Critically assess the view that banks in emerging markets weathered Essay

Critically assess the view that banks in emerging markets weathered the recent financial crisis (2007-09) better than banks h - Essay Example Critics would surely credit their phenomenal growth due to the global economic shift that has taken place during this period where China has become the world’s manufacturing center and back office. While these two happenings have indeed helped in the growth of Chinese banks, one should not lose sight of the equally important fact that while banks in developed western economies crumbled during the global meltdown during 2007-2009, Chinese banks weathered this economic turmoil without any apparent signs of wear and tear (The winners' dilemma, 2010). Reliance on old fashioned mores of banking Banks in India, China and Brazil still prefer to do banking in the so-called old fashioned manner of carrying out business. They depend almost entirely on deposits they can mobilize and never lend out more than they collect through deposits. Also, they never depend on economically unstable international financial instruments that promise huge possibilities of return but are forever volatile and dependent on a host of economic factors that are linked to health of diverse economies of the western hemisphere. If there is turmoil in one developed economy, its impact spread across the entire banking sector via these volatile international financial instruments (Rambo in cuffs, 2010). This conservative approach to banking is also reflected in the comparatively meager salaries and perks that chief executives of banks in emerging economies receive as remuneration. An example might put things in proper perspective. The chief executive of Chinese bank ICBC, the world’s largest bank in terms of market capitalization, received only $134,000 in 2009 which is way behind the remuneration of his peers in western banks (The bigger and bigger picture, 2010). Role of Governments of emerging countries The biggest difference between developed and emerging economies with regard to banking is the extent of involvement of government in banking activities. While governments of developed economies hardly have any say in how banks would be run, governments of emerging economies actively participate in the business of banking. This might initially seem to be an unwarranted governmental intervention in the mechanism of free market but on deeper analysis it becomes clear that governmental involvement shielded banks in emerging economies to a considerable extent from global turmoil during 2007-2009 (Mutually assured existence, 2010). In the matter of growth and expansion Chinese banks have beaten their emerging economy counterparts hands down. The profits of China Construction Bank, the second largest bank in the world, have grown to $16 billion which is decidedly higher than the profits of JPMorgan, Wells Fargo and Goldman Sachs, the three largest banks in United States of America. With such large scale expansion, the problem of bad debts has also increased more than proportionately. Chinese government has taken certain explicit steps to prevent bad debts from eating a way into the financial soundness of banks. In April 2010, Liu Mingkang, head of banking regulatory authority in China, issued clear instructions to