This module is aimed at providing general guidance to AIs on the risks associated with credit card business, and the systems of control expected of them in managing such business. It also sets out the best practices that they should aim to achieve.
Experience has shown that the quality of AIs’ credit card portfolios mirrors the economic environment in which they operate. Very often, there is a strong correlation between an economic downturn and deterioration in the quality of such portfolios. The deterioration may become even more serious if AIs have relaxed their credit underwriting criteria and risk management standards as a result of intense competition in the market. It is therefore important for AIs to maintain prudent policies and practices for managing the risks of their credit card business which are relevant to the market environment that they operate in.
Lending by foreign banks to emerging markets is a defining feature of financial globalization. In the years preceding the recent global crisis, foreign bank lending to emerging economies expanded rapidly—whether directly from foreign banks‘ headquarters (cross border) or through affiliates operating in host countries. Although it had its pros and cons, on balance the presence of foreign-owned banks was generally believed to have enhanced competition and aided overall financial stability.
During the recent global credit crunch, however, foreign banks were potential vehicles for spreading a crisis that originated in advanced economies into emerging markets. As their financial health deteriorated sharply, banks‘ global scramble for dollar liquidity and the need to deleverage balance sheets raised concerns that these bank flows could retrench significantly, disrupting macroeconomic stability in emerging markets.
The channels of international business cycle co-movements have been debated in the literature, with this debate focusing on how such co-movements have been propagated and transmitted from one country to another. There are several possible channels, the most prominent channel being trade. Frankel and Rose (1998) state that countries with closer trade links tend to have more tightly correlated business cycles. Baxter and Kouparitsas (2005) also arrives at similar conclusions whereby intense bilateral trade tends to result in a high degree of synchronization among business cycles. By contrast, Gruben et al. (2002) and Inklaar et al. (2008) find that the trade effect is smaller than previously reported. Crosby (2003) even states that trade does not explain the correlation.
