Will COVID 19 pandemic trigger another global banking crisis - A lesson from previous global financial crisis

This research described the effects and devastation of the epidemic on the global economy, focusing on analysing the impacts on the international financial banking system.

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SEMESTER 1, 2020

Will COVID 19 pandemic trigger another global

banking crisis?

A lesson from previous global financial crisis

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, 2020

Contents

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

Therefore, the operation of commercial banking systems is one of the most seriously 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 estate industry This research was conducted to consider whether this disaster may raise another 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 the global economy, focusing on analysing the impacts on the international financial banking system

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

- The study also investigated the depth and breadth of the global recession storm impacting on the global financial system The new global economic downturn was the first since 1870 that originated from a pandemic; leading national policymakers had to consider implementing additional powerful interventions, rather than letting the economy recover itself after the recession through bailout packages and fiscal policies

- The study assessed the long-term effects of the recession on the prospects for long-term economic development, a serious decline in human resources and the fissure 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 of the global economy based on the strength of the international banking system; including scientific and technological advances in digital connectivity, e-financial service packages, as well as recommendations for appropriate business policies and decisions

1.3 METHODOLOGY AND DATA

The main methodologies were conducted based on both qualitative research while data resources were from economic reports and research papers from reliable sources Qualitative research: via case studies and practical observations that financial institutions and countries performed policies to prevent an increase in economic disaster; simultaneously analysing the developments and situations that financial 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 introduced the aims – objectives, methodology and data resources of the research The second chapter focused on previous research documents assessing the impacts of the disaster to the global economies and international banking sectors; and the ways to respond to the disaster; then summary findings and critical review of those research documents The third chapter made a description of methodology (qualitative method) and data resources of the research From those methodology and data, the research carried out analysis of economic indicators and qualitative data in the next chapter The final chapter summarizes the findings and recommendations of this research, 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 the effects that the Covid-19 pandemic has caused to the banking industry in general through research articles, reports, etc In addition, the author also tended to analyse and evaluate the content of previous studies on this issue, thereby forming a framework and theoretical foundation to analyze the impact of Covid-19 to the banking crisis in a specific context of Bloomberg

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

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

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

The third part is the conclusion for the chapter In this section, the author will conclude through summarizing all literature, analysis Moreover, achievements about theory and framework were also displayed in this part, which will be used to apply for analysis 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 two major world financial crises, the Great Depression from 1929 to 1933 and the global financial crisis in the 2007-2009 period After that, the articles gave many lessons related to financial system instability (real estate bubbles, subprime debt, economic inequality problems, financial products causing systematic risks) These two global financial crises were the worst since World War I In both crises, the US banking system has always played a key role in letting the crisis spread around the globe when 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 product fell 29%, pricing level also fell 25%, unemployment rate stretched out more 20%, approximately 9,000 bankers stopped common operations In the 2008 crisis, the global 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, like Brexit, European government debts The intervention of governments of the countries is the main difference between the two crises During the Great Depression, the governments became more passive when it came to policy to prevent crises developing However, the role of the government in the economic recovery in the 2008 crisis became more pronounced.

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

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

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

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

- Legal intervention was needed to prevent the crisis spreading

However, the 2020 recession bore different characteristics from the two previous great crises The aforementioned lessons whether happen or not happen in the 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 of solving bad debts from the banking crisis COVID-19 followed the global economic crisis This leads to an increase in NPL The sustainability of bank reporting is reduced, 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 high debt is one of the typical characteristics when the bank is in crisis and this problem is studied 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 has led to an increase in many bad debts, and the problem of resolving bad debts will be even more difficult First of all, the article shows the status of NPL Normally, bad debt 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 avoiding bad debt is high below 0.25% The crisis has left a lot of consequences, the bad debt ratio often increases sharply by 3.4 times, and even up to 10 times Thus, the NPL is increasingly 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 is necessary to help the economy recover.The article shows some useful measures such as:Reassessment of financial statements to review capital structure.Divide assets into 2 types of good and bad assets This will make the bank's financial problem more transparent, giving the bank many loan opportunities

In summary, the paper summarizes the measures that can solve bad debts If the 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 recovery rate after the epidemic will make the bad debt ratio higher Thus, the introduction of policies to resolve bad debts is the situation that needs to be resolved as soon as possible to avoid causing a crisis for the economy

Through assessment, we can see that this article gives quite detailed information about the status as well as solutions for the NPL The article has many models and tables to compare the fluctuations in bank debt before and after the pandemic That article is really necessary for this research article, because NPL is one 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 a description report about the ways banking systems over the world responded to the impacts of the COVID 19 disaster based on capital cushions First, the report conducted a review of the 2008 financial crisis, which was triggered by a direct shock from the banking industry; meanwhile, the current shock originated from a world pandemic and the banking system just was an affected object However, the banking system plays an important role in the process of supporting economic recovery through supplying many loans to organizations affected by the disease

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

By applying Basel III - a comprehensive standard set of reform measures built to improve regulations, supervision process and risk management of the banking sector, Europe’s CET1 ratios were 13%, this number in the UK reached 14% while 12% 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 economic recession based on a capital conservation buffer with the value of 2.5% total risk weighted assets After that, McKensey had built scenarios for resilience to the world economy after the pandemic:

(Resource: McKensey)

In which, there are three most likely scenarios: the global economy can recover 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 a negative assessment of the effectiveness of public health

McKensey forecasted that capital reserves of many banks in the US will get the 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 of almost all banks may be lowest at 5.5% In each zone, banking managers and government agencies must know their position to make the right decisions because raising 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 energy industry, medical services and even aviation via national and international banking systems

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, the bank operates on the savings of individuals and households and uses it as a fund for its operations This paper has studied quite sufficiently and in detail about each aspect that banks are affected This report has studied quite adequately and in detail about 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 in the financial statements to consider the level of losses in the operational situation and financial activities of the bank

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

The activities of the bank are closely related to all changes of organizations and 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 seen that 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, the growth rate of assets and profits tended to decrease, but remained above 5% But in the time of COVID, accumulated bad debts increased, the bank lost the ability to manage bad debts After that, the report offers solutions to minimize bad debts, as well as help banks strictly manage NPL For example, stimulating consumers to sign

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

Strict management of non-performing loans and maintenance of long-term credit are essential for banks to anticipate an increase in non-performing loans However, COVID also brings new opportunities for the service industry, such as an increase 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 increase product productivity After proposing that strategy, the report also announced the bank's performance on a business scale

In summary, with the introduction of live data and specific facts, the research has shown the risks posed by COVID to the banking industry Besides, it also presents opportunities and challenges for the banking industry now, and finally the solution This paper, mainly focusing on solutions for banking services during the COVID season, does not analyze the impact of COVID on aspects of the banking industry Therefore, it is difficult for readers to imagine the impact of COVID on the banking crisis It is even more unclear what the government's policy has done for this service 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 banking industry during the pandemic of Covid-19 and its effects Indeed, the banking industry has been hit harder than other sectors because the Covid-19 pandemic has been 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 default swap (CDS), spreads of bond as well as rating of credit

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

Consequently, by the time of the April’s last week, the stock’s prices of banks decreased 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, which was much under than one for banks in Europe and the USA on average Banking sector 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 recent years, the stock’s price declines equally to the Lehman Brothers’ collapse period in

2008 (figure…) The spreads of CDS experienced the same performance By this development, the outlook from the rating of the bank's long-term began deteriorating and 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 spreads enlarged in various maturities and currencies substantially Nevertheless, this spread was narrowed partly in the first week of April by following the political decision of the Federal 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 after selling off initially (figure…) Especially, banks that have good capital recovered much better than the poor one Therefore, banks were rewarded by markets because of their robustness In terms of CDS markets, they have responded remarkably during the period of pre-pandemic, which rely on short-term funding In more profitable banks, the CDS spreads fell more than before the crisis, which was measured 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 were more likely to reduce their own outlook to suggest the scope going forward for downgrades outright

It is not differentiating among banks in the stock market regarding their ratings before the Covid-19 (figure…) Investors in equity tend to concern more and more about the overview of deterioration of performance outlook in banks, which was not detailed to any rating of credit As a result, the prices of stock broadly moved like the categories’ ratings in the middle of February In contrast, the CDS market has penalised 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 the strongest 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, the banking industry was also severely affected A variety of policy measures that have been taken in wide-range by national authorities to support sectors in the economy and 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-needed relief, which includes households and SMEs in particular (World Bank Group, 2020) Besides, in order to solve serious strains in the main funding markets, the liquidity and 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 the Standard-Setting Bodies (SSBs) with their efforts to supply sound and measures with well-coordinated policy There are several objectives in this guidance including (i) national jurisdiction has taken supporting measures to combat the Covid-19 pandemic, 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 by encouraging the international financial community; (iii) additional operational capacity will be provided for national authorities as well as financial institutes to response to the sudden priorities of financial stability and (iv) protecting consumer will be enhanced transparently In general, all the SSBs’ activities aim to provide a steady and coordinated response to support authorities, financial institutes as well as the economy to preserve the financial stability then ensure that the market can continue being 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 when businesses and families are negatively affected Credit demand may decline in the first two quarters of the year With the banking system, the Covid-19 epidemic is reported to affect two important aspects

The first is that the demand for credit is reduced due to the lower demand for credit of businesses and households, leading to difficulties in production and business activities Regarding the impacts, it can be seen that the consequences of bad 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 For the economy: Bad debt will increase the pressure on inflation, restraining production and business activities The biggest danger is that if the bad debt with a large credit line can lead to a crisis of the banking and financial system and the whole economy.For the system of commercial banks: Bad debt will make commercial banks use capital inefficiently, reduce profits, bear cash flow risks, reduce solvency for bank payments From early 2020 to now, the Covid pandemic -

19 taking place worldwide has caused serious impacts on the economy - society in general, the operation of businesses and the commercial banking system in particular

Based on past studies, we have found out how the bank is affected in the COVID-19 epidemic Typically, it is the NPL issue - a prominent issue that the bank will encounter in a financial crisis Besides, it can be seen that the recovery after COVID-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 the minimum, ways to reduce bad debts, to help the economy recover after the pandemic

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 of economic recovery by 2021

CHAPTER THREE: METHODOLOGY AND DATA

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

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

This chapter included distinctive five parts While the methodology of this research was presented in part two that had talking about each methodology of each factor group, the main participants were global macro-economic indicators, micro banking system indicators and criteria for a black swan event The next part showed some key formulas used in this research to analyze data collected The fourth part made 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 successful professor in the finance field, book writer, and merchant on Wall Street He elaborated on the black swan theory in his own book, in which the black swan effect has 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 but still has disastrous consequences, it is essential that people always consider black swan events to be a possibility and should have built plans accordingly The dot-com bubble of 2001, the global economic crisis of 2008, the Swiss bank announced the floating exchange rate of Swiss-France were particularly black swan events "In this world, anything can happen!"

The first purpose of the black swan theory was not to try to make forecasts of unpredictable events in the future, but to build a solid framework to prevent and minimize damage from negative events while increasing exploitation of other positive events Taleb believed that global banking systems and international commercial companies are very vulnerable and attached with the dangers of unpredictable losses from dangerous black swan events In terms of business and qualitative finance, in particular, Taleb was critical of the widespread usage of the normal distribution model applied in the financial field (Taleb, Nassim Nicholas, 2010)

In order to extend the analysis process the black swan theory of Taleb, the research used comparative methods Following Pickvance (2005), a comparative method was performed generally for explaining and detail understanding the causal matters relevant to the characteristics of events or relationships often by a set of explanatory variations or variables There are so many ways to make a comparison between two events (2008 crisis and 2020 depression), however the research focused on variation-finding comparison Comparative search method of variation aims to build a set of criteria for the cause, character and intensity of the events by analyzing the systematic differences between the events The process of evolving an event has its own way of functioning, as a result, the research tried to find a connection 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 economy plays an important role in the financial crisis of banks Ouarda Merrouche and Erlend Nier, 2010 have successfully studied using qualitative method, regression function to explain the formation of crisis Thereby, in this study, the author has selected 3 main macro factors that affect the analytical objectives Specifically, there were 3 factors of GDP, inflation rate and interest rate.The author has provided convincing evidence of GDP based on the ratio of bank credit to GDP Low GDP growth has a significant relationship with banking risk Because it can be seen that GDP directly affects the capital inflow of any business, not just banks The increased risk has been combined with 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 have synonymous with poor commercial credit (Hume and Sentence, 2009)

In addition, in 1997, Asli Demirguc-Kunt used a multivariate logarithmic economic model, the author pointed out that the probability of a crisis occurring is proportional to the underdevelopment of the macro environment, especially during the period of high inflation and low growth, in addition, the higher the actual interest rate, the more the bank has paid attention to the liquidity issue

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

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

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

Figure…: Basel III framework

Source: Compatibl, 2020

The international framework of a liquidity risk was introduced by the Basel III for the first time, which could reflect the excessive liquidity risk experiences to take serious flaws in managing the risk of liquidity of banks in running to crisis of finance erupted in August of 2007 and linked to the negative external factors Banks always play significant roles in the provision of liquidity to them during normal as well as crisis 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 is protecting 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 the future is small (Ulrich et al., 2011)

Additionally, many firms in the financial industry have identified that the inadequacy of liquidity risk management has been one of the most critical issues (Senior Supervisors Group, 2008 and 2009) The committee of Basel has developed the “Principles for Sound Liquidity Risk Management and Supervision” to build up standards for managing risk of liquidity and supervisory practices in 2008 (BCBS, 2008) From that, the framework of liquidity risk was established, which was considered a revolution of the regulation of Basel III in December of 2010 (BCBS 2010) 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 one month Therefore, the LCR will also be used in analysis and evaluation in this dissertation

The reason why the author chose the LCR to apply in this paper is because with previous evidence, the financial crisis's most common feature is requirement for liquidity When funds are needed for businesses, individuals and entities of the economy 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 to low-risk assets like bonds of the U.S Treasury Therefore, the disruptions of finance could be vulnerable by borrowing a range of sectors and that lé to a shortage of systematic 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 for economic growth, not usually serving crises Furthermore, another ratio was also mentioned in the new Basel III capital framework - the “Leverage Ratio” This ratio has the purpose for restricting the excessive leverage’s build-up in the banking industry to prevent from destabilising the processes of deleverage, which may damage 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 To sum up, to measure and evaluate the crisis of the banking industry, the author has chosen 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 cash outflow within the time of 30 days Specifically, to calculate the LCR, the formula is used 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 very complicated The model included the dependent variable, the time variable and the dummy variable In which, the dummy variable takes the value of 0 if there is no crisis, and 1 when the country has a crisis X (i, t) has been called the probability that crisis 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 financial losses caused by Covid-19 Contemporaneously, this research also gathered evidence 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 from secondary data collection methods that data sources had earlier been published in book, newspaper, magazine, journal, online sources The financial crisis of 2008 was seen 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 black swan theory of Nassim Nicholas Taleb

3.4.2 Macroeconomics

With the advent of econometric models, data collection has always been very important The data has been collected by the authors with reliable financial sources The author has obtained from the World Bank, from data available from previous studies For example, the author Asi Demirguc-Kunt study collected data from 65 countries, over 14 years from 1980-1994 However, in the selection process, the author had to leave many countries for lack of data on inflation, GDP growth rate, as well 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 to gather enough data for the study

3.4.3 Risk modeling

Risk modeling is considered as a representation in mathematics of a system and it is commonly incorporated in probability distributions Thus, by using this model, 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 events that can occur as well as potential severity of it Furthermore, collecting from the right database is suggested in this dissertation to help decision makers get more comfortable with the models and background assumption of them to apply if meaningful decisions need to be made

3.5 CONCLUSION

The Covid-19 epidemic is still happening in the world with unpredictable developments Therefore, the data requirements for the impact of the Covid-19 epidemic are often formulated based on projections The research was conducted based on qualitative research methods for three groups of indicators While the research considered to prove the Covid-19 disaster as a black swan event based on the characteristics and consequences of Covid-19 pandemic following the conditions

of a normal negative black swan event

Bank solvency is affected by macro factors When banks are insolvent, they are more susceptible to increased debt, leading to an increased risk of financial crisis Macro indicators are included in analytical models to create relationships between variables Research results show that, to ensure the best liquidity risk management, most managers often ignore external factors without knowing that these are important supporting factors for their ability to manage Therefore, the regulation of macro factors such as inflation, unemployment, and low GDP growth rate is a way to help banks avoid the highest risk of default.

Managing liquidity risk is indispensable in both normal and stressful periods; thus, risk modeling should be developed in every company, especially in the banking industry The Basel III Framework will be used to have a comprehensive analysis and view in this dissertation and to be more detailed, the formula of Liquidity Coverage Ratio (LCR) will be applied to calculate for the company After that, some evaluation will be concluded in this dissertation

CHAPTER FOUR ANALYSIS AND RESULTS

4.1 INTRODUCTION

This chapter aims to analyze and evaluate the current situation in the world financial markets The author conducts analysis of the causes that have caused a world financial crisis, analyzes the manifestations of the crises that have occurred in the past In addition, data is collected to find signals of a crisis in the current period (2020) From there, the conclusions are made to see whether there is a global financial crisis at the moment or not Then, a few recommendations on each aspect will be given to the banking industry to avoid the crisis

In this chapter, there are four main parts including the introduction part, data analysis part, summary of the results interpretation and the conclusion for the chapter

First, the parts of the introduction will describe the purpose of chapter 4 In addition, this introduction part will cover the main content of each section in this chapter, what issues the sections will deal with