GLOBAL FINANCIAL CRISIS

GLOBAL FINANCIAL CRISIS

Demonstrate your understanding of classical and modern, domestic and global operations of money and capital markets by:

Explaining how the Global Financial Crisis [GFC] has had a significant impact on

The stability and interconnectedness of international financial markets and economies

The regulatory responses that have been implemented in an attempt to stabilize the financial system.

While Commercial Banking was not the only sector to be affected by the GFC, apparently business continuity was threatened, and many were exposed to the very real risk of failure. Business continuity risk management may be said to incorporate a disaster recovery planning process and a disaster recovery response process.

Define business continuity risk management.

Identify and briefly explain the core components of a disaster recovery planning process.

Identify and briefly explain the core components of a disaster recovery response process.

While Commercial Banking was not the only sector to be affected by the GFC, clearly business continuity was threatened, and many were exposed to the very real risk of failure. Business continuity risk management may be said to incorporate a disaster recovery planning process and a disaster recovery response process.

Define business continuity risk management.

Identify and briefly explain the core components of a disaster recovery planning process.

Identify and briefly explain the core components of a disaster recovery response process.

Introduction

Global Financial Crisis, as the name suggests global financial crisis implies unavailability of finance globally. Finance is very important for the running of any business activity. Without money, we cannot even start a new venture itself, and own capital is not always sufficient to start or carry on the business activities (Reinhart and Rogurt, 2008).

Global operation of money

Global monetary crisis happens during the year 2007-08. We can say that the world financial crisis occurs when the lenders of the financial resources globally are unable to pay its debt. This happens to owe to the explanation that the banking sectors were providing loans to a large number of lenders. This increasing quantity of loan amount increases the Supply of cash within the market. With the rise in the pecuniary resource, the worth of cash reduces i.e. in different words, the buying power of the buyer decreases. With the increased supply of money, the lenders though of investing the money in real estate. Now we know that increasing demand also increases the price of the commodity. Thus with the increase in money supply the demand of properties increases which in turn increases the price of properties. Thus the owner of properties was unable to sell the same due to high price. Thus when the time arrives for repayment of a loan, the lenders were unable to make good their debt. Thus the banking company has become bankrupt as the dues become irrecoverable (Romeo, 2010).

Financial market and the economy of the country and world are highly interrelated. This is so because an enterprise goes for international trade only if the economy of the country supports the entity financially. Now with the financial crisis, the countries were unable to meet the financial requirement of the entity as the banking company was not providing financial assistance to the entity as they lose confidence on the lenders. This has an adverse impact on the international trade. The volume of international trade reduces to a greater extent.

Impact of Global Financial Crisis

This global financial crisis has a major impact on the capital market as well apart from the money market. To overcome such a situation and restrict such activity to occur in future the government is required to take strict action. Accordingly, the government of the affected country strengthens the apex bank of the country, who monitors the activities of all the banking institution in a country. This central bank was given the power to continuously monitor the activities of the banking institution and to devise policies and rules which are required to be followed while providing a loan to a customer. This will reduce the credit risk. This way we can say that government of the affected countries has taken appropriate measure to stabilize the global financial crisis (Dhameja, 2010).

Currently, the business environment has become much dynamic and risky; anything can happen at any time having an adverse impact on the continuity of the operation of the company. In such a scenario the company is required to predict these future uncertainties in advance so that they are ready to face such adverse situation and take appropriate action for managing such situation. Thus business continuity risk management is nothing but managing the risk threating the continuity of the company. Thus to mitigate or manage those risk the management of the company is required to put in place a business continuity plan. This business continuity plan contains the action to be taken whenever such treat comes. Managing business continuity is not easy in the given business environment where there is stiff competition. BCP is a strategic planning and thus require the involvement of both the employees of the company and the management. For constituting a business continuity plan in depth knowledge of industry, risks, and economy in which the company operates is required (Zaman, and Georgescu, 2009).

Continuity risk management

A disaster recovery plan (DRP) is a subset or a part of business continuity plan (BCP). The business continuity plan of a company also includes the disaster recovery plan. First of all, what kind of disaster impact the continuity of the business is required to be identified, such as natural disaster, server breakdown, theft, etc. Secondly the company is required to identify the critical activities of the organization, which they want to continue ensuring the business continuity. All these activities should be listed down in the DRP. Thirdly there should be some identified personnel who are responsible for initiation of DRP and takes necessary action as per the plan for recovery. Thus the DRP should contain the name, contact number, and responsibilities of the respective person. Fourthly, the DRP should the necessary action to be taken when the disaster happens (Staehr, 2010).

Now the disaster response process is completely dependent upon the DRP. This is so because the disaster recovery process will follow DRP only for disaster recovery. In the disaster recovery process, the person stated in the DRP document will take the stated actions. They are required to inform about the disaster to the concerned person. He must try to reduce the initial impact of the disaster. Finally, the disaster recovery process should ensure that the core activities of the company are restored at an appropriate location within the appropriate time.

Conclusion

We know that due to the financial crisis the banking institution has become bankrupt. But we cannot ignore that due to financial crisis many of the other companies were also impacted. This is due to the reason that these companies were highly capital intensive and without financial assistance, they were not able to survive. Thus one should have a business continuity plan in place.

Performance Analysis

Bottom-up analysis approach focuses on the analysis of accounting ratios and other performance measures. Discuss this approach from two perspectives.

Evans and Partners is an investment advisory firm that provides specialist investment advice to its private clients. As part of the investment decision process, the senior investment analysts at the firm apply the bottom-up approach to the fundamental analysis of share prices.

Explain why Evans and Partners would use this type of analysis.

Identify and discuss six different accounting ratios that should be included in a bottom-up approach model.

Identify and discuss three other performance measures that may be used.

2. An investor is evaluating the use of the bottom-up and the top-down approaches to fundamental analysis. The investor wants to use the approach that will best enable the structuring of a diversified share portfolio that will achieve specified income returns and capital gains.
3. Compare both approaches and propose a recommendation as to which approach the investor adopt – top-down or bottom-up or both? Provide sound reasoning for your argument.
4. The top-down approach includes an analysis of the local economy in which a company is situated, plus the economies of major trading partner countries and the global economy more generally. Why would an investor be interested in forecasting changes in these economies?

INTRODUCTION

Performance analysis is done by the investors before making any investment. The annual report is the best source of company’s information both financial and non-financial data. There are several approaches to performance analysis and approach to be followed is dependent upon the requirement of different types of investors. Among the entire approach bottom up approach is most important and carries out the in-depth analysis of the company’s performance.

By bottom up approach, we mean in-depth analysis of company’s performance without taking into account the environment condition i.e. the economy and the industry in which the company operates. Thus according to this approach, the investor is required to make an assessment of the performance of the company from company individual perspective only. So if the economy is facing problem or industry is not performing well, the analyst will analyze the performance of the company in isolation to all this activity (Kim et. al. 2014).

In the given case the analyst wants to use bottom-up approach for analyzing the share price of the company. For this the analyst, under bottom up approach will use several tools such as ratio analysis, analyzing the six months trend in company’s share price, etc. All this will help to analyze whether the company is performing well and have a good performance history thus is worth investing.

We know that there are several tools by which the bottom up approach can be undertaken. Among all the tools ratio analysis is an important tool for analysing the performance of the company. By ratio analysis, we mean assessing the different financial data in respect of another financial data. This will help to analyse the company performance from an overall view. Accordingly, I have identified the following ratios to be considered for analysis of the performance of the company (Saedan, 2013):

Turnover ratio: total sales/total asset. This ratio is used to calculate how many times the asset is in respect to its turnover i.e. how much company makes it sale with the use of asset;

Current/ liquidity ratio: This ratio is used to understand the working capital requirement of the company and to check whether current asset of the company is enough to meet the day to day liability of the organization. Current ratio = current asset of the company/ current liabilities of the company;

Debt equity ratio = Debt/ equity.

This ratio is used to understand the financial technique of the company i.e. how much company asset is financed by equity and debt. The aim of the company is to use less amount of debt;

Profit ratios: these ratios assess the profit-making ability of the company. How efficiently the company has used its resources to generate profit for the company thus befitting the stakeholders of the company (Shah, 2015);

Dividend to retention ratio: this implies as out of total income earned by the company what amount is distributed to the shareholders of the company and what amount is retained for the further progress of the company (Abdullah and Rosli, 2014).

The net worth of the company also reflects the actual financial standing of the company which means that it reflects the exact value of the company.

(Pandey, 2014)

We know that there are several tools for performance enhancement under bottom up approach. Thus apart from ratio analysis, the following are the other performance measurement tool which can be used under bottom up approach:

Analysis of the director’s report of the company;

Obtaining the credit rating of the company from external agencies which reflect the company performance record;

The internal audit report is also the best source of performance analysis.

There are several approaches to performance analysis and approach to be followed is dependent upon the requirement of different types of investors. The two most important tools are (Alrafadi and Yusuf, 2011):

Bottom-up approach – bottom up approach we mean in-depth analysis of company’s performance without taking into account the environment condition i.e. the economy and the industry in which the company operates. Thus according to this approach, the investor is required to make an assessment of the performance of the company from company individual perspective only. So if the economy is facing problem or industry is not performing well, the analyst will analyze the performance of the company in isolation to all this activity. Thus this approach is highly beneficial for the large investors who invest a lot, so this approach will help to make in-depth analysis and exact company’s performance.

Top down approach: this approach analyses the performance of the company after taking into consideration the economic environment and the industry in which it operates. While assessing the performance of the company, its results are compared with industry standards and performance, and then only investment decisions are taken. According to this approach, a company’s performance is highly impacted by the performance of the industry to which it belongs (Carmelo, 2015).

Top down approach as we have analyzed, we can say that top-down approach assumes that the company’s performance is highly impacted by the economic condition, industry position, and other external factors, etc. Apart from operational impact, these factors have also impact on the financial performance of the company as well. So when there is distress in the economy, the company will also be not able to perform well. Similarly, if there is a sluggish growth in the industry, then also the concerned company will not be able to grow as expected. Thus we can say that to a greater extent the analyst is required to consider the forecast of changes in the said environment at the time of determining the performance of the company (Kelleher et. al. 2009).

Listing Requirements for ASX

Listing on a stock exchange might be highly desirable for a company, but there are some requirements, conditions, and costs associated with becoming a publicly listed corporation. For example, Freelancer Ltd is one of the newest public companies to list on the Australian Securities Exchange.

Provide a broad overview of Freelancer Ltd AND identify and discuss the rights, roles, and responsibilities of Freelancer’s shareholders, board of directors and executive management now that it is a publicly listed company, including the specific requirements for Australian companies seeking general admission to the ASX and the ASX profit test and asset test requirements.

Explain why these rules are in place and how they contribute to an efficient stock exchange, support the interests of listed entities, maintain investor protection and impact will these have on the liquidity management of the firm and firm value?

Within the context of the ASX, explain why there are a requirement and need for continuous reporting.

INTRODUCTION

Listing of a company in the stock exchange is not easy and involves much cost as well. Thus before getting the shares of the company listed on the stock exchange the company should asses the requirement of listing from the cost point of view as well.

Each organization yearning to gets its securities recorded on the stock trade; this is so because by getting its stock recorded on the stock trade the organization would have the capacity to exchange its securities and can raise cash from the general population also. Also, recorded organizations are more mainstream and along these lines affect goodwill too. Be that as it may, the posting of an organization on the stock trade is difficult and includes much cost also. In this manner before getting the shares of the organization recorded on the stock trade the organization ought to assess the prerequisite of posting from the cost perspective too.For this reason, Australian stock exchange has imposed certain listing requirements so as to ensure that the company being listed is proper and eligible to get listed. Following are the listing requirements (Reza, 2011):

The company is constituted under the Corporation law of Australia;

There is a dedicated person who will act as liaison between the company and the stock exchange;

There must be at least 300 non-affiliated shareholders in the company;

All the 300 non-affiliated shareholders in the company should have a minimum investment of A$ 2,000 into the shares of the company;

An appropriate business is carried out by the company as per the requirement of ASX;

There must be free float of 20% by the company before getting listed;

The aggregated profit of the company of A$ 10,00,000 or more from its operating activities for the preceding three years, and, at least A$ 500,000 from the last 12 preceding months;

The company should have a tangible asset of A$ 4 million or greater or market capitalization of A$ 15 million.

(GRI, 2015)

From the above discussion, it can be said that there are several requirements that the company is required to fulfill before getting listed on ASX. All these requirements seem to be stringent, but such listing provision is necessary to ensure that the public money is in safe hands and optimum utilization of the same should be made.

Listing of a company in the stock exchange is not easy and involves much cost as well. Thus before getting the shares of the company listed on the stock exchange the company should asses the requirement of listing from the cost point of view as well. Listed company’s securities which are listed on the stock exchange are easily tradeable; here the public money is involved. Therefore, there is a requirement of protecting the scrutiny of the shareholders. The necessity of listing requirement is obvious to control the admission process; otherwise, every company would apply for listing irrespective of their financial standing and nature of business. For instance, the requirement of non-affiliated members, minimum aggregate profit, net worth, reporting requirement, etc.When a company is listed on a stock exchange the share of such company becomes tradable, and thus any individual or entity can become the shareholder of the company by acquiring the shares of the company from the market. Moreover, the company should be carrying on large business and have huge net worth so that they can use the money for the benefit of the stakeholders as a whole. For this reason, the ASX has imposed listing requirements.

Apart from initial listing requirement, the listed company is required to file regular reports as well. As per ASX, the company is required to file half yearly and annual financial with the respected regulatory authority to make sure that the activities of the company are carried on as expected within the regulatory requirements and on prudence basis.In the regard of regular reporting, the company is required to have prepared its financial statement as per the accounting standard issued by ASB. These standards contain the manner in which the different items of the financial statement should be accounted for and presented in the annual report of the company (Brown and Georgens, 2009). These are the major source towards the knowledge about the financial position of the company. Every company is required to follow such standard specially the listed one. All these requirements are present to ensure on an on-going basis that the company is making proper utilization of fund and is not used for the benefit of any individual. Moreover, the company is required to get such report audited by an independent auditor to make sure that the report represents a true and fair view of a state of affairs of the company. Even though the company gets its financial accounts audited by the auditor, the auditor cannot make sure that the financial statement is free from any error. Thus the concerned regulator is required to impose ruling from the different side to make sure that the company is carrying out its activities in the interest of the company as a whole and such activity is not detrimental to the interest of the shareholders of the company (Williams, 2016).

CONCLUSION

From the above analysis, it concluded that the listing requirement imposed by ASX is fair enough to ensure admission of an appropriate company into the stock exchange and the continuing reporting requirement is necessary for monitoring their activities.

References

Abdullah, N. and Rosil, N. F. (2014). How well do partial least squares and financial ratio analysis predict corporate failure in Malaysia? 3(7)

Alrafadi, K. M. S., and Yusuf, M. (2011). Comparision between financial ratio analysis and balanced scorecard. American journal of economics and business administration. 3(4). 618-622.

Brown, R., and Gorges. T. (2009). Treasury working paper. Australian national university.

Carmelo, C. (2015) Bottom-Up or Top-Down Approach? Understanding the Way to Reach the Milestone of Recovery in Stroke. Int J Neurorehabilitation 2:e107. doi:10.4172/2376-0281.1000e107

Dalabeh, R. K. (2013). The Role of Financial Analysis Ratio in Evaluating Performance (Case Study: National Chlorine industry). Interdisciplinary journal of contemporary research in business. 5(2)

Dhameja, N. (2010) Financial Crisis: Impact, Challenges, and Way Out’ Indian Journal of Industrial Relations, 45(3): 11-16.

Fleming, G. (2013). Corporate governance in Australia, Agenda 10(3).

GRI, (2015). A resource for ASX listed companies. GRI.

Kelleher, N. L. et. al. (2009). Top Down versus Bottom Up Protein Characterization by Tandem High-Resolution Mass Spectrometry. Journal of the American Chemical society. 121(4). 806-812.

Kim, Y. H, Sting, F. J, and Loch, C. H. (2014) Top-Down, Bottom-Up, or Both? Toward an integrative perspective on operations strategy formation.Journal of Operations Management 32: 462-474.

Pandey, I.M. (2014) Financial Management, 9th Edition, New Delhi: Vikas Publishing House PVT Ltd.

Reza, M. (2011). The one.tel collapse: lessons for corporate governance. Griffith University research article.

Reinhart, C. and Rogoff, K. (2008), Banking Crises: An Equal Opportunity Menace, NBER Working Paper No. 14587, December.

Romeo, I. (2010) ‗Romania and Greece: Together or Alone Against the Present Global Crisis’ African Journal of Business Management Vol. 4(19): 4191-4198.

Saedah , M. ( 2013), management accounting with a focus on the costs for the purpose of planning ,decision –making, controlling and evaluating the performance, Ram Institution for technology and computer ,Mo`ta , Alkarak

Shah, M. B. (2015) A financial ratio analysis of Hindustan Unilever Limited, Research Hub- International multidisciplinary research journal.2(5).

Staehr, K. (2010) ‗The Impact of the Global Financial Crisis on the New EU Countries’, Working Papers, (2): 12-15.

Wade, R.(2009) Global imbalances to global reorganizations of capitalism, Cambridge Journal of Economics. , vol. 33(4). pp. 539-62.

Williams, I. (2016). Corporate governance in Australia: A snapshot.

Zaman, G, and Georgescu, G. (2009) The Impact of Global Crisis on Romania’s Economic Development’ Annales Universitatis Apulensis Series Oeconomica, 11(2): 611-624.