and uses it as a fund forits operations This paper has studied quite sufficiently and in detail about eachaspect that banks are affected This report has studied quite adequately and in detailabout each aspect that banks are affected Specifically, the bank's items threatened

by pandemic are as follows: bank debt, capital structure, the influence of the items inthe financial statements to consider the level of losses in the operational situationand financial activities of the bank

In addition, the report also addresses the issue of relief from the FederalReserve, FDIC in order to minimize the risk for banks The report uses year-to-yeardata, as well as a table to compare figures to identify the financial situation of thebank As such, this paper explores Covid 19's impacts on the banking industry, aswell as current solutions to help the banking industry overcome this global crisis

The activities of the bank are closely related to all changes of organizationsand individuals in society Therefore, with the impact of the COVID-19 pandemic,there will be a significant impact on the banking industry In particular, it can be seenthat out of the 11 largest banks in the world, China accounts for 4 banks Thus,COVID-19 has a great pressure on China's economy, or more clearly the banking

industry Therefore, Oliver Wyman, 2020 published the report "COVID-19 and

financing services in China" to address the impact of service industries by this

epidemic

First of all, the report summarizes the table before and after the epidemic The

5 service sectors in this report are: Banks, securities firms, insurance companies,asset managers and wealth managers Before Covid, for the banking sector, thegrowth rate of assets and profits tended to decrease, but remained above 5% But inthe time of COVID, accumulated bad debts increased, the bank lost the ability tomanage bad debts After that, the report offers solutions to minimize bad debts, aswell as help banks strictly manage NPL For example, stimulating consumers to sign

up for health insurance packages, thereby making the bank gain a considerableprofit Bank of China needs to reconsider the business process in the period ofdiversifying production and product sourcing

Strict management of non-performing loans and maintenance of long-termcredit are essential for banks to anticipate an increase in non-performing loans.However, COVID also brings new opportunities for the service industry, such as anincrease in online services (the sales of mutual funds increased by 400% in the first

2 weeks of February) Then, are the solution models for banks in this outbreak That

is, health care is closely linked with banks to minimize risks, as well as increaseproduct productivity After proposing that strategy, the report also announced thebank's performance on a business scale

In summary, with the introduction of live data and specific facts, the researchhas shown the risks posed by COVID to the banking industry Besides, it alsopresents opportunities and challenges for the banking industry now, and finally thesolution This paper, mainly focusing on solutions for banking services during theCOVID season, does not analyze the impact of COVID on aspects of the bankingindustry Therefore, it is difficult for readers to imagine the impact of COVID on thebanking crisis It is even more unclear what the government's policy has done for thisservice industry

Last but not least, the “Effects of Covid-19 on the banking sector: the

market’s assessment (Iñaki Aldasoro, Ingo Fender, Bryan Hardy and Nikola

Tarashev, 2020)” has synthesised fully the data as well as assessment of bankingindustry during the pandemic of Covid-19 and its effects Indeed, the bankingindustry has been hit harder than other sectors because the Covid-19 pandemic hasbeen spreading unsettlingly around the world This has led the financial market face

to a tailspin According to the BIS Bulletin report, an assessment about performance

of banks was examined and it mainly focused on the prices of stock, credit defaultswap (CDS), spreads of bond as well as rating of credit

During the first seven weeks of the early year, the market was still stablegenerally but almost changed quickly after that Till the middle of February, themarket is getting more stressful, the prices of stock tend to fall in lockstep in thewhole market However, when the stock market began emerging the onset of ageneralised sell-off on 5th of March, it has led banks to participate in the worstperformers (figure…)

Consequently, by the time of the April’s last week, the stock’s prices of banksdecreased much deeper than other fields which are the hardest-hit of the economics

(Source: Datastream; FitchRating; JPMorgan Chase; BIS Bulletin)

When the prices of stock fell down, the ratios of price-to book did also, whichwas much under than one for banks in Europe and the USA on average Bankingsector has suffered more and more due to both relative others and previous crises’comparison To be more details, although it has been recovered partially in recentyears, the stock’s price declines equally to the Lehman Brothers’ collapse period in

2008 (figure…) The spreads of CDS experienced the same performance By thisdevelopment, the outlook from the rating of the bank's long-term began deterioratingand displayed the concern about Covid-19’s impact on earnings of banks

While conditions of the market were deteriorated, costs of funding indicators

in banks grew significantly In the early of March, indices of bank’s bond spreadsenlarged in various maturities and currencies substantially Nevertheless, this spreadwas narrowed partly in the first week of April by following the political decision of theFederal Reserve and the ECB (figure…)

Source: Markit iBoxx; BIS Bulletin

According to the characteristics of banks before the pandemic of Covid-19,patterns of differentiation in the stock market were more pronounced than afterselling off initially (figure…) Especially, banks that have good capital recoveredmuch better than the poor one Therefore, banks were rewarded by markets because

of their robustness In terms of CDS markets, they have responded remarkablyduring the period of pre-pandemic, which rely on short-term funding In moreprofitable banks, the CDS spreads fell more than before the crisis, which wasmeasured by “return on assets” (ROA)

Source: Blomberg; Datastream; Fitch; Markit; BIS Bulletin

In Europe, banks have been plagued with low profit for a long time In which,the ROA of them notably hovered below than in other jurisdictions (figure…)(Bogdanova et al (2018)) In general, with banks that gained less profit, they weremore likely to reduce their own outlook to suggest the scope going forward fordowngrades outright

It is not differentiating among banks in the stock market regarding their ratingsbefore the Covid-19 (figure…) Investors in equity tend to concern more and moreabout the overview of deterioration of performance outlook in banks, which was notdetailed to any rating of credit As a result, the prices of stock broadly moved like thecategories’ ratings in the middle of February In contrast, the CDS market haspenalised strictly the low rating banks Banks that had the BBB+ rating or lower,particularly in ratings of high yield, witnessed their spreads of CDS have thestrongest increase during the initial turmoil

Source: Bloomberg; Datastream; FitchRatings; Markit; BIS Bulletin

2.2.3 Global governments initiatives to date to support the banking industry

During the period when the Covid-19 epidemic drove the economy over, thebanking industry was also severely affected A variety of policy measures that havebeen taken in wide-range by national authorities to support sectors in the economyand try to maintain the adequate liquidity in the system of finance

Those policies consist of supporting debt moratoria and fiscal in large-scale,guaranteeing credit, providing to affected sectors and borrowers with much-neededrelief, which includes households and SMEs in particular (World Bank Group, 2020).Besides, in order to solve serious strains in the main funding markets, the liquidityand monetary stimulus have been restored by the policy makers By these policies,the resilience and lending of the financial sector have been supported significantly

In addition, guidance to support national authorities have been issued by theStandard-Setting Bodies (SSBs) with their efforts to supply sound and measures withwell-coordinated policy There are several objectives in this guidance including (i)national jurisdiction has taken supporting measures to combat the Covid-19pandemic, especially in the careful design of general debt moratoria’s form; (ii)existing flexibility within standard of globe consist of buffers will be made use byencouraging the international financial community; (iii) additional operational capacitywill be provided for national authorities as well as financial institutes to response tothe sudden priorities of financial stability and (iv) protecting consumer will beenhanced transparently In general, all the SSBs’ activities aim to provide a steadyand coordinated response to support authorities, financial institutes as well as theeconomy to preserve the financial stability then ensure that the market can continuebeing its functions.

Overview of Statements and Guidance Provided by Standard-Setting Bodies in Response to the COVID-19 Pandemic

Source: World Bank Group, 2020

2.3 CONCLUSION

The Coronavirus epidemic can cause banks' bad debt to increase whenbusinesses and families are negatively affected Credit demand may decline in thefirst two quarters of the year With the banking system, the Covid-19 epidemic isreported to affect two important aspects

The first is that the demand for credit is reduced due to the lower demand forcredit of businesses and households, leading to difficulties in production andbusiness activities Regarding the impacts, it can be seen that the consequences ofbad debts bring extremely difficult solutions It has a negative impact on the economy

in general and the operation of commercial banks and customers in particular Forthe economy: Bad debt will increase the pressure on inflation, restraining productionand business activities The biggest danger is that if the bad debt with a large creditline can lead to a crisis of the banking and financial system and the wholeeconomy.For the system of commercial banks: Bad debt will make commercial banksuse capital inefficiently, reduce profits, bear cash flow risks, reduce solvency for bankpayments From early 2020 to now, the Covid pandemic - 19 taking place worldwidehas caused serious impacts on the economy - society in general, the operation ofbusinesses and the commercial banking system in particular

Based on past studies, we have found out how the bank is affected in theCOVID-19 epidemic Typically, it is the NPL issue - a prominent issue that the bankwill encounter in a financial crisis Besides, it can be seen that the recovery afterCOVID-19 is affected by the capital structure of banking, as well as net returns.Thereby are the solutions of the government, the bank to minimize risks to theminimum, ways to reduce bad debts, to help the economy recover after thepandemic

However, most reports are made based on the assumption that the world will

be able to successfully control the pandemic by 2020 and begin the process ofeconomic recovery by 2021

CHAPTER THREE: METHODOLOGY AND DATA

The banking system plays an important role in the circulation of capitalsources and the amount of money in an economy The banking system consists ofmany commercial banks, national banks and government agencies The bankingsystem in each country is different from other countries, so the operation of theglobal banking system is very complicated There are many factors that affect thehealth of the banking system in general

There have been many models and methods built to ensure a strong bankingsystem that is strong enough to promote economic development While this researchapplies qualitative research methods With macroeconomic factors, this researchapplied to consider qualitative methods: analyzing macroeconomic policies usedmainly qualitative methods while analyzing macroeconomic indicators used mainlyqualitative methods Banking market factors took advantage of qualitative methodswhen focusing on analytical statistics The last black swan theory concentrated onqualitative methods when describing surprising, strong-impacting and inappropriatelyinterpreted events because Covid-19 might be considered as a black swan event

This chapter included distinctive five parts While the methodology of thisresearch was presented in part two that had talking about each methodology of eachfactor group, the main participants were global macro-economic indicators, microbanking system indicators and criteria for a black swan event The next part showedsome key formulas used in this research to analyze data collected The fourth partmade a description to collect data that served this research.

3.2 METHODOLOGY

3.2.1 The Black swan theory application

The Black swan theory in “The black swan the impact of the highly

improbable” book of Nassim Nicholas Taleb

The term black swan was developed by Nassim Nicholas Taleb, a successfulprofessor in the finance field, book writer, and merchant on Wall Street Heelaborated on the black swan theory in his own book, in which the black swan effecthas three main characteristics:

- Beyond far from normal predictions, rarely happen

- There were dire consequences when it happened

- There were many warnings before that incident happened

Since a black swan event was unpredictable due to very extreme rarity butstill has disastrous consequences, it is essential that people always consider blackswan events to be a possibility and should have built plans accordingly The dot-combubble of 2001, the global economic crisis of 2008, the Swiss bank announced thefloating exchange rate of Swiss-France were particularly black swan events "In thisworld, anything can happen!"

The first purpose of the black swan theory was not to try to make forecasts ofunpredictable events in the future, but to build a solid framework to prevent andminimize damage from negative events while increasing exploitation of other positiveevents Taleb believed that global banking systems and international commercialcompanies are very vulnerable and attached with the dangers of unpredictablelosses from dangerous black swan events In terms of business and qualitativefinance, in particular, Taleb was critical of the widespread usage of the normaldistribution model applied in the financial field (Taleb, Nassim Nicholas, 2010)

In order to extend the analysis process the black swan theory of Taleb, theresearch used comparative methods Following Pickvance (2005), a comparativemethod was performed generally for explaining and detail understanding the causalmatters relevant to the characteristics of events or relationships often by a set ofexplanatory variations or variables There are so many ways to make a comparisonbetween two events (2008 crisis and 2020 depression), however the researchfocused on variation-finding comparison Comparative search method of variationaims to build a set of criteria for the cause, character and intensity of the events byanalyzing the systematic differences between the events The process of evolving anevent has its own way of functioning, as a result, the research tried to find aconnection between the most recent financial crisis and the recent crisis.

3.2.2 The banking crisis is caused by macroeconomic factors

There are many studies in the past that have shown that the macro economyplays an important role in the financial crisis of banks Ouarda Merrouche and ErlendNier, 2010 have successfully studied using qualitative method, regression function toexplain the formation of crisis Thereby, in this study, the author has selected 3 mainmacro factors that affect the analytical objectives Specifically, there were 3 factors ofGDP, inflation rate and interest rate.The author has provided convincing evidence ofGDP based on the ratio of bank credit to GDP Low GDP growth has a significantrelationship with banking risk Because it can be seen that GDP directly affects thecapital inflow of any business, not just banks The increased risk has been combinedwith inflation and high nominal interest rates because a bank conversion is unlikely

to be possible Stable inflation has been shown to exist in advanced economies,which has led to expanded trade credit; and underdeveloped countries havesynonymous with poor commercial credit (Hume and Sentence, 2009)

In addition, in 1997, Asli Demirguc-Kunt used a multivariate logarithmiceconomic model, the author pointed out that the probability of a crisis occurring isproportional to the underdevelopment of the macro environment, especially duringthe period of high inflation and low growth, in addition, the higher the actual interestrate, the more the bank has paid attention to the liquidity issue

Therefore, based on 2 studies by 2 authors, Ouarda Merrouche, Erlend Nierand Asli Demirguc-Kunt, we can conclude that 3 macro factors are the cause of thebanking crisis: GDP, inflation rate, interest rate, Evans Agalega & Samuel Antwi,

2013 stated that lending interest rates have a large impact on GDP This means thatGDP and interest rates are negatively correlated Falling interest rates lead toincreased GDP, the interest rate increase leads to GDP decrease Shariq ahmadBhat's study showed the model between them

For many years, risk modeling has been used prevalently in current industriesand they have made integral to businesses for example financial services andenergy Recently, companies in both public and private sectors realized and startedadopting the simulations of risk models widely in order to address risks of strategy,operations, compliance, geopolitics, etc Models making has become more and morepractical because of wider available data and more analysis abilities; besides, theenvironmental risks are also increasing that make building a risk modeling get morevalued

Figure…: Basel III framework

Source: Compatibl, 2020

The international framework of a liquidity risk was introduced by the Basel IIIfor the first time, which could reflect the excessive liquidity risk experiences to takeserious flaws in managing the risk of liquidity of banks in running to crisis of financeerupted in August of 2007 and linked to the negative external factors Banks alwaysplay significant roles in the provision of liquidity to them during normal as well ascrisis period The reason is because of interaction among banks in their operations,that is obviously necessary The purpose of the Basel III framework after that isprotecting the stability of finance and sustainable promotion of economic growth To

be more detailed, if the capital level is high, the financial crisis probability in thefuture is small (Ulrich et al., 2011)

Additionally, many firms in the financial industry have identified that theinadequacy of liquidity risk management has been one of the most critical issues(Senior Supervisors Group, 2008 and 2009) The committee of Basel has developedthe “Principles for Sound Liquidity Risk Management and Supervision” to build upstandards for managing risk of liquidity and supervisory practices in 2008 (BCBS,2008) From that, the framework of liquidity risk was established, which wasconsidered a revolution of the regulation of Basel III in December of 2010 (BCBS2010) As a result, the Liquidity Coverage Ratio (LCR) aims to issue the lowest level

of high quality of liquid assets that can suffer a scenario of acute stress for onemonth Therefore, the LCR will also be used in analysis and evaluation in thisdissertation

The reason why the author chose the LCR to apply in this paper is becausewith previous evidence, the financial crisis's most common feature is requirement forliquidity When funds are needed for businesses, individuals and entities of theeconomy to operate and invest, but financial institutes were difficult even impossible

to lend them and led to a major loss for investors These result in shifting funds tolow-risk assets like bonds of the U.S Treasury Therefore, the disruptions of financecould be vulnerable by borrowing a range of sectors and that lé to a shortage ofsystematic liquidity Regarding the “capital requirements” index, this is considered as

a key tool of armory of regulators due to several important functions it can serve(Avgouleas, 2015)

As such, capital requirement is often used to measure and manage risks foreconomic growth, not usually serving crises Furthermore, another ratio was alsomentioned in the new Basel III capital framework - the “Leverage Ratio” This ratiohas the purpose for restricting the excessive leverage’s build-up in the bankingindustry to prevent from destabilising the processes of deleverage, which maydamage the system of finance and the economy broadley (BCBS, 2013) As a result,the Leverage Ratio is often used to measure the stability of the banking industry Tosum up, to measure and evaluate the crisis of the banking industry, the author haschosen the LCR as the most reasonable indicator for this analysis

3.3 BREAKDOWN OF METHODOLOGY IN DETAILS BUT IN PRECISE

LCR is used as a measure to compare the liquidity buffer and the net cashoutflow within the time of 30 days Specifically, to calculate the LCR, the formula isused as follow:

The standard of the LCR need to meet the requirement of lower than 100%the log regression model of macro factors was given as follows:

Thus, it can be seen that the research model used by the author is verycomplicated The model included the dependent variable, the time variable and thedummy variable In which, the dummy variable takes the value of 0 if there is nocrisis, and 1 when the country has a crisis X (i, t) has been called the probability thatcrisis will occur in country i, at time t P (i, t) is the dummy variable of variable X (i, t)when that crisis occurred

3.4 DATA COLLECTION

3.4.1 The Black swan theory of Nassim Nicholas Taleb

This dissertation had collected data related to human losses and financiallosses caused by Covid-19 Contemporaneously, this research also gatheredevidence to prove that the Covid-19 epidemic was considered to meet the conditions

of a negative black swan event The method to collect in this section was fromsecondary data collection methods that data sources had earlier been published inbook, newspaper, magazine, journal, online sources The financial crisis of 2008 wasseen as a Black Swan event (Nassim Nicholas Taleb, 2010), but the recession of

2020 was seen as a White Swan event (Nassim Nicholas Taleb, 2020), so what's the

difference? To handle this question, the research proposed to use Comparative

research methods Comparative research is a commonly used method to make the

difference from phenomena to the nature of two or more problems From there,generalizing specific cases to testing hypotheses as well as the theory of the blackswan theory of Nassim Nicholas Taleb

3.4.2 Macroeconomics

With the advent of econometric models, data collection has always been veryimportant The data has been collected by the authors with reliable financial sources.The author has obtained from the World Bank, from data available from previousstudies For example, the author Asi Demirguc-Kunt study collected data from 65countries, over 14 years from 1980-1994 However, in the selection process, theauthor had to leave many countries for lack of data on inflation, GDP growth rate, aswell as interest rates Therefore, this method of study has inevitably caused the lack

of observations due to lack of standards As a result, the authors worked hard togather enough data for the study

3.4.3 Risk modeling

Risk modeling is considered as a representation in mathematics of a systemand it is commonly incorporated in probability distributions Thus, by using thismodel, the relevant historical data will be used to analyze as the secondary data.Moreover, asking experts is also applied to understand the probability of risk eventsthat can occur as well as potential severity of it Furthermore, collecting from the rightdatabase is suggested in this dissertation to help decision makers get morecomfortable with the models and background assumption of them to apply ifmeaningful decisions need to be made

3.5 CONCLUSION