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Managing Risks in Commercial and Retail Banking by AMALENDU GHOSH

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CHAPTER 27

The Causes and Impact of the Asian and the United States’ Financial Crises

Risk assessment tools and techniques and the laws on financial activities regulation that were in place proved to be inadequate after the financial crises that occurred in the Southeast Asian countries during 1997 and the United States during 2006 to 2008. The financial crises revealed that the parameters of risk assessment that banks usually follow were not enough as systemic and contagion risks, and risks from certain plausible events were not adequately mapped within the measurement framework. The crises brought new dimension to the risk assessment practices and procedures as it became evident that severe risk could arise due to the close linkage between economies and financial markets across the world. Consequently, the bank's risk assessment process must recognize the contagion and domino effects of risk events that can take place both in developing and developed countries.

The financial crises revealed the failure of banks to appropriately assess and measure the risk that can arise from undue acceleration of credit to achieve higher economic growth through large inflow of short-term foreign funds and use of innovative financial and derivative instruments to fuel the credit boom. The crises brought to light the gaps that exist in the financial activities regulatory framework and the supervisory coverage of financial institutions.

27.1 THE ASIAN FINANCIAL CRISIS CAUSES AND IMPACT

An investment ...

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