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Sun 11 Sep 2011 07:31 AM

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Banking on recovery

9/11 attacks set in motion the seeds for the banking and financial crises we are currently living with today

Banking on recovery

Images of the World Trade Centre towers collapsing in New York on September 11 will remain one of the most iconic images of the 21st Century. Amidst the rubble of Ground Zero, many analysts now believe the seeds of the current banking and financial crisis began to take shape.

As the New York Stock Exchange, established in 1792, remained closed for four days as a result of the attacks, Wall Street realised that the physical dependency on one site was too great a risk. This led the NYSE to relocate parts of its operations out of New York and a new wave of electronic trading soon took hold. Observers have put forward a theory that the growth in electronic trading led to a slump in commissions for the large Wall Street firms, which were forced to look for alternative sources of income.

The new sectors and products they developed were more daring and included the sale of securities backed by home loans, which subsequently led to the subprime mortgage crisis. Eventually, this was followed by the credit crunch and the financial recession in which the global economy now finds itself.

While Shrikanth S, an industry analyst in the business and financial services sector at Dubai-based consultancy firm Frost & Sullivan believes it is too simplistic to blame the growth in electronic trading as the sole event which led to the present day economic turmoil, he does believe the attacks were the start of a series of events leading up to the present day.

“The 2008 crisis was mainly due to complex financial products introduced in the financial system by the banks. The 2011 crisis is mainly due to fiscal deficit in the developed world and concerns about whether the countries will honour their commitments,” he says.

However, he does acknowledge that the 9/11 event can be seen as a catalyst for the events that were triggered in the US economy and the crises that have struck the global banking and financial sector in the ten years since the attacks.

The 9/11 attacks affected multiple sectors in the US economy, mainly as the labour market weakened and unemployment rose as a result of the loss of jobs in the manufacturing, construction, travel, retail, entertainment and hospitality sectors. For example, between 2002 and 2010 the number of people employed in finance, insurance and real estate in Lower Manhattan dropped by a fifth.

This loss of jobs spread across the US and impacted consumer buying power.

“In order to increase consumerism, the government and the US banks were forced to bring down the interest rates so that the consumer could borrow funds at lower cost. In the backdrop of increased competition the banks were forced to attract less credit-worthy customers,” says Shrikanth.

This in turn led to the banks being saddled with the prospect of high Non Performing Assets (NPAs) as the housing market went into freefall. As the European banks had exposure to these NPAs their risk profiles also increased and the crisis became a global concern.

“The weakening consumer spending sentiment, especially in the developed markets delayed the economic recovery and also the revival in the banking industry,” says Shrikanth.

A more obvious element the fact that 9/11 led to the US engaging in two wars, in Iraq and Afghanistan, which helped post a huge fiscal deficit in the US budget.

“The 9/11 attacks resulted in US government engaging in two costly wars in Iraq and Afghanistan and also increased their defence and homeland security spending. This contributed to increase of US debt which is estimated to be greater than $14 trillion in 2011 (close to 100 percent of US GDP) and led to Standard & Poor’s downgrading of the US economy,” adds Shrikanth.

He believes that in order to reverse the effects of the events triggered by 9/11, the banking community needs to see US and European governments undertake strict austerity measures and, in the short term, make some more positive economic moves in order to reverse the growing wave of negative sentiment which currently dominates.

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