In the early 1990’s Argentina launched a widespread liberalization process, involving, among other things, large privatizations and financial and trade reforms. Between 1990 and 1994 Argentina experienced a rapid increase in Total Factor Productivity (TFP), Real GDP per capita and the skill premium the extra-wage received by skilled labour compared to its past. At the same time, unemployment rate went from 7% in 1992 to 13% in 1998, and Gini coefficient from 0.422 to 0.493, representing a greater economic inequality. As suggested by Autor, Katz & Krueger (1998) changes in production techniques, organizational changes, and capital deepening are associated with the incorporation of skill-biased technologies.
The sub-prime crisis emerged in the United States in mid-2007 and spilled over to Europe and other economies. From mid-2007 to mid-2008, the spillovers were relatively modest. The situation began to change in mid-2008. Then, following the bankruptcy of Lehman Brothers in mid September 2008, developments took a dramatic turn leading to a global financial crisis. During the crisis, the US dollar has seen some remarkable swings against major currencies. For example, from September 2007 to March 2008, it depreciated about 16% against the euro and yen, while between March and September 2008, it gained sharply (22%) against the euro. On the other hand, the dollar depreciated against the yen about 21% from August to December 2008, in particular after the Lehman’s default (see Figure 2 below). During this crisis, banks reportedly faced severe liquidity problems. US dollar funding shortages put intense pressure on the balance sheet capacity of the banking sector due to financial sector deleveraging. In response central banks around the world took unprecedented policy measures to supply funds to the banks (see McGuire and von Peter, 2009).
The purpose of this paper is to investigate any link between the market wide liquidity risk caused by the deleveraging process and exchange rate movements during the crisis. Adrian and Shin (2008) document that aggregate liquidity can be understood as the rate of growth of the aggregate financial sector balance sheet. When asset prices increase, financial intermediaries’ balance sheets generally become stronger, and, without adjusting asset holdings, their leverage declines. The financial intermediaries then hold surplus capital which they use to expand their balance sheets. On the liability side, they take on more short term debt. On the asset side, they search for potential borrowers. Aggregate liquidity is intimately tied to how hard the financial intermediaries search for borrowers, including through the interbank market. Conversely, when asset prices decline during a financial crisis, the financial intermediaries’ balance sheets contract and are thus reluctant to lend. Aggregate liquidity then declines.
This booklet has been prepared solely to facilitate greater public understanding of banking & financial services in the Kingdom of Bahrain. The contents of this booklet do not constitute legal or investment advice and persons in doubt about any matter are encouraged to seek independent professional advice. The BMA shall not be responsible for any loss or other detriment suffered as a result of acting on the information herein.
This booklet explains how interest rates are calculated and the types of interest rates a consumer may encounter when dealing with financial service providers in Bahrain. Knowing about interest rates is important to consumers since it tells them how much it costs to borrow money and how much they can earn by depositing their money with a bank.
