Introduction

Ideally, education should continually prepare an individual for life so that they may live it to the fullest while aiming at an experience of the greater good for all and sundry. Nurturing of the human capacity for creativity requires a fertile environment for growth. Thus, education can be acquired from home, where the educative process is informal. It can also be appropriated from an institutionalized setting in the form of a public school or a privately owned school. In the United States, each of these environments is well represented as a source of education. The extent to which each of them has been instrumental in the drive for the greater good has, however, not yet been established.

Also, it would be an interesting engagement to try and determine how much each of the three entities have contributed towards this goal in the American context. This article shall explore education in the United States based on the aforementioned sources of enlightenment. According to the National Catholic Educational Association, no database extant in the American continent provides data regarding public schools. Furthermore, no database collects the same; also, no database compares findings concerning private and public schools (NCEA, 2010). This treatise shall attempt to make such comparisons. Findings of privately run schools and home-based learning centers shall be considered in mutual exclusivity, and comparisons made of the same regarding various parameters of interest. The author shall then endeavor to draw logical conclusions from the comparisons thus made.

General Structure of the Education System in the United States

In the United States, education can be seen from two perspectives. There is a level at which education is considered not to be compulsory, and there is compulsory education. The non-compulsory level of education is below kindergarten. Different states have different ages at which children may enter compulsory education. This is usually six years of age. However, the range is usually between five and seven years (USAEducation, 2011). This level of education is also known as pre-higher education, and it lasts for ten years on average. For example, a child who joins compulsory education classes at the age of six years shall be expected to graduate at the age of sixteen, approximately ten years later. Within this level, one starts with pre-schooling, which commences from age three to six. The types of schools that provide pre-primary education include nursery schools, kindergarten, and daycare centers. A child in kindergarten spends two years in school (EuroEducation, 2011). In some cases, certificates are awarded as proof that a child indeed attended pre-primary classes. These certificates make the children eligible for admission into Elementary school.

Elementary school lasts four years, and the age of entry is usually six years, immediately after completion of Kindergarten. There are four grades at this level, but that also depends on the state and local practice. At ten years of age, one is likely to graduate with a certificate or a diploma that is awarded by the State or District. The student is then eligible to join Middle School. Sometimes, however, the issuance of awards may not be necessary (EuroEducation, 2011). For example, when a student is to maintain their residency within the same school, there will be no need for proof of graduation to the next level since the student is already known.

From ten to fourteen years of age, a student attends Middle School. This is from grade four to grade six but in some cases, it may go up to grade seven, or grade eight. On average the level takes three years to be completed. High school is from grade seven (or eight) to twelve and lasts six years; from thirteen to eighteen years of age. Some schools offer a level known as the Junior Secondary, which typically runs from thirteen to fifteen years of age and lasts an average of three years. The representative grades in this level are grade seven to eight, seven to nine, or eight to nine. It is a level followed immediately by the Upper secondary. The latter takes five years, is composed of grades nine or ten to twelve, and involves children who are between fifteen and eighteen years of age. Twelfth grade is the level for graduation from secondary school in all states. When one graduate, they are awarded a High School Diploma together with a transcript which details the marks that the student obtained and the curriculum in which he or she was involved (USAEducation, 2011).

Beyond secondary school education, there are two branches of education that one may opt for. They may get vocational education and training. This does not culminate in one being awarded a degree, but under certain circumstances, there may be transferable credits that lead to the award of a degree. On the other hand, a high school graduate can opt for the pursuance of a degree in any field that interests him or her (USAEducation, 2011). Higher education, also called post-secondary education can last an entire lifetime. It might also last for only three years after which the student decides to seek employment either in a field relevant to the acquired knowledge or an entirely different field. The transmutability of knowledge gained from higher education places the scholar at an advantage in that they are not confined to their area of expertise. The open-minded graduate will find gainful employment in whichever field they opt for. The essence of education is not to end up having a job, but to live life fully. Therefore, one who gets a job after they have acquired their degrees is fortunate

Subjects Taught at Various School Levels

Much of what children are introduced to while they are in Kindergarten is repeated through the course of their elementary school life. Numbers, language, and social science are taught using computers, film, and books. These lists are, however, not exhaustive. Teachers have the responsibility of shaping the way children will think at this level and what the children learn shall be important determinants of whether or not the students shall be successful in the future. The teacher encourages them to play so that they may develop language and social skills. At Elementary School, one or two teachers are usually held responsible for a group of children whom they instruct in one of several special subjects. These subjects include science, music, and art (United States Bureau of Labour, 2002).

The private education system in the United States

Behind every decision for one to embrace either the public school system or private school system, there is a motive. The rationale behind American people opting for private education is multi-faceted. However, there seems to be one underlying reason (opines the author) that traverses all others and that is, a collectively disgruntled group of people who have lost faith in the education that the public sector provides. What are some of the reasons for opting to go private? If the 2004 publication on private schooling is anything to go by, private schools are a reserve of the financially capable. The same publication gives the impression that the majority of rich people prefer having their children attend private schools that have no religious affiliations (Education Week, 2004). It would also so appear as if this group of people detests the idea of their progeny being indoctrinated with religious dogma; that not being relevant to their realization of the good life. Moreover, it depicts the definition of the good life as something subjective, arguable depending on personal perspectives of what comprises the good in life. If the observations on religious dogma were true, then a paltry 10% of the school-age population would still be an overestimation of the proportion of people who do not view success in life as a function of ones religiousness or lack thereof.

According to the Council of American Private Education, one of the reasons the American populace opts for private educational institutions is the provision of quality education that they appropriate (CAPE, 2011). The implication of this is that, for the parents of school-going children who attend private school, the delivery of quality is better experienced away from public institutions. Other reasons cited for preferring private to public schools are supportive communities, safety and orderliness in private environments, and the impartation of morals and ethical values. When each of these factors is taken in isolation and regarded as a polarizing factor, it does not appear to hold much water, if any at all. About the quality of education, for example, it would be expected that public schools would offer better quality. This is because the federal government has the backing of the whole American population, albeit begrudgingly for some, in form of income tax returns. Therefore, the acquisition of quality personnel and educative amenities would/should not be an unbearable burden.

The National Centre for Education Statistics (NCES) defines a private school as one that does not obtain its financial support primarily from public funds. Besides, such schools use classrooms to deliver educative material from kindergarten up to grade 12. Other levels that compare to K-12 but as yet ungraded are also considered, for example, some Montessori schools assign institutions to primary or intermediate levels rather than giving specific grades. The said schools should also employ one teacher or more, for them to snugly fit within this criterion. The NCES does not consider a private school an institution or organization that does not use a classroom set-up to deliver instruction. It has been running the private school survey since 1997, with data derived from administrative personnel in the same institutions (NCES, 2011).

According to NCESs 2009-2010 survey, some private schools had religious orientations and these formed the majority of private schools (Broughman, Swaim and Hryczaniuk, 2011). The religious leanings notwithstanding, an interesting fancy that comes to mind is a look at the reasons behind these proclivities. It would also be of sensual appeal to study the various religious interests represented in the various school, to find out which is the most represented and why.

From the same survey mentioned above, it was evident that the majority of private schools around the United States had no religious affiliations at all. That is, not one religion had several schools that exceeded that of schools devoid of religious inclinations. These unspiritual (read non-sectarian) schools were closely followed in number by private schools that are predominantly Roman Catholic (Broughman, Swaim, and Hryczaniuk, 2011). According to the National Catholic Educational Association, when a single year is considered, examining test scores to determine student achievement, and to compare the quality of education between public and private schools avails very little relevant information (NCEA, 2006). This statement has been construed to engender the lack of comparison of other relevant data within any single academic or survey year.

For example, based on the 2009-2010 NCEA report, one may easily compare the enrolment of students in Roman Catholic schools and those in the Baptist church, thereby concluding that the higher the number of schools, the higher the number of students who enroll in them. This conclusion, however, is flawed, especially when one goes a step further and makes the same comparisons with, say, Jewish schools. The conclusion would imply direct proportionality between the number of schools and the number of enrollees. Nevertheless, the Jewish schools number less than half of the Baptist schools, but students enrolled in Jewish schools are more than half the number of those in Baptist schools. Similarly, it would be expected that since the number of Greek orthodox schools are exactly half the number of schools of the Church of God in Christ, the enrollees in the latter institution would be, ideally, half the number in the former give or take a few thousand students. A stark contrast is observed in this case, when the number of Greek orthodox enrolees exceeds the number of enrollees in schools considered to be affiliated with the Church of God in Christ (Broughman, Swaim and Hryczaniuk, 2011). With such discrepancies, it is highly unlikely that comparisons within different years would avail anything different.

From the survey carried out by the NCEA, several questions are likely to arise in the curious-minded. One would ask, for instance, how religious affiliations affect examination scores or how the religiously inclined to turn out in life after attending school. Furthermore, one would be interested in knowing the drop-out rate per grade of the religiously inclined vis a vis the non-sectarian. This, followed by an exploration of the reasons why would be a worthwhile engagement leading to a keener understanding of the school demographics. It would also enlighten one who needs to make decisions regarding which school his or her children ought to attend. However, the report provided addresses none of these concerns. Where one would probably get the answers to these questions, the data is not as detailed as to be of much relevance. A document by the Council for American Private Education, in mentioning the scores by students doing science, states that in 2009, 44% of the students in private schools scored at or above the proficient level in science. The same publication further states that, for students in the fourth grade, 48% were deemed proficient according to NAEP (CAPE, 2011). It is thus evident that one might need to investigate to arrive at the answers to the queries above.

Apart from the meager statistical information from the well-established institutions like NAEP and the NCEA, several studies have been carried out whose objectives are congruous with the raised questions. Some studies have concluded that students from private schools perform better than their public school counterparts. However, other studies find conflicting results. Those whose results are in the affirmative invariably find out also that the best performers are students from catholic schools (Figlio & Stone, 2011).

According to Figlio and Stone, these studies did not employ robust instruments for the adjustment of non-random selection. They, therefore, proposed the implementation of a system of study that would improve system power prediction by about three times compared to studies done before theirs. They, like the aforementioned National Catholic Educational Association, did their studies while considering high schools in three categories: religious private high schools, nonreligious private high schools, and public high schools. Having made these modifications, they found out that nonreligious schools have a significant superiority to the religious schools in as far as science and mathematics subjects are concerned (Figlio and Stone, 2011).

There exists a debate about the benefits (if any at all) that private schools bring to the American schooling system. Those who criticize the private schools say that parents decide to opt for them being driven by the desire to appear socially elite or simply to separate themselves. It is the collective points of view of these critics that parents do not necessarily choose private schools because of better academic performance. They contend that these parents are hell-bent on keeping their children separate and untainted from those who come from other races and backgrounds. Furthermore, they say that for these parents, their childrens attending private schools is an attractive status symbol. The critical punch line they put forward is that private schools propagate segregation by class and race (Education Week, 2004).

On the other hand, there exist proponents for private education. In support of the system, they say that the monopoly extant with many public schools is not competitive. They add that a competitive system that opens up the opportunity for people to choose the schools to which they shall take their children is required. To support this point, they say that private school students are superior academies to their public school counterparts. They contend that schools need to be autonomous, and such a system would promote this autonomy; also adding that due to autonomy, student performance would improve. The proponents say that there is bias in the private school system. They propose an opening up of the system by the introduction of children from low-income families and those whose affiliate groups are underrepresented. This would mean that a means of supporting these students education be established. They, therefore, propose the use of vouchers as well as school choice programs (Education Week, 2004).

The proposal regarding the use of vouchers and increased school choice was given a counter-offer by the group called Americans United. On their website, they gave several reasons why people ought not to support this emerging trend. Among the reasons was the fact that the First Amendment gave a guarantee of freedom of religion from state influences. That is, they invoke the unending debate of the separation of church and state. They contended that this law would be broken when Americans agreed to support the issuance of vouchers for schooling. Citing the fact that a majority of private schools have religious affiliations and that these institutions have the mandate to indoctrinate the students and to educate them as well, the Americans United felt that Americans would be inadvertently supporting religion against their free wills. Americans would be paying for their children to be indoctrinated with religious dogma with which they did not agree (Americans United, 2011).

Ostensibly, the issuance of the voucher would be a tad more acceptable if it appreciably led to an improvement in the academic performance of students in their academics. That not being the case, however, the Americans United group is vehemently opposed to the idea. They contended that students in public schools performed much better in mathematics and reading than students in private schools. Furthermore, they would have expected the program to cause several changes in the students who participated in it. For example, participants were expected to have positive aspirations concerning their schooling in the future and to improve in the frequency with which they did their homework. However, the program never did bring such changes. On the contrary, student participants likelihood of absenteeism from class increased significantly (Americans United, 2011).

The report by the NCES never detailed graduation statistics for the year 2009-2010. Instead, it had data for the previous year. Whereas the reason for missing this data remains unknown, the NCES reported that of the twelfth graders who were enrolled in October 2008, ninety-eight percent graduated in 2009 (NCES, 2011). That was a very high success rate for graduates in private schools, which would have been taken as indicative of the quality of education that private institutions have to offer. Furthermore, 64% of the high school graduates from private schools later enrolled in 4-year colleges. This was representative of 308,813 high school graduates, who enrolled by the fall of the same year as they did graduate (NCES, 2011).

Using multiple sources of data, Heckman and LaFontaine made estimations of trends of graduation rates in the United States high schools. They noted that previous calculations were rife with biases and corrections had to be made for their study to be acceptable. Eventually, they found out that the rates provided by the National Centre for Educational Statistics were substantially high and thus misleading. They also found out that for forty-odd years, there had been a decline in the rate of graduation. Furthermore, they observed that even though the number of immigrants and minorities was on the increase in American society, this was not the cause of declining high school graduation rates among native populations. Therefore, they were able to explain why college attendance was also on the decline. Findings concerning gender differences in graduation from high schools were also useful in deciphering the reasons behind the gaps extant in male-female college attendance, and why those gaps were gradually increasing (Heckman and LaFontaine, 2011). These findings were not specifically for high school graduates from private high schools, but a traversal of all high schools regardless of their administrative leanings. In an appeal to the part being a representative of the whole, one would comfortably suggest that these findings could be transmuted to the private school population with similar implications.

The sizes of private schools might affect the effective transmission of knowledge and its receptivity among students. Here, the paper explores what other people have said regarding this, and the recommendations that they put forth towards improving the education system in the United States. Taken from an economic perspective, larger school sizes are better than smaller ones because of economies of scale benefits realized in the former. According to Ferris and Leung though, this is a consensus that requires revision because the benefits accrued from one side are outweighed by the disadvantages from other fronts. They cite the fact that more and more students are growing frustrated by the system, and coupled with the escalation of violence in the same schools, the drop-out rates are also on the rise (Leung and Ferris, 2008).

Since class sizes in most private schools are small, the student to teacher ratio critical for individual attention is easily achieved. This ratio stands at 15:1, but smaller ratios are more advantageous both to the teachers and students alike. With smaller ratios, teachers have fewer students to deal with and can divide their time well among the few students demanding their attention. Each student benefits by having more time spent with the teacher. Therefore, each student in a private school classroom has the opportunity to be personally aided by the teacher when the need calls for it (Kennedy, 2011).

A Summary of Some of the Benefits of Private School System

According to the United States Department of education, when private school students and their public school counterparts are compared, the former generally outperform the latter on standardized achievement tests. Also, for the former to graduate, they pass through requirements that are more demanding than for their counterparts. Completion of advanced-level courses is more likely for private school graduates than for their public school counterparts when they take three academic subject areas. National Assessment of Educational Progress results showed that private student scores were above average nationally. Experts recommend students to take up challenging subjects that push them into striving for excellence. Private schools make provisions for this by making it a requirement for students to take difficult courses like calculus before they graduate. When it was assessed who between the two was more likely to attain a bachelors degree by their mid-twenties, those who had gone to private schools in their eighth grade scored 52% compared to 26% for the public school attendees (CAPE, 2011b).

Depending on a schools financial resources, compensation for private school teachers might be higher than that for public school teachers. On the whole, however, they are usually comparably lower. The teachers usually benefit from getting free housing and meals as opposed to the public school teachers who do not get such benefits. Also, teachers in private schools have widely variable pension schemes. They are required by private schools to be credentialed. That is, a teacher has to have a teaching certificate backed with a degree in the relevant subject. Armed with these two documents, a teacher stands a greater chance of being hired than one who does not have them. However, concerning budgetary costs, public schools stand a better chance of raising significantly large amounts of money. They do so by making annual appeals, cultivating alumni, and soliciting grants from corporations. Private schools nurture strong bonds with their alumni. Therefore, they also have high rates of fund-raising success. They also have a management structure that is considered to be lean. This means that a critical decision does not have to pass through several authorities to get approval. Rarely, if ever, will a private school have to contend with a union of teachers (Kennedy, 2011).

Some observed discrepancies to the generalizations regarding private school superiority

Rothstein, Carnoy, and Benveniste filed a report regarding the accountability of private schools to students parents, the outcomes parents expected of their children, and policies for retention and selection of teachers. They found out that in elementary school accountability to students parents does not differ significantly from the same in public schools. There was also no clearly defined school outcome expectation in private schools, and that was in no way different from the situation in public schools. Neither type of school did mentor teachers nor evaluate them formally to assess variation in their performance and delivery of instruction. They also found that where there was a competition between private and public schools, innovations by private schools never made their competitor public schools improve in any way whatsoever. Therefore, they made a point to the proponents for choice in public education, that to improve academic achievement, choice of public versus private institutions held very little weight (Benveniste, Carnoy and Rothste, 1999).

Private schooling also has its disadvantages. Some things are not implicitly taught in private schools. For example, a graduate from a private school would find it difficult to strike a conversation with any other person, who is essentially different from them. Unless it was a fellow graduate who came from the same institution, or a school with a similar status, building meaningful rapport would not be easy. Indoctrination also occurs in private schools albeit of a different kind than the commonplace religious dogma inculcation. That indoctrination goes a long way to assure students of private schools that they are better than those who never succeeded in attending similar schools.

The latter is seen as inferior people who are not even worth spending time with. The effect of this influence upon the indoctrinated was made evident in the Democratic presidential nominee, Al Gore, who could not speak to the populace. Thus, such students remain ignorant of some facts like there being other smart people apart from those who attend similar schools to theirs. They remain unaware that some highly adept people never see the inside of classrooms. Also, they realize rather belatedly that some of the so-called smart people are not smart at all. School is lacking in the instruction on social intelligence, the ability to be creative, and it does not teach emotional intelligence (Deresiewicz, 2008). Deresiewicz does not, however, give the way through which one may be educated in these latter aspects, pertinent through the acquisition of this knowledge might be.

The private school system achieves the creation of analytically biased minds, thereby developing lopsided intelligence that may not be entirely beneficial in seeing and appreciating the value inherent in other people. Such people are more adept at dealing with machines or analyzing books than interacting with other members of the human race. The system of private schooling essentially alienates one from that which is human in the sense that it creates a block to interpersonal interactions that are every bit human. Besides, a person develops a misguided sense of how worthy they are to receive certain rights and privileges. The unbearable truth in all of this is the fact that all through the life of a student who has been in private school, they have been graded using numerical rankings. Such students end up equating their grades to their identity and value. Absolute excellence, they forget, does not imply academic excellence or vice versa (Deresiewicz, 2008).

Whether it is a private school or a public school, one would contend that both have a common disadvantage. This is about the type of interaction a school-going child is exposed to. They can only interact with their age-mates while in school. Bigger children invariably bully the smaller ones, who in turn do the same to yet smaller ones. Among these children, none appreciates how to interact with grownups. The fear that is inculcated into them by the bullies they meet in school becomes the same fear that they show towards their parents back at home. Fear is a monster that feeds upon itself, however. Therefore, the fear engenders a reciprocal propensity for abuse from parents who do not know better. It is not a seldom occurrence to find children whove been abused by otherwise well-meaning parents.

The vicious cycle started with their being taken to school, which alienated them from their parents. They then picked up bits and pieces of strange behavior from their peers, which they came home with, much to the chagrin of their unprepared parents. Thus, there is a growing concern that home-schooling would be the only best option for a growing child (Oeser, 2011). Furthermore, time taken out to quietly reflect on ones own is an alien concept to school-going students, who are more inclined to be rowdy, loud, and disorderly. Also, since they learn to pass their examinations, school-goers eventually lack long-standing applicable knowledge. Most of what they learn is quickly forgotten with the passing of the examination. Their understanding of concepts is not adequate as the knowledge they have does not correlate well with real-life issues.

American Education in Public Schools: A Brief History

A majority of people in the United States who come from low-income backgrounds take their children to public schools. Currently, the parents whose children attend private schools are rather similar in characteristics. For one, they are from affluent backgrounds. The fact that school fees charges in private schools are high shields this elitist group of people from other influences. However, if the restrictive costs of financing education in private schools were to be revised downwards, up to 59% of parents would opt for private education. This would be aided by vouchers which would, ideally, be catering for the whole tuition fees. Besides, parents with low income show greater enthusiasm for private school enrolment, but money continues to be their major hurdle. It is opined that there would be a greater diversity of parents and the group would inevitably be larger if the price of private education were reduced (Education Week, 2004).

For some people, the public education system is the ideal system of instruction. However, it faces a lot of criticism, and many times it has had to be revised so that it may continue playing a pivotal role in the shaping of public opinion regarding solidarity with the government. Having developed in the nineteenth century, its inception was the result of a suggestion by the then President Jefferson. Public school education is under the management of states and school districts. Whereas education in the United States began with puritans and Congregationalists, a purely Christian group of people, the introduction of the public school system came much later. With the coming of people from different countries, there was a foreign influence upon the natives. The entrant people did not all embrace the Christian faith, they have been of different inclinations. For this reason, private education began and thrived in the mid-eighteenth century (Thattai, 2011).

Disadvantages of Public Schools

In public schools, teachers generally get better remuneration. However, starter salaries are usually very low. This leads to very few teachers being

Introduction

This Resource Note book is about characteristics of students with disabilities. According to the Disability Discrimination Act, a disabled individual is anyone who has a mental or physical impairment that has a long-term and substantial adverse effect on that individuals potential or ability to undertake normal day-to-day activities (Disabled People, 2008). The Individuals with Disabilities Education Act (IDEA) (P.L. 101-476) and the Education for All Handicapped Children Act (P.L. 94-142) came up with particular categories of disabilities through which children may qualify for special education and related services.

IDEA identified a child with disability as a child with speech or language impairments, mental retardation, visual impairments (including blindness), traumatic brain injury, hearing impairments (including deafness), serious emotional disturbance, autism, orthopedic impairments, other health impairments, specific learning disabilities, or other health impairments: and who by any virtue of the above mentioned disabilities, needs specialized education and other related services (Disabled People, 2008). Such types of disabilities may actively hinder students to dependably and easily process various types of information if not well taken care of. These disabilities will be addressed in depth in this Resource book. The main aspects of these disabilities that will be looked into include the definition of the disability, causation, prevention, characteristics, current trends and instructional strategies for each disability. The Note book will also look into aspects of Early Childhood Education (ECD).

Students with Learning Disabilities

According to Lyon (1996), over 5 percent of all students in public schools have a learning disability. Most students are taught at an early age how to develop an organized strategy or plan when confronted with a problem, and how to process information. But other students find such cognitive tasks as learning basic skills quite challenging. These and many other children having diverse disabilities that limit their educational performance in relation to other normal children are referred to as children with Learning Disabilities (Smith, 1997). The learning disabilities fall on a continuum, ranging in severity from mild to critical impairment. The U.S. congress passed an educational bill in 1975 named the Education for All Handicapped Children Act (PL 94-142), assuring children with learning disabilities an appropriate, quality, and free education in the least restrictive environment (Bernadette & Barbara, 1998).

Mental Retardation

Definition

According to IDEA, mental retardation is a significantly sub average general intellectual functioning existing concurrently with deficits in adaptive behavior (Bernadette & Barbara, 1998). It is often noticeable during the childs development period, thereby unfavorably affecting his or her educational performance.

Causes of mental Retardation

There are many causes of mental retardation as it can be caused by many condition that damage the proper development of the brain either before birth, during the birth process, or during childhood years. Indeed, there are several hundred causes of mental retardation (Heward, 2005) and (Link et.al. 1999). These causes can be categorized into the following broad categories.

Genetic conditions

  • Abnormal genes inherited from parents
  • Errors in genes combinations
  • Gene disorders caused by infections during pregnancy
  • Overexposure to X-rays
  • Inborn errors of metabolism, such as the deadly Phenylketonuria (PKU)
  • Chromosomal abnormalities bringing diseases such as Fragile X syndrome and Down syndrome

Problems during Pregnancy

  • Alcohol abuse by pregnant mothers
  • Pregnancy illnesses such as granular disorders, rubella, cytomegalovirus, and diabetes
  • Malnutrition
  • HIV infection originating from prenatal life

Problems at Birth

  • Injury to the infants brain during the birth process, resulting to physical malfunctions
  • Prematurely born infants
  • Low birth weight

Problems after birth

  • Child illnesses such as chicken pox, Hib disease, measles, and whooping cough can lead to encephalitis and meningitis that can in turn damage the brain
  • Man-made and natural disasters and accidents
  • Dangerous substances such as lead mercury and lead

Poverty and Cultural Deprivation

  • Malnutrition due to poverty
  • Inadequate medical care
  • Environmental health hazards
  • Deprivation of many day-to-day and cultural experiences leading to brain under stimulation

Prevention of mental retardation

Mental retardation can be prevented through various prevention strategies. However, due to the fact that that most mental retardation cases occurs during pregnancy and the subsequent upbringing of the child, it is imperative that the prevention strategies are subdivided into two  Prenatal and Post natal (Heward, 2005; Link et.al. 1999; Simpson, 2008).

Prenatal Prevention Strategies

  • Avoid using drugs such as cocaine and heroine, alcohol, and smoking
  • Obtain quality medical care when sick
  • Keep away from habits that can expose you to sexually transmitted diseases
  • Maintenance of good healthcare and nutrition during pregnancy
  • Obtain all the necessary prenatal and genetic tests
  • Treat infections immediately
  • Administer folic acid tablets to avert the occurrence of neural tube disorders

Postnatal Prevention Strategies

  • Proper Medicare and nutrition
  • Obtain appropriate immunizations such as DPT, BCG, and MMR
  • Avoid intake of dangerous chemicals such as lead
  • Avoid child neglect and abuse
  • Eliminate dilapidating conditions of poverty and associated problems
  • Employ toddler and infant seat belts and car seats
  • Universal iodization of salt to curtail iodine insufficiency
  • Adequate pregnancy spacing to allow the body replenish lost nutrients

Characteristics of Mental Retardation

The characteristics of mentally handicapped individuals may be divided into four broad categories namely intellectual functioning, social skills, motor skills, and communication skills.

Intellectual functioning

  • Failure to demonstrate learned skills spontaneously
  • Slow learners and failure to notice relevant features of what the teacher is teaching
  • Difficulty in applying the learned knowledge and skills to new situations
  • Difficulty in contemplating complex skills and abstract concepts

Social Skills

  • Difficulty in developing interpersonal relationships
  • Not interested in individuals and events around them
  • Rarely makes any eye contact to those around them
  • Engagement in inappropriate or isolated behaviors

Motor skills

  • May exhibit signs of delays in motor and sensory development
  • May exhibit signs of physical disabilities such as visual impairments, speech impairments, epilepsy, and hearing defects.
  • In cases of severe mental retardation, seizure disorders, cerebral palsy, hydrocephalus and other cardiovascular disorders may be witnessed.

Communication skills

  • Speech problems like delayed speech is widespread among students with relentless disabilities
  • The development of language skills may be significantly delayed or inhibited
  • The quality and content of language may be significantly affected as people with mental retardation usually construct less complex, shorter sentences

Current Trends

  • 1 to 2 percent of the worldwide population is mentally retarded
  • Slightly over 1 percent of the school going population is requiring special education due to mental retardation
  • Almost 90 percent of all individuals requiring special education have symptoms of mild mental retardation (WHO Fact sheet, 2004)

Instructional Strategy

  • Functional Assessment  this strategy is good in these circumstances as it looks beyond the behavior of the mentally retarded students to identifying particular pupil-specific, affective, social, cognitive, and environmental factors associated with the mental retardation. A broader perspective of the problems will help the instructor understand the mentally retarded (CECP, 2001).

Emotional Disturbance

According to IDEA, a child is deemed to have emotional disturbance when he or she exhibits one or more of the following characteristics:

  • An active inability to concentrate in learning that cannot be explained by sensory, intellectual, or health factors.
  • An active inability to either build or maintain a sustainable interpersonal relationship with teachers and peers.
  • Inappropriate or questionable types of feelings and behaviors under normal situations
  • A general passive mood of depression and unhappiness.
  • A general tendency of developing physically manifested symptoms or fears associated with school or personal problems.

According to IDEA, serious emotional disturbance may develop into Schizophrenia and psychosis (Bernadette & Barbara, 1998).

Causes

Heward (2005) and Dharitri (1996) argue that the causes of emotional disturbances among students are often varied and hard to determine. However, the causes can be grouped into the following broad categories.

Biological Factors

  • Genetics and brain chemistry
  • Biochemical factors
  • Neurological factors

Environmental factors

  • Social rejection by friends
  • A belligerent pattern of behavior exhibited on entering school
  • An unfavorable early rearing environment

Family

  • Relationship and interaction between parent and child
  • Child abuse and neglect

School

  • Peers at school
  • Teacher actions and expectations on the student

Society

  • Impoverished environment and poor nutrition
  • Sense of frustration and hopelessness
  • A Disrupted family

Prevention

Due to an unclear understanding on the causes of emotional disturbance among students, it is often hard to pinpoint an exact preventive strategy (Heward, 2005; The Lead Center, 2008; Mauro, 2009). However, some of common strategies used include:

  • Positive behavioral interventions, strategies, and supports  Effective for a student whose personal behavior impedes his or her own learning and that of other students.
  • Psychological and counseling services  Effective on emotionally disturbed students
  • Career education (both academic and vocational)  Should be offered to all adolescents

Characteristics

  • Psychiatric disorders  includes anxiety disorders, mood disorders, and conduct disorders
  • Hyperactivity  includes impulsiveness and short attention span
  • Withdrawal  includes retreating from social interaction conversations and failure to initiate social interaction with others.
  • Aggression/ Self-injurious behavior  always involved in fights and acting out
  • Learning difficulties  always performing below grade level academically
  • Immaturity  includes temper tantrums, inappropriate crying, and poor life coping skills

Current trends

  • One in every five children has in one time or another developed a diagnosable emotional, mental, or behavioral disorders.
  • Up to ten percent of all children may develop a serious emotional disturbance later on in their adult life.
  • Worldwide, up to 70 percent of all children who have developed emotional disturbance do not in anyway receive mental health treatment (WHO Fact sheet, 2004).

Instructional Strategies for Emotional disturbance

  • Presentation of materials at independent level, not frustration at level
  • Providing short and manageable class assignments
  • Provision of mini-breaks between lessons

Autism

Definition

IDEA defines autism as a developmental disability that significantly affects the social interaction and verbal and nonverbal communication of children before they attain the age of three years, thereby adversely affecting their educational performance. Other characteristics associated with the condition include resistance to change in daily routines or to environmental change, engagement in repetitive activities, unusual responses to sensory experiences, and stereotyped movements. It was added as a distinct class of disability in 1990 under P.L. 101-476 (Bernadette & Barbara, 1998).

Causes

According to Heward (2005) and ASA (2008), no research has been able to unearth the causes of Autism. But possible causes put forth by researchers can be grouped into two broad categories that entail:

Genetic Vulnerability

  • Abnormalities in brain function and structure
  • Link between genetics, heredity, and medical problems
  • Metabolic imbalances
  • Genetic illnesses such as tuberous sclerosis, Fragile X syndrome, untreated phenylketonuria (PKU), and congenital rubella syndrome.

Environmental factors

  • Medical conditions such as acute viral infections
  • Exposure to dangerous environmental chemicals and metals such as mercury
  • Problems during pregnancy

Prevention

  • No known prevention strategy to reduce incidences or severity of the disorder at this time

Characteristics

According to Heward (2005), the characteristics of the Autistic disorder can be divided into the following major categories:

Social interactions and language development

  • Signs of rejection, lack of general interest in people and physical contacts.
  • Evade making eye-to-eye contact with other people, including parents
  • Experience difficulty in communication
  • Failure to interact with other children or develop interpersonal relationship
  • Delay or total lack of language development
  • Failure to use language to develop with others effectively
  • Repetition of words and phrases (Echolalia)
  • Using idiosyncratic or stereotypical language

Behavioral and cognitive development

  • Presence of stereotyped or repetitive patterns of behavior
  • Preoccupied usually with moving objects, parts of objects, and lights
  • Repetitive motor movements such as finger or hand flapping and rocking
  • Noticeable hypersensitivity to certain types of noises
  • Perform rituals
  • Maintains routines that are excessively rigid or nonfunctional
  • Undertakes highly restricted patterns of interests or preoccupations

Current Trends

  • Autism occurs in approximately 1 per 2,000 children
  • Improved media coverage has led to public allure with autism
  • There exists astonishing claims about the efficacy of some treatment approaches but no empirical evidence has been able to substantiate the claims

Instructional Strategies

  • Printed schedules
  • Printed directions
  • 3-D rewards such as small toys
  • Visual prompts such as overlays to put on the page that the student should focus on (Disability Resources, 2007).

Other Health Impairment

Definition

According to IDEA, Other health impairment is a condition attributable to individuals who have limited vitality, strength, or alertness as a result of acute or chronic health conditions such as rheumatic fever, heart condition, leukemia, hemophilia, and asthma, which unfavorably affect the educational performance of that individual (Bernadette & Barbara, 1998).

Causes

According to Heward (2005) a multiplicity of factors is believed to play a pivotal role in causing other health impairments. However, the most common causes are:

  • Genetic impairments
  • Disease
  • Environmental factors such as pollen, animal dander and chemical irritants

Prevention

Although some Other Health Impairments are hard to prevent, the following preventive strategies have been found useful.

  • Physiotherapy
  • Being physically active and maintaining a healthy body weight
  • Reducing alcohol intake and fat in food
  • Avoiding prolonged exposure to the UVA/UVB sources such prolonged sun tanning

Characteristics

  • Lack of alertness or strength to keep up with class work among the students with OHIs, thereby affecting the students ability to perform successfully
  • Long periods of absence due to acute or chronic health problems
  • Observed inability to perform tasks at the same pace and length of time as peers due to acute or chronic health problem
  • Inability to attend to tasks due to the medication being taken
  • An acute inability to attend to school duties for more than a few hours a day due to limited vitality and strength
  • Developmentally inappropriate degrees of impulsivity, inattention, and over activity

Current Trends

The number of students diagnosed with OHIs worldwide is less than 5 percent. However, the number is rising than in the past decades because students with attention deficit hyperactivity disorder and ADD are now integrated in this category.

Instructional Strategy

Be flexible with deadlines. Due to the students lack of strength and vitality as a result of the OHIs, they may require more time to complete a task or assignment. Other students with medicated or chronic pain may need an extension of time or additional explanations of the materials that have already been covered in class (Disability Resources, 2007).

Traumatic Brain Injury

According to IDEA definition, Traumatic Brain Injury (TBI) is an acquired injury to the brain occasioned by an external physical force, thereby causing partial or total psychosocial impairment or partial functional disability, or both, that unfavorably affects a students educational performance. The definition applies to closed or open injuries to the head, resulting in actual impairments in one or more areas, such as language, memory, cognition, abstract thinking, attention, judgment, perceptual, problem-solving, and motor abilities. The injuries may also result in impairments in physical functions, psychosocial behavior speech, and information processing. TBI was added as a distinct category of disability in 990 under P.L. 101-476 (Bernadette & Barbara, 1998).

Causes

TBI can be can be caused by a multiplicity of causes like the ones indicated below (Adams et.al. 2008).

  • Motor Vehicle  traffic crashes
  • Assaults/ Firearms
  • Falls
  • Struck by/ against situations
  • Harmful chemicals such as solvents, insecticides, lead poisoning, and carbon monoxide poisoning
  • Lack of adequate oxygen (Hypoxia)
  • Disease

Prevention

There are numerous ways to prevent the chances of TBI happening. Some of them are:

  • Fastening of seat belts while driving and buckling your children too
  • Never drive under the influence of alcohol
  • Wear a helmet when riding a motorbike, playing contact sport, riding a horse, etc.
  • Making living areas safer by removing clutter in walkways, installing grab bars next to a toilet, improving the lighting systems throughout the home, etc.
  • Putting lethal chemicals out of reach of children

Characteristics

According to Kimes (2005), there are many characteristics of TBI students. Below are the most basic ones

  • A deep sense of frustration and denial occasioned by the fact that the student was previously living a normal life prior to the acquired brain injury. The student physical, social, emotional and academic life drastically changes due to the injury bringing about the deep sense of frustration.
  • Greater degree of disorientation, confusion, and emotional outbursts during the initial stages of recovery from the injury.
  • Unusual discrepancies in ability levels such as inconsistent patterns of performance and uneven cognitive deficits.
  • Significant problems in integrating, generalizing, and structuring information
  • Behavioral problems such as being more distractible, impulsive, hyperactive, and perceptions of being socially inappropriate.

Current trends

Approximately 1.5 individuals in the U.S. suffer from TBI every year. Out of that number, 50, 000 succumb to the injuries, and another 85, 000 suffer long term disabilities. More than 5.3 million individuals in the U.S. live permanently with disabilities occasioned by TBI. Among the children aged 0 to 14 years, 2,685 die out of TBIs, 37,000 are hospitalized, and 435,000 receive emergency department visits each year (Centre for Disease Control, 2008).

Instructional Strategy

Compensatory strategy  Due to heightened levels of frustration, stress, and self denial occasioned by the acquired disability, the students concentration levels in class is substantially affected. As such, what the student hear does not stick, a situation known as slowed acquisition. As such, the instructor must use a lot of repetition to compensate for what the student lacks to grasp (Disability Resources, 2007).

Multiple/ Severe disabilities

Definition

IDEA defines multiple/ severe disabilities as a combination of impairments (such as mental retardation-physical disabilities, or mental retardation-physical disabilities) that has the capacity to cause extreme educational problems that the child cannot find any accommodation whatsoever in a special education program sorely for one of the multiple impairments. However, the term does not cover deaf-blindness situations (Bernadette & Barbara, 1998).

Causes

In 40 percent of all cases of multiple disabilities, no identifiable cause has been forthcoming. But according to Heward (2005) and a fact sheet on multiple disabilities published in 2006, the most likely causes of multiple disabilities includes metabolic disorders, prenatal biomedical factors, brain malfunctions, possible dysfunction in production of enzymes causing a large buildup of toxic chemicals substances in the brain, problems during pregnancy, problems at birth, low birth weight, incidents after birth, and heredity problems..

Prevention

A good prevention strategy for multiple disabilities should include:

  • Good prenatal care
  • Pre-Pregnancy determination of risk causing factors
  • Access to quality healthcare
  • Public awareness of prevention strategies

Characteristics

According to Heward (2005), Allyn and Bacon (2004), the characteristic of multiple disabilities are varied. They can be subdivided into the following sub-categories.

Cognitive

These includes Motor delays, abnormal muscle tone, Balance problems, Muscle atrophy, Memory loss, and Contractures

Medical

These characteristics include Seizure disorders, Problems in hearing and vision, Heart disease, and Cerebral palsy.

Language

Characteristics include having trouble generalizing information and communication problems

Social

Trouble communicating in community activities without supports

Current Trends

  • In the U.S., only 0.18 percent of students have multiple-severe disabilities
  • The requirements for this type of disability are different in various states. For instance, some states exclude hearing problems and learning disabilities from this category. However, the unique needs of all the students having this disability are met.
  • Currently, children with multiple-severe disabilities are being placed in classrooms and other community-based activities with their counterparts who are not disabled. However, this trend has been courted with controversy

Instructional Strategy

Note taker services  due to the severity of the multiple disabilities, such students can be assisted by finding effective note takers to help them take notes in the class. The note takers should be pooled from the class (Disability Resources, 2007).

Communication Disorders

Definition

According to IDEA, a communication disorder is a language or speech impairment such as impaired articulation, voice impairment, communication disorder or a language impairment that unfavorably affects a childs educational performance (Bernadette & Barbara, 1998).

Causes

According to Heward (2005), the causes of communication disorders are varied, and are related to the functioning of the brains. They can be classified under the following categories.

  • Hearing impairment  Either full or partial hearing impairment may cause difficulty in language and speech development
  • Physical disabilities  Causes includes palate, cleft lip, Cerebral palsy, malformations of the nose or the mouth, and vocal cord injury.
  • Developmental disability like the Down syndrome, Autism
  • Learning disabilities
  • Diseases such as the Austin spectrum disorders and Pervasive Development Disorders
  • Behavior and emotional problems like deficiencies in social skills
  • Alcohol intoxication

Prevention

There are many strategies that can be used to prevent communication disorders (Heward, 2005) and (Khan, 2007). However, these strategies can be grouped into three distinct groups  primary, secondary, and tertiary preventive measures.

Primary

These include genetic counseling, health education, hearing conservation, environmental change, vocal hygiene, immunization, prenatal care, and prevention of secondary communication disorders.

Secondary

Secondary prevention measures for communication disorders include:

  • Screenings for speech-language disorders
  • Screenings for hearing/ balance disorders
  • Early intervention for hearing/ balance disorders
  • Early intervention for language-swallowing disorders

Tertiary

  • Tertiary prevention measures include:
  • Patient counseling
  • Family/ caregiver education programs
  • Treatment of identified disabilities
  • Posted in Uncategorized

Introduction

The phrase subprime mortgage crisis became common in 2007. It describes the decline in the performance of the United States of America mortgage market (Tong & Wei, 2008, p. 3). The 2007 subprime mortgage crisis is described as the most terrible financial crisis to have occurred since the previous Great Depression. The financial crisis has adversely affected other economic sectors such as the real sector. One of the factors associated with the financial crisis is an increase in the number of subprime loans advanced (Sanders, 2008, p.254). After the end of the 2nd world war, a large number of people could own homes due to the development of mortgage credit which was affordable to middle-class households. However, individuals with low credit ratings could not own homes (Fratantoni & Schuh, 2003, p.558). This arose from the fact they could not access the mortgage from financial institutions. One of the factors which contributed to this was the high-interest rate associated with the mortgages and the requirement to pay monthly installments (Gramlich, 2007, p. 2). This was worsened by the occurrence of the financial crisis.

The core objective of this chapter is to conduct a review of the subprime mortgage crisis in the US and compare it with the UK. The chapter is organized into a number of sections. The first part entails a definition of what the subprime mortgage crisis entails. Subprime mortgage crisis causal factors are analyzed in the second part. This is undertaken by considering elements such as the rate of interest, increased financial product innovation, imbalances in the global market in relation to investment and deposits, expectations of house prices, increased bank credit and information asymmetry.

Subprime Mortgage Crisis

In the recent past, the US has witnessed an increment in the number of homeownership. For example, in 1994, the overall homeownership averaged 64% (Gramlich, 2007, p.7). However, there was a boom in ownership by 2005 with homeownership increasing to 69 % (Demyanyk & Hemert, 2008, p. 5). As a result, approximately 12 million Americans were able to own homes (Gramlich, 2007, p.3). The increment in homeownership is associated with the emergence of subprime loans which provided an alternative source of money for these individuals.

The core objective of subprime loans was to aid individuals to strengthen the borrowers financial capacity (Demyanyk & Hemert, 2008, p. 5). According to Reed (p.136), approximately 25% of individuals made use of subprime loans in their mortgages. From the graph below, it is evident that there was a steady increment in subprime loans for the period ranging from 2005 to 2008. On the other hand, there was a steady decline in housing prices during the same period as illustrated in the graph below.

Graph showing growth in subprime loans for the period ranging from 2005 to 2008.

Growth in subprime loans for the period ranging from 2005 to 2008.
Figure 1. Growth in subprime loans for the period ranging from 2005 to 2008.

As a result, a significant proportion of financial institutions considered integrating subprime mortgages in their lending practices. In the introductory phase, the interest rate subprime rate is relatively low. In most cases, the interest rate for the subprime loan is set at 2/28. This means that the loan holder is subjected to a fixed interest rate for the first 2 years (Gramlich, 2007, p.3). However, the interest rate for the other years becomes an ARM (Adjustable Rate Mortgages). This means that the rate of interest applicable on the loan increases. This can result in an increment in the number of foreclosures since homeowners cannot be able to meet their mortgage payments.

According to Gramlich (2007, p.4), most of the subprime loan borrowers are low-income individuals who are prone to loss of income hence affecting their payment ability. The occurrence of the 2007 financial crisis had a negative effect on the payment of the subprime mortgages loan interest and monthly installment. 2007 witnessed an increment in the number of foreclosures in relation to subprime mortgages both in the US and the UK. An increment in the rate of interest resulted in a reduction in the demand for homes which culminated into a reduction in the price of homes as illustrated in the graph above.

Subprime Crisis

Low-interest rate

In an effort to attract customers of the lower-income class, financial institutions decrease their threshold in relation to subprime mortgages. The resultant effect is that individuals can easily borrow money. This policy stimulated subprime mortgage market growth (Shijian, 2008, p.1). The resultant effect has been a growth in various economic sectors (Ayuso, Blanco & Restoy, 2006, p. 9). Before the occurrence of the crisis, the US Federal Reserve conducted a massive reduction in the rate of interest. The core objective was to safeguard the occurrence of a recession considering the previous tech bubble.

According to Hoffinger (2009, p.3), the Fed implemented an expansionary monetary policy. This was conducted through an aggressive reduction in the interest rate at the onset of the decade. In an effort to stimulate the countrys economic growth, Fed prolonged its low-interest-rate policy for the duration ranging from 2000 to 2004. The result was an increment in demand for housing as individuals considered investing in the real estate sector as the most appropriate. The rise in demand culminated in an increase in housing prices.

Reduction in the rate of interest stimulated the growth of various economic sectors such as the housing sector. Teaser rates of interest were integrated in both US and the UK housing sector (Whitehead, 2010, p.11). For example, in 2003, the Feds rate of interest was 1%. The low rate of interest culminated in an increment in mortgage financing. The low rate of interest coupled with low down payment requirements made adjustable loans to become very attractive to investors.

According to Hoffinger (2009, p.3), a low interest rate stimulates a countrys economic growth culminating in economic expansion. This arises from the fact that liquidity amongst financial institutions is increased. The resultant effect is that financial institutions start to advance credit services to individuals whose creditworthiness was low.

A turning point occurred within the US housing industry in 2006. This resulted from an increment in the rate of interest due to the incorporation of the Adjustable Rate Mortgage concept. By 2006, the rate of interest was adjusted to approximately 5.25% and 6% (Gramlich, 2007, p.14). This represents a significant increment in their interest payment considering the fact that the subprime mortgage holders paid approximately 2% to 3% during the 1st five years (Gramlich, 2007, p.11).

As a result of low-interest rates, financial institutions which were issuing mortgages relaxed their lending standards due to increased demand. Swan (2009, p.126) asserts that the spread between subprime and prime mortgages reduced from 2.8% to approximately 0.6% from 2001 to 2004. This clearly indicates that demand in relation to securitized mortgages. This was further instigated by increased optimism with regard to speculations on housing prices. Non-prime mortgages market which is composed of Alt-A loans a, subprime and near-prime mortgages experienced explosive growth during the period ranging from 2001 to 2006(Swan, 2009, p.126).

Over financial product innovation

Excessive financial product innovation is one of the reasons why the US witnessed subprime mortgage crises. US banks have increasingly realized the importance of product designing in an effort to maximize their profit and attain a high competitive advantage (Ding & Li, 2009, p.8).

The US mortgage market is divided into two (Ding & Li, 2009, p. 114). These include the Fixed Rate Mortgages (FRMs) and Adjustable Rate Mortgages (Adjustable Rate Mortgages (ARMs).FRMs are characterized by a fixed rate of interest for the entire period of the loan. On the other hand, ARMs have a variable interest rate which is based on a predetermined index in addition to a fixed margin (Jansen & Linsmann, 2008, p. 2). The period ranging from 2003 to 2006 witnessed an increment in the number of Alternative Mortgage Products (ARMs). These products were mainly issued to individuals with a high default rate (Kirk, 2007, p.2). Some of these products included the Mortgage-Backed Securities (MBS).

As a result of financial product innovation in the housing industry with regard to mortgages, there was an increment in the rate of mortgage securitization. Mortgage securitization involves pooling a number of mortgages that are used as collateral in issuing a particular asset. Cash flows from these mortgages are used in paying the mortgage. According to Swan (2009, p.126), there was an increment in the volume of subprime loans advanced during the period ranging from 2001 to 2005. The amount of loan advanced increased by approximately 45%. However, the volume of loans reduced in 2006 to settle at 2,646,000 (Kirk, 2007, p.19). Approximately 85% of these loans consisted of securitized subprime mortgages. Swan asserts that these loans are characterized by a relatively high default risk compared to prime loans. This arises from the fact that securitized mortgages are also issued to individuals with a low credit score.

The financial crisis culminated in a decline in personal income which made it hard for individuals to service their mortgages (Kirk, 2007, p.13). The subprime mortgage crisis was further exacerbated by rising in the rate of interest applicable to mortgages. The resultant effect was a decline in the value of mortgages leading to a loss by holders of MBS. The losses led to a lack of confidence by investors in these assets due to the high degree of uncertainty. The complexity of MBS made the process of determining their value challenging. Rating agencies conducted poor ratings on financial products developed by financial institutions such as mortgages. This resulted from the use of backward and inefficient valuation methods which culminated in a gross underestimation of risk (Ding & Li, 2009, p.8).

Information asymmetry

Increased information asymmetry within the financial sector is one of the criticisms that are associated with the 2007 subprime mortgage crisis (Ding & Li, 2009, p. 110). One of the reasons why financial institutions did not disclose the associated risk is the associated complexity. According to Bhat & Jayaraman (2009, p.1), there has been an increased failure in financial institutions reporting process. Bhat and Jayaraman asserts that financial institutions have not been effective in providing timely information regarding their performance.

According to Fitzpatrick and McQuinn (2007, p.84), the presence of information asymmetry among financial institutions creates a conducive environment for financial accelerators. Financial accelerators have the effect of reducing an individuals borrowing capacity whereby borrowers are required to have collateral in order to access finance from the financial institutions (Ding & Li, 2009, p. 104).

Excessive bank credit

Over the past decade, there has been significant growth in the amount of credit advanced by banks. By increasing banks liquidity, the banks lending capacity is increased. In addition, increased liquidity culminates in a reduction in the rate of interest. One of these forms of credit which were affected by increased bank liquidity includes mortgages. As a result, mortgage credit ranks first in comparison to other forms of credit.

Over the past decade, the UK and US mortgage markets have undergone rampant expansion. The rampant growth is associated with a credit boom that made banks loosen their lending standards.

According to DellAriccia, Igan and Laeven (2008, p. 1), there is a 50% to 75% probability of a banking crisis occurring during credit booms. The current mortgage delinquencies experienced in the subprime mortgage market are linked to past credit growth (Kirk, 2007, p.22). The rapid growth in the subprime mortgage market is linked to the relaxation of credit standards. The subprime mortgage crisis was severe in countries which experienced a high credit boom compared to those with low credit boom. There has been an increment in the number of subprime mortgage lending in relation to the total number of loans issued and loans originated in both markets (Kirk, 2007, p.33).

Mankiw (2006, p. 551) asserts that when the rate of interest is high, the cost of accessing loans from a financial institution is high. During these periods, few investors are motivated to borrow in order to buy a house. The resultant effect of a high-interest rate is a decline in investment within the real estate sector. Availability of credit culminated into house price appreciation. This arose from a general notion that investors were gambling for the housing boom. According to Mankiw (2006, p.551), a rise in house prices culminates in an increment in money demand. This further pushes the interest rate up. The lenders believed that mortgage holders could easily liquidate their collateral in order to repay their loan (DellAriccia, Igan & Laeven, 2008, p. 18). During the housing boom period, consumer spending was high while saving was low. In addition, the investors increased their debt which became difficult to pay upon the occurrence of the financial crisis.

According to DellAriccia, Igan & Laeven (2008, p. 18), the easy initial terms incorporated by banks in advancing mortgages encouraged investors to take more risky mortgages. This arose from the fact that they believed that they could easily refinance the mortgages at much more favorable terms. When the interest rate applicable to mortgages began to rise while house prices decreased, it became difficult for individuals to refinance their mortgages (DellAriccia, Igan & Laeven, 2008, p. 19).

House price expectation

Before the occurrence of the subprime mortgage crisis, there was a shift in perception with regard to housing whereby individuals perceived housing as an investment with high appreciation potential. It is evident that there was an appreciation in housing prices in the US for the period ranging from 2000 to 2006 (Tucker, 2008, p.2). However, this did not persist for a long period. 2006 witnessed a significant reduction in housing prices. The result was a reduction in demand for investors due to a reduction in value. This means that it was difficult for lenders to recoup the advanced amount in terms of mortgages.

Graph showing movement of house prices in the US from 1986 to 2008.

Movement of house prices in the US from 1986 to 2008
Figure 2. Movement of house prices in the US from 1986 to 2008

According to Goetzmann and Yen (2009, p. 1), past increments in the price of houses may depict low default risk. This arises from the fact that there is the expectation of the debt-to-value ratio decreasing with future increments in house prices.

Imbalances between investment and deposits

Global macro-economic imbalances played a vital role in stimulating the current subprime mortgage crisis. This arose from the increment in the rate of globalization. Countries such as the UK, United States, Portugal, Greece, Spain, Turkey, East and Central European counties had huge current account deficits. On the other hand, countries such as Taiwan, Korea, China, Japan and Malaysia had current account surpluses. This imbalance in addition to capital flows resulted in a decline in the rate of interest in the UK and United States financial institutions (Martin & Milas, 2008, p. 45).

The rate of consumption was further stimulated (Hongyu & Yue, 2005, p. 335). As a result, financial institutions in the UK and US increased their search for investment destinations where they would achieve higher yields. This means that there was an increment in risk-taking whereby financial institutions relied on opaque and composite financial instruments. The influx in the number of investors who considered the housing industry as an optimal investment destination was instigated by consideration of the sector as a safe investment vehicle due to the low liquidity associated with the sector.

Relationship between monetary policy and house price in the USA

Monetary policy refers to the process that is used by the government through the central bank in regulating the amount of money supply within the economy. This is undertaken by regulating the rate of interest (Gowland, 2007, p. 76). Depending on the economic conditions in the country, the government can either conduct expansionary or contractionary monetary policy (Uhlig, 2005, p. 384).

Over the past decades, US federal bank has been committed to improving the countrys economic performance through the attainment of macroeconomic goals which include price stability, high employment and sustainable economic growth. One of the methods incorporated by the Fed to ensure that this is attained is increasing the money supply. There are various mechanisms that firms can be incorporated by Fed in order to increase the money supply. One of these mechanisms relates to reducing the reserve deposit ratio. According to Leonard (2007, p. 148), a reserve deposit refers to the minimum amount of money that commercial banks should have in their accounts at the central bank at all times. By shrinking the reserve deposit ratio, the central bank of a given country is able to increase the amount of money supply in the economy Leonard (2007, p. 148). Fed reduced the minimum amount of bank deposit reserves applicable to commercial banks. In an effort to stimulate the economy through expansionary monetary policy, Fed increased the number of loans it issues to commercial banks. When there is a high demand for money relative to supply, the market rate of interest tends to increase. This limits the amount of bank credit thus slowing economic growth. Fed increased the amount of bank credit in an effort to enhance adequate economic growth in all sectors (Public Information Officer, 2000, p. 3). The core objective of this expansionary policy was to increase bank lending to both households and businesses. As a result, commercial banks had a sufficient amount of money to lend to potential investors. In an effort to attain a high competitive advantage, commercial banks increased their relaxed their lending standards. However, banks extended their lending practices to individuals with low credit ratings culminating in the subprime mortgage crisis.

In addition, the US Federal Reserve increased the money supply in financial institutions by lowering the rate of interest in early 2000 (Uhlig, 2005, p. 388). This was aimed at preventing the country from experiencing a recession after the 2001 terror attack and the hi-tech meltdown (Uhlig, 2005, p. 382).

The loose monetary policy resulted in an expansion in various economic sectors. Various sectors in the US housing industry witnessed rampant growth during the period ranging from 2000 to 2004 as a result of the loose monetary policy adopted by the Federal Bank (Eickmeier & Hofmann, 2009, p. 19).. Some of these sectors include sale, resale and construction of residential properties. This arises from the fact that investors could be able to access finance from financial institutions and invest in the housing sector. For instance, as a result of loose monetary policy in the US, the commercial banks expanded their businesses.

The economic growth witnessed by the US during this period increased the level of confidence amongst commercial banks in issuing loans. This arose from the fact that the countrys economic growth resulted in an increment in the citizens disposable income.

One of the ways through which the loose monetary policy implemented by the Fed resulted in the housing industry crisis was as a result of relaxing the standards applicable to mortgages. In an effort to attain a high market share, commercial banks and other financial institutions issued loans to investors with a low credit rating due to increased investment demand. According to Eicmeier and Hoffman (2010, p.10), monetary policy shocks have an effect on the price of assets in various economic sectors. For example, a loose monetary policy results in a decline in the applicable rate of interest. Low rates of interest contributed to imbalances within the housing industry.

Increased liquidity made homes affordable to individuals of diverse income classes leading to an outward shift in demand (Whalen, 2008, p.9). An increase in demand had the effect of increasing house prices. Before the NASDAQ bubble, financial institutions considered individuals with Fair Isaac Corporation (FICO) scores less than 620 not eligible for a loan. Due to the high risk of default associated with this category of borrowers, the financial institutions set the applicable rate of interest to be relatively high. As a result, most US banks lost. This had an effect on the UK considering the fact that most Briton mortgage lenders depend on revenue resulting from the sale of mortgage debts banks in the United States a process known as securitization. The collapse of US banks made the UK banks cease purchasing the loan books. The resultant effect is that the UK banks could no longer be able to subsidize its low-interest rates (OConnor, 2010, para. 8).

The decline in house prices culminated in an increment in the rate of delinquencies and foreclosures. These were made worse by increased incorporation of subprime mortgages and the integration of ARMs which culminated in excessive risk-taking.

In the United States, the situation in the housing industry was made worse by government programs (expansionary monetary policy) which were aimed at promoting homeownership (Swan, 2009, p. 125). The graph below illustrates a sharp increase in the rate of inflation within the US housing industry from 2003 to 2006. This was followed by a subsequent decline. During this period, foreclosure and delinquency rates were inversely related. Upon the rise in house prices, there was a decline in foreclosure and delinquency rates.

A sharp increase in the rate of inflation within the US housing industry from 2003 to 2006
Figure 3. A sharp increase in the rate of inflation within the US housing industry from 2003 to 2006

Increased liquidity led to the housing bubble which culminated in the housing industry collapsing. The low rate of interest stimulated demand for investing in the housing sector. This arises from the fact that investors considered it a potential investment destination after a decline in the rate of interest applicable to treasury bills which were considered as a safe investments. In their investment decision, investors integrated the concept of high-risk high return (Swan, 2009, p. 125).

Poor regulation

An effective global financial system is determined by the effectiveness with which the economy is regulated (Uhlig, 2005, p. 282). Inefficient financial regulation played a significant role in the current subprime crisis. Despite the US governments effort in stimulating economic growth after the dot-com bubble, the monetary policy it implemented was not well regulated (Swan, 2009, p. 122). The government via the Fed undertook a significant reduction in the rate of interest thus increasing the money supply in the economy. Banking is characterized as a highly leveraged sector as it entails public borrowing via deposits or financial instruments such as commercial paper.

The government did not ensure effective information disclosure amongst financial institutions in issuing securities that were backed by subprime mortgages (Ryan, 2008, p. 5). This increased the degree of risk faced by such investors. Numerous individual and institutional investors bought securities that were backed by subprime mortgages based on their rating. This was made worse by the complexity of the mortgages as investment vehicles (Schwarz, 2008, p.1).

Summary

From the analysis above, it is evident that the US and the UK subprime mortgage crisis resulted from a number of factors. In an effort to improve the performance of the economy, the US government via the Fed undertook expansionary monetary policy. This was undertaken by reducing the rate of interest during the early to mid-2000. The result was a significant increase in the demand for finances from the financial institution since the cost of capital was relatively low.

Reduction in the rate of interest stimulated investment demand in various economic sectors. One of the sectors which investors regarded as a viable investment destination was the housing industry. Demand was further stimulated by expectations of future increments in the price of houses. As a result, investors perceived a high probability of increasing their yield from investing in the real estate sector. This means that the housing sector was perceived as an investment rather than for ordinary housing purposes. The occurrence of the subprime crisis posed a challenging task to policymakers (especially monetary policymakers).

Considering the effects of the subprime mortgage crisis, monetary policymakers should make decisions aimed at regulating the amount of liquidity injected within the economy. For example, one of the ways that can be used to curb excessive lending is the implementation of lending laws (Elliot, 2009, p.8).

The US government through Fed failed in conducting its financial institution regulation role. Due to an increment in demand for investing in the housing sector, banks developed investment vehicles that could enable investors with low credit ratings to access finance. This led to the emergence of various types of subprime mortgages. This means that the threat associated with these assets was not given ample consideration. In addition, the government did not ensure optimal disclosure of the risks associated with the subprime mortgage instruments designed. This made a large number of institutional and individual investors consider investing in these instruments.

Prudential regulation within the financial sector in relation to the credit boom can play a significant role in curbing excessive credit growth hence reducing the risks associated with such boom. Due to the contagion effect, the UK housing industry was also affected by the occurrence of the US subprime mortgage crisis.

The subprime mortgage crisis also resulted from the existence of imbalances with regard to deposits and investments. These imbalances were instigated by the high rate of globalization. This led to the emergence of surpluses and deficits in the current account. The United States is one of the countries that had deficits. In order to sustain itself, the country relied on capital inflows from foreign countries. This had the effect of lowering both short and long-term rates of interest. Low rates of interest increased demand for finance among individuals whose credit rating is low.

Reference List

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  24. Posted in Uncategorized

Introduction

Financial Accounting Board issued a statement permitting the use of fair value measurement for business as a measuring attribute but some entities such as the banking industry suspended the application on the basis that FABS 157 contributes to the current credit crisis. The application of this measurement would change the current accounting principles and provide new measuring techniques that will be transparent and consistent. Reasons for issuing fair value measurement is that businesses were using measurement techniques that did not comply with GAAP. The Financial Accounting Standards Board (FABS) therefore designed fair value measurement that was inconsistent with GAAP.

Background

The project reviews Financial Accounting Standards Board Statement (FASB) Number 157 and describes fair value measurement techniques. The paper will begin by reviewing the fair value measurement techniques (present value and valuation techniques).

The paper will then give an overview of statement number 157. It will cover the reasoning for issuing the statement. In order to completely understand the reasoning for the statement, the paper will discern how fair value was measured prior to the issuing of statement number 157.

Once the rationale and the current situation have been discussed, the paper will review the anticipated improvement from the issuing of the statement, as well as, review the cost and benefit analysis of the implementation of the statement.

The original statement was issued in September 2006 with an effective date of November 15, 2007 and beyond. Since the issuance of the statement, companies have commented on the possible impact that the statement will have own their financial reporting. This paper will review the views of a few companies and industry experts.

The paper will also discuss how this statement could have affected/contributed to the current credit crisis. It is important to highlight the importance of how the standards that are issued by the FASB could affect the economy in a positive and/or negative way

Overview

Fair value is the price at which an asset is agreed to be sold or a liability transferred between willing participants to the market in which the reporting entity would transact for the asset or liability, known as the principle. The whole concept of fair value measurement focuses on the price that the item would be sold at or price paid to transfer the liability but not the price paid to acquire the assets or the liability entry price.

Fair value is therefore market based measurement determined by perspective of market participants but not an entry specific measurement. Market participants determines fair market value by obtaining market data from reliable independent reporting sources and entities own assumption of what is considered to be fair market value. It draws its assumption basing on unobservable inputs of the market activity at that date at which the asset or liability will be measured (Financial Accounting Standards Boards 2009).

In a case where the fair value market is determined by participants, the reporting entity should employ maximum efforts in obtaining information about market participants assumptions before setting out prices. The assumption should be calculated in terms of foreseen risks such as those of pricing models used to measure valuation techniques. It is important for market participants to include assumption about risk such as risk inherent in valuation and reflect its effect the on the sale or use of the asset. If the asset is subjected to certain restriction on the sale or use, fair value measurement should consider effect of the laid down restriction on determining the price of that particular asset (Financial Accounting Standards Boards 2009).

Aims and objectives

The aim of this research is establish whether FASB No. 157 application to entities will improves effectiveness and consistency of measuring techniques. The research also intends to determine whether statement contributes to the current credit crisis.

Literature analysis

FABS 157 fair value measurement ensures entities provide reliable information regarding their transactions thereby enabling users of financial statements compare similarities and differences between two sets of economic events that will be used to determine fair market values measurements. In price determination, assets and liabilities should comply with FASB statement no. 2 of Qualitative Characteristics of Accounting Information that emphasizes on provision of comparative information. FABS No. 157 fair value measurement uses participants assumption of current market situations to reflect the future inflows. Future inflows are the economical benefits attributed from sale of an asset and outflows of liability. It is this prediction that benefits the future economy (Financial Accounting Standards Boards 2009).

Fair value improves financial reporting by integrating fair value measurement into the current accounting system resulting to increased consistency and comparison in the measurement of fair values. The use of fair value measurement has provided users with reliable financial statements with better information about what fair values are used to measure assets and liabilities, effects on measurements used in calculating value of assets at a given period and what the system uses to develop the measurement (FASB 5).

Conditions, location, sale restrictions and use of the asset or liability should be considered at measurable dates before their prices are determined. Assets or liabilities should be measured alone or as a group depending on the measurement used. Examples of standalone assets or liabilities are financial instrument and operating asset. Group assets or liabilities include reporting unit and businesses. Whichever way an asset or liability chooses to be measured, unit of account should be the determining factor. The measurement should also be based on the level at which an asset or liability is aggregated or disaggregated in order to apply other accounting principles. Accounting provisions requires that the unit of account of any asset or liability be determined in accordance to its pronouncements (FASB 8).

In determining asset measurement, fair value assumes the highest price as perceived by market participants. The asset to be transacted should be in good condition and financially feasible at the measurement date. Valuation premise method includes in-use and asset in-exchange methods. In-use method is where participants anticipate the asset will provide maximum value if used as a group, for example if the asset is installed.

Therefore when the asset achieves the highest and best value when in use, then fair value will be measured using an in-use valuation premise. In In-use valuation premise technique, fare value of the asset is determined by the price that will be received in a current transaction when the asset is sold on the assumption that the other combined assets i.e. used as a group will be available to market participants at that time b). Asset in-exchange, the highest and best value of an asset is calculated on stand alone basis. For instance, financial assets are measured using in-exchange valuating premise based on the price that will be received when that particular asset standalone is sold (FASB 9).

The fair value of a liability reflects nonperformance risks at a measurable date. The non reporting risk considers the effect of its credit when measuring the liability at fair value in all periods and the effect of the risks depends on each liability measured. For example, if the liability requires cash delivery (financial liability), delivery of goods and credit enhancement, they should all be considered (FASB 10).

Valuation Techniques

Valuation techniques are methods used to measure assets and liabilities depending on the assumption of market participants. The techniques used to determine the prices are market, cost and income approaches.

Market approach

Market approach uses pricing technique and gathered information involving market transactions of similar or comparable assets or liabilities. Market approach system incorporates a wide range of multiples to be used on each comparable. Markets participants therefore select prices within a range of appropriate multiples and also consider factors that apply to the chosen measurement such as qualitative and quantitative measurements. One of the multiple used is Matrix pricing technique that values debt securities without considering quoted prices for specific securities but rather on the underlying security relationship to other ruled out quoted securities (FASB 10).

Income approach

Value measurement is determined by current market expectations of what it anticipates the future prices to be. Income approach therefore converts future amounts to present values such as discount rates. Option-pricing models as used by Black-Scholes-Menton formula and binomial model is employed in calculating income approach whereas multi-period excess earnings technique is used for measuring fair values of intangible assets (FASB 10).

Cost approach

In cost approach, the buyer determines the price of an asset by measuring the cost that will be required of him to acquire or construct a substitute asset or cost adjustments in case the asset deteriorates physically, technologically or economically (FASB 10).

In using valuation techniques the entities must provide sufficient data that will be used in measuring fair value of an asset or a liability. As we have seen earlier, some cases of value measurement may require application of single value technique when valuing assets and liabilities or multiple techniques in valuation of reporting units. Single valuation technique measures fare value using quoted prices of the current market for assets or liabilities that are identical while multiple evaluation technique measures its fair values basing on attained results from respective indicators and weighed as per the provided results by reasonable indicators.

Depending on each valuation technique employed, fair value measurement therefore indicates the point within which entities determine the range to represent their fair values at given measurable dates (FASB 11).

Valuation techniques applied in fair value measurement should be consistence but its application may change in measurement especially when multiple valuation techniques are used. Changes in valuation techniques arise when new markets develop, technology changes, availability of new information and changes in valuation techniques. FASB No. 154 considers any change in valuation technique or application to be change in accounting estimates (FASB 11).

Input valuation techniques as used in fair value measurement is the assumption market participants uses to determining the price of an asset or a liability basing on the risks they anticipate to undergo such as risk inherent as used in pricing model to measure fair values.

Input valuation technique may be observable or un-observation depending on the measurable dates. Observable input is where participants determine the price of an asset or a liability per the market sources from independent reporting entities while unobservable input is the assumption reporting entities uses to predict the assumptions market participants would use in determining the price of assets or liability. They therefore use market participants assumptions in setting out prices. Valuation techniques should therefore maximize observable inputs and cut down on unobservable inputs (FASB 11).

Present Value Techniques

FASB Concepts Statement No.7 provides guidelines to entities that use Cash Flow Information and Present Value techniques for measuring fair values. The guidance provided bases on traditional or discounted rate adjustment to be used in cash flow and present value technique. There is no specific present value technique for measuring fair values as the method depends on facts and underlying situations in relation to the asset or liability to be measured in comparison to the market assumptions and availability of sufficient information (FASB 27)

Present value is a tool that links uncertainty of future amounts of cash flows and values to that of present amount using discounted rates. The technique used in value maximizing behavior and capital market equilibrium should be inconsistence with accounting standards. Therefore fair value of an asset or a liability should consider the following elements in measuring present value

  • Draw expectations about possible variations in the amount of an asset or liability or timings of the cash flow that may create future uncertainties
  • Allocate provisions for the prices in case of uncertainty inherent in the cash flows
  • Consider case specific factors that will be used by market participants
  • Consider the time value of money as represented by risk-free monetary asset rates such that maturity dates does not conflict with periods covered by cash flows also known as risk free interest rate.

When calculating present values for U.S, Treasury securities has established appropriate risk free interest rate to be used. U.S. Treasury securities are recommended to be used since they do not pose any uncertainty timing or risk to the holder e). Non-performance risks relating to liability including that of the obligators own credit risks (FASB 28).

Present value techniques must adhere to the following general principles in determining fair value measurement

  • Cash flow and discount rates should reflect market assumptions for pricing the asset or liability
  • Cash flow and discount rates should include factors attributed to asset or liability in measuring fair values
  • Present value techniques should make sure that nothing is omitted or double counted in computing risk factors and discount rates.

Risk inherent used in cash flows should be calculated according to market participants assumptions d). Cash flows and discount rates assumptions should be determined internally.

This means that nominal cash flows should reflect the effect of inflation at that particular period and the discounted rates should include the effects of inflation. Nominal risk free interest rate as used by U.S. Treasury securities includes the effects of inflation and does not need further discounting. Real cash flows that do not include the effects of inflation should therefore be calculated at the rate that excludes the effect of inflation. Also after-tax cash flows discount rates should be computed using after-tax discount rate and pre-tax cash flows that comply with U.S. Treasury securities as quoted on pretax basis or on prevailing term loan rate e). Discount rates should reflect current economic factors such as credit crisis in the currency in which cash flow is denominated (FASB 28).

Risks and Uncertainty

Fair value measurement using present value technique requires observation of uncertain conditions since the method used in cash flows are based on estimates and therefore the amount and time used are unknown. The estimates become uncertain even if the amounts are fixed like loan payments. In risk-averse market, participants seek compensation for adopting uncertainty inherent in cash flows computation of assets or liabilities.

The compensation is known as the risk premium. Fair value measurement should therefore include risk premium depending on the amount market participants would request since risks inherent in cash flows are uncertain. Risk premiums should always be reflected in fair value measurements. Techniques used in present values differ from time to time in the way they adjust to risks and the type of cash flows used. For instance, discount rates adjustments use risk adjustment discounted rate technique and cash flows in the following methods;

  1. Present value technique uses a risk free rate and adjusts the risk in the cash flows and
  2. Present value technique method uses risk adjustment discount rate and expected cash flows for fair value measurements (FASB 28) (Brigham & Ehrhardt 2008).

Discount Rate Adjustment Technique

When computing discount rate adjustment techniques, single cash flows from a wide range of estimates are used. The estimated are based on contractual or promised amounts such as bonds or cash flows. Normally, cash flows estimates are conditional in their occurrence. As we have seen earlier, discounted rates are based on observed rates as used by comparable assets or liabilities, therefore when contractual, promised or cash flows are used, discounted rates should correspond to observed market rate per the assumption of market participants to reflect market rate returns. Before discount rate technique is applied, thorough market data analysis should be done for comparable assets or liabilities.

Comparability for this instance is established by determining the nature of cash flows based on contractual or non contractual basis as they respond similarly to economic conditions and other factors such as liquidity, restrictive covenants, collateral and credit standing. If single or comparable assets or liabilities do not reflect risk inherent in cash flows of assets or liabilities measured, then discounting rating should use data from several comparable assets or liabilities incorporation with the risk free yield curve also known as build up approach (FASB 29).

Benefit and Costs of using fair market values

  • Financial Accounting Standards Board (FASB) missions and goals is to establish improved standards of financial accounting reporting such that information provided (financial statements) is reliable and useful to users such as creditors, capital markets, donors and investors. Reliable financial statements will enable users make rational investment decisions and offer credit extensions. FASB therefore ensures that proposed standards fulfill significant needs and estimated costs meet the boards standards. Costs attributed from implementing new standards vary from organization to organization, but users of financial statements benefit a lot from improved financial reporting therefore stimulating effectiveness of market functionality for capital and credit facilities and also allocation of resources to the economy
  • Fair value used together with frame work for measuring fair value result to increased consistency and comparability. Providing comparable information to users also helps them compare similarities in and differences between two economic sects
  • The statement expands fair value measurement knowledge therefore improving the quality of information provided. Transparent information enables users to make rational investment decisions and assessment on credit worthiness (FASB 54)

The FASB plays an important part in ensuring the statements develops disclosures by obtaining input data from users, interested parties and preparers to make sure that information provided is within a reasonable cost-benefit constrains. Also business are required to disclose fair value information disclosed under FASB statement and also under accounting pronouncements all in one place as it improves quality of information provided by users of financial statements about measurements used therefore making the whole process easy to understand.

The statement also demonstrates to users how fair value financial reporting is used. Amendments made in fair value statement simplify and codify the current fair value measurement, eliminating the previous complexities experienced in GAAP and making sure that the statements are inconsistence with FASB related codification initiatives. Framework for measuring fair values bases on current practices and requirements but the FASB allows some entities to use certain methods that do not comply with its statement resulting to changes in the current practice. Once an entity adopts fair value measurement, operational changes will be made as cost increment will be realized.

Despite the expenses, benefits attributed to it are tremendous. Entities experience increased consistency and comparability in fair values information provided as compared to other accounting standards. The system also improves communication of financial statements information therefore improving financial reporting (FASB 55).

FASB No. 157 in use

Since statement FASB requires highest and best use of all assets or liabilities, real property has been using the statement for measuring its assets fair values. The price of the property is therefore determined by assumption of market participants. Before the property is sold, examination is done to determine whether it will be used as it is in its current condition or will be improved. Different properties uses different fair value for measuring their real property assets therefore statement no. 157 provides provisions for such adjustments. The statement considers the highest and the best use of group assets as per the assumption of market participants.

When assets or liabilities are valued as a group, seller benefit since the buyer pays higher for the assets in combination than they would individually. Statement No. 157 is still evaluating the best techniques for allocating real property. Since real property price is based on the intended purpose, fair value should then base their measurement on the assumption of market participants at a measurable date. Real estate properties (assets) or liabilities are the most affected by this statement since assumptions of market participants are the determining factors on what price the asset should be sold (Gottlieb, Bohlin et al 1-3).

Methodology

The research was carried out in energy industry that required managers, employees and economist perception to the implementation of FASB No. 157.

Energy companies for instance KPMG are planning to implement FASB statement No. 157 in fair value measurement for financial assets and liabilities. Before implementation, the companies are required to plan and consider the impact statement adoption in reporting their financial statements. Energy companies in the implementation of the statement will concentrates more on financial assets and liabilities as well as non financial ones. Before the company implements the statement, project leader and management should provide proper infrastructure govern project development. Also clear channels of communication and issue resolution should be established to ensure the project runs efficiently.

The company should identify key stake holders and participants in each department to take part in the implementation. First and fore most, key players need to be educated on the components and application of FASB no. 157 and identify accounting areas and specific amounts to be affected by the new requirement in fair value measurement (KPMG 2).

Inputs are categorized into three levels according to fair value measurement hierarchies. The levels include Levels 1, 2 and 3. In level 1, inputs from markets are given the highest priority while Level 3 gives the lowest priority to unobservable inputs. The company should therefore categorize each item on its list within fair value hierarchy. If most of the items are listed under Level 1, then the company may experience some challenges in implementation of the statement. If items fall in Level 3 of fair value measurement, then the company will be required to make changes in its current policies, systems and processes of reporting. The company should also make a list of challenges it anticipates to face in Level 3 measurement as well.

Analysis

Apart from identifying accounting policies and line items that will be affected by FASB No. 157, the company should consolidate an imperative inventory system and reliable data sources that it will use for determining fair value measurements. The company should also analyze its business environment such as if its requires other stake holders in its operations such as IT that may need it to comply with other accounting principles for this case the Sarbanes-Oxely Act and analyze how the implementation can affect reporting environment. Energy companies will need to keep in mind complexities of some valuation techniques and make sure the one they choose is they most appropriate as defined under the statement. For instance if it chooses to use market valuation approach, it will be then be required to have maximum access to market pricing resources (KPMG 3).

Results

Trade groups gave out mixed reactions to the implementation of fair value measurement in banking industry for reporting financial statements saying that the move will lead to income statement buoyancies (understatement and overstatements). Fair value measure as proposed by U.S and International Accounting Standards is the most desirable financial instrument for trading purposes according to ABA reports. He adds that assets or liabilities that are not based on short term trading or held to maturity, loans, deposits and receivable for instance may affect income statement fair value measurement that may eventually lead to overstatements and understatement.

Bankers are opting to using mixed attribute financial reporting model to that of fair value measurement as financial instruments. The reason for this option is that, loans are issued for the purpose of generating interest over time (maturity period. Therefore fair value calculation that requires periodic up to date information of the loan development would result to less predictive value therefore unable to use the statement. It is the absence of relevance and reliability that force bankers to use mixed attribute financial reporting model. Yingling emphasizes that financial conditions and value of assets and liabilities should be measured based on real life situations. He adds that accounting policies should focus on measuring the current economic crisis (Leone 1).

According to Herz, loans are financial instruments and should be subjected to fair value measurement contrary to bankers opinion. Also loans are not always held to maturity periods therefore qualifying for the rule. Bankers should incorporate fair value measurement in its accounting system to reflect the interest of investors as they rely on the financial statements in decision making. In a survey carried out on investors perspective on use of fair value measurement, 79 percent of 2,000 investment professions conclude that the statement improved transparency and enabled them better understand the risk profiles of the business.

They also said that fair value requirement would greatly improve market integrity. CFA institute argues that bankers should use fair value measurement in loan calculation as it helps them determine whether loans would be paid because the statement reflects the current market information. The problem encountered by mixed attribute model is that the method is not transparent therefore hard for investors to make their decisions basing on them (Leone 2).

Discussion

Statement FASB 157 requires commercial banks to value securities and loans reflected in their balance sheet quarterly per the prices paid for the same instruments o the current market regardless of whether the bank planned to sell the asset or not. Martin Sullivan former chief executive of American International Group said the current accounting practices created huge losses for insurance firms. He says the losses experienced by insurance firms required $85 billion bail out that stressed the economy. He adds that the accounting practices resulted to transaction vacuum that made mortgage securities disappear to what is currently known as mortgage risks.

The amount of U.S. commercial mortgage-backed securities (CMBS) issued July 2008 to September was zero as compared to $60 million CMBS issued the previous year. Taking mortgages to the market when there is less demand results to vindictive pricing since few bonds available will be lucky to be traded. Since the markets are not liquidated, agitated sellers undermine the value of the transactions resulting to undervaluation of banks balance sheet (Hudgins 2008).

Sullivant laments that if financial institutions used fair value accounting, financial crisis would not have sunken that deep. Trade leaders of Commercial Mortgage Securities Association and bank industry were authorized by law makers to put on hold FASB 157 use as a bail out measure for some period until when market stabilizes.

Change in accounting system should help financial institutions improve their efficiency and at this time of economic depression, the banks should use it as a bail out in helping them regain liquidity either than shifting complains. Dan Smith, managing director of Real Estate Mortgage Company argues that securities should be valued in relation to current sales otherwise problems will be created by price distortions sinking the economy further. Its to this reason that policy makers were unable to avoid current crisis regardless of fair value suspension.

The only effect of applying fair value measurement to banks at this time of credit crisis is that the statement will overstate the balance sheet but this does not mean that it would have contributed to the crisis. Credit crisis is too big to be fixed by suspending fair value measurement since its not the central part of the problem. Jim Smith, an economist argues that the main problem of credit crisis is that financial institutions lack of transparency in disclosing information on how assets were valuated on balance sheets.

Therefore, if the system would have been transparent, the fear of further crisis development affecting credit market would reduce. Leamer points out that the FASB No. 157 application would subject banks to insolvency as they would have already established fear that the statement would drive market valuation. The fear is based on lack of trust and transparency in the current accounting systems (Hudgins 2008).

Lack of trust and transparency in the banking system should be the main reason for credit crisis rather than FASB N0. 157 statement application. According to Leamer, the key to restoring liquidity would be increasing transparency in the system by banks disclosing all their assets in balance sheets and forcing these institutions to acknowledge their losses and establish measures to prevent them in future. The president and chief operating officer of capital markets, Kenneth Rudy agrees the idea of suspending FASB 157 as the statement will enable banks quickly resume to lending then later realize losses as they will be quickly disposing off securities and loans.

Once the government starts buying securities that are piled up on lenders balance sheets, then suspension of fair value measurement will allow banks to make more money as they will selling more securities enabling them to offer loans. Law makers should lift fair value measurement suspension once credit markets regain stability as the statement maintains transparency as compared to other accounting applications (Hudgins 2008).

Conclusion

Statement No. 157 established disclosure of valuation technique it uses enabling users understand how fair value estimates were produced, a system that banking industries are not willing to undertake. What contributes to the current credit crisis is the fact that the existing accounting methods do not require financial institutions to disclose all their assets and liabilities therefore enabling them mask balance statements.

In order to get out economic depression, managers must disclose all assets

Introduction

One of the major operations of banks in contemporary society is lending. This is whereby the bank makes money available to the public for various purposes in the form of loans. The borrower approaches the bank for a loan to finance various activities. These may include the purchase of an asset such as a car, land, machinery, or a house among others. In other circumstances, the borrower may take out the loan to finance another debt from a previous lender.

The banks may lend money to differing clients. These may include organizations, governments, and businesses among others. The loan may also be advanced to individual members of the public as personal loans.

There are various considerations carried out by the bank before processing or approving a loan request from a potential borrower. These may include the creditworthiness of the borrower, whereby those who have defaulted on loans before are avoided by the banks. The bank may also assess the use that the potential borrower intends to put the borrowed money into. This is also aimed at assessing the risk of the money that is borrowed, or the likelihood of the borrower to default.

Money lending by the banks is attended by a myriad of risks, ranging from the failure of the borrower to clear off the loan, and the rise in interest rates or inflation within the period that the loan is to be repaid. Out of these, loan default by the borrowers is the major risk facing banks wishing to avail funds to the public.

There are various reasons why a borrower may default on a loan. Some of the causes of defaults are within the control of the borrower, while others are without their control. A case in point is when the business in which the borrower had plowed all the money is affected by a natural calamity such as an earthquake or floods. Given that the borrower intended to clear off the loan using the proceeds from the business, interference with this source of income will affect their ability to pay off the loan negatively. The assets of the borrower, according to, are wiped out. They are made incapable of restarting their business soon enough to clear the loan. These are unavoidable causes of loan defaults. However, as earlier indicated, there are also causes of loan defaults that are avoidable, which are within the borrowers control. A case in point is when the borrower puts the money into the wrong or unintended use. This is for example using money borrowed and intended for business on personal effects such as house furniture.

In an ideal situation, all the borrowers are expected to repay their loans to the bank. However, this is not the case in the real world. Some borrowers will repay their loans, while others, for one reason or the other, may default on payments. This affects the well-being of the lending institution or individual. This is despite the fact that some of the reasons causing the borrower to default may be genuine, such as a natural catastrophe.

In lieu of this, banks and other financial institutions that are involved in the process of lending money have found it necessary to put in place norms and procedures which they undertake before they release the money to the borrower, may it be an individual or a business. As earlier stated, the lender goes through the credit proposal brought before them by the potential borrower. This is in order to check for the viability and feasibility of the proposal. Each of the loan requests submitted to the bank is evaluated on an individual basis, given the fact that the potential borrowers are unique in their ability to pay or put the money to good use.

One of the precautions that are taken by the bank to safeguard against non-payment is obtaining security from the potential borrower. Security may take various forms, ranging from intangible to tangible assets. Tangible assets include land, car, house, and ushers. On the other hand, intangible assets or securities may be the borrowers payslips (salary for the employed borrowers), bonds, and stocks (Veneziano, 2011).

Several issues surround the securities aspect of money lending by banks. For example, there are legislations that govern the conduct of both the borrower and the lender regarding the security of collateral provided. Such legislations are for example those prohibiting the borrower from using the security on another loan, the remedies of secured creditors, and such others. Also included in such legislation includes various provisions on how the security will be treated should the borrower be declared bankrupt before they have cleared the loan (Getzler & Payne, 2008).

In this paper, the author is going to analyse the notion of banks taking of security over assets in the lending process. The nature of security in this context, as well as the various forms of securities available to the bank, will also be analysed. The author will integrate relevant decided cases in this field in the process of analysis. The scenarios when a banks security may come under threat of postponement to the rights of other creditors will also be analysed. In this case, the author will additionally look at the mechanisms that the bank may utilize to avert the loss of security in such an instance.

To effectively address the objectives above, the paper will be structured into several sections. Each of these sections will deal with a particular issue regarding bank lending and security. The author will start by looking at the general overview of the nature of security, where the importance of this function in bank lending will be assessed. This will be followed by a discourse on the forms of security interests as defined by law. Here, legal mortgage, equitable mortgage among others will be addressed. The third segment of the paper will deal with the negative pledge, and how they affect the relationship between the bank and the borrower. This will be followed by a discourse on registration requirements under section 262 of the Corporations Act. The remedies for secured creditors will also be addressed in a subsequent section of the paper, followed by an analysis of the problems on the enforcement of these remedies. Finally, the author will look at the issue of financial distress of companies and subordination.

Nature of Security

An Overview

Various scholars have defined security within the context of bank lending and borrowing variously. The various definitions are informed by the individual scholars philosophical orientation and the school of thought they subscribe to.

However, generally speaking, security can be conceptualized as an asset of any kind or description, and which possesses some specified qualities that can be possessed by the lender in the event that the borrower or debtor fails to pay the borrowed amount. Among the qualities that the asset acting as security should possess includes monetary value, which should be equal to or higher than the amount of money lent. The asset, when possessed in case of a default by the borrower, is used to recover the loan. The lending bank may sell off the asset or dispose of it in such a way that the bank recovers the money lent and interest that may have accrued.

The desire of the bank in lending out money is to ensure that the borrower repays off the loan plus all the interests that may have accrued. This is one of the major reasons why the bank finds it important to secure the loan. To ensure that the interest plus the principal amount is recovered, the bank will usually create a charge against the asset that may have been financed by the loan that the borrower took from the bank. For example, a charge may be created against the house that the borrower financed with the money that they borrowed from the bank.

There are two types of securities that are available to the banks in the event of securing a loan. These are primary and collateral securities, and they refer to different circumstances during the lending process.

Primary Security

This is the form of asset that is directly formed out of the finance provided by the bank. A case in point is when a bank provides an individual borrower with the funds to buy a house. In this case, the house becomes the primary security for the bank loan. To secure the loan provided by the bank in such a case, a charge is created against the asset so financed. The charge that is created in such a case provides the bank with legal authority to dispose of the asset should the borrower default on the payments. The proceeds from this disposal are used to offset the defaulted loan.

The problem with primary security is the fact that the value of this security may depreciate, especially in cases of negative market developments. This is for example when the prices of a house in a given locality fall due to adverse developments in the locality. In such a case, the risk to the bank is aggravated, given the fact that the primary security may not be able to liquidate the loan. This realization creates the need for collateral security.

Collateral Security

This is specific additional security over the primary security that the lending bank obtains with the intention of securing the loan.17 In the scenario given above of the house financed by the bank, the lending bank may decide to obtain collateral security in addition to it. The bank may opt to take the land around the house as additional security to the loan that was granted to purchase the house. The major purpose of this form of security is to offset the risks attending the primary security as stated above.

The two above are not the only form of security for loans though. For example, a borrower can provide personal security for the loan. When a bank obtains personal security for a loan, it has a legal authority to proceed against the borrower and their personal estate, and apply the proceeds to the recovery of the loan if the borrower defaults.

Proper security acquired by the bank greatly reduces the likelihood of having the loan defaulted. When, despite all of the precautions taken by the lending institution, the borrower defaults, the loss that the bank stands to accrue is reduced a great deal.

Why Take Security?

As already indicated in this paper, there are several reasons that make the bank take security for a loan granted.

Reduces Likelihoods of Defaults

One of the major reasons for securing a loan is to ensure that the likelihood of the borrower defaulting on the loan is minimised. The fact that the borrower has used an asset that is valuable to them as collateral means that they will try their best to repay the loan, and to avoid defaulting.20 This is given the fact that they are aware if they default, the bank has legal authority to repossess their assets. This being the case, defaulting becomes very unattractive to them.

In Case of a Default, the Loss to the Bank is Reduced

There are instances where, despite all their efforts to meet their pledge and clear their loan, the borrower defaults on the loan. This is for example due to unavoidable and unforeseeable events such as fire, floods, and earthquakes among others. The ability of the borrower to clear the loan in such circumstances becomes hard, and they are likely to default on the loan.

When the bank has secured the loan, the loss that it suffers in case of such unavoidable default is mitigated. For example, the bank may repossess the security, dispose of it and use the proceeds to clear the loan. There are times when the value of the property may not be enough to cover the loan and the accrued interest on the same. However, the loss of interest is small compared to the loss that the bank may have suffered has the loan been unsecured. In such a case, the bank will have lost both the principal amount and the interest on the loan.21

Types of Security Interests

An Overview

Before looking at the various forms of security interests that are available to the bank in the process of lending money to the public, it is important to first look at what security interest is. A definition and overview of this phenomenon will help the reader to contextualise the discourse that will follow in this section.

Security interest is conceptualised as a form of property interest that is created when the lender and the potential borrower agree to negotiate on the loan application. It is created by legal operation on assets, and it is aimed at securing the performance of an obligation on the part of the borrower. The performance in this case is the borrowers payment of the debt granted by the bank.

The security interest, according to Berger et al (2009), provides the bank with preferential rights regarding the disposition of the property that is so secured. These rights vary with regard to the form of security interest that is under consideration, as well as the kind of debt that the bank is lending the borrower.

When a bank takes a security interest when lending money to the individual or an organisation, it automatically becomes a secured creditor to the borrower. There are several benefits that come with being a secured creditor, and this is the major reason why banks prefer taking a security interest over assets. For instance, the bank has the legal right to take the collateral should the borrower default.

Types of Security Interests

Tyree and Everett & McCracken identify eight forms of proprietary security interests. These are as listed below:

  1. true legal mortgage
  2. Equitable mortgage
  3. Statutory mortgage
  4. Fixed equitable charge, also referred to as bill of sale
  5. Legal lien
  6. Hypothecation, also known as trust receipt
  7. Floating equitable charge
  8. Equitable lien
  9. Pledge, also known as pawn

In this section, the author will look at a few of these security interests. In looking at these forms of security interests, the author will also analyse the case of Toohey v. Gunther, a classical case when it comes to English law regarding security interests.

True Legal Mortgage

There are times when the secured assets are transferred to the secured party, or the lending bank, as borrowers security for the obligation to pay the debt.30 When this happens, and when it is subjected to a right on the part of the borrower to have the assets transferred back to them when the debt is settled, this is referred to as a legal mortgage. Finch refers to this right as the equity of redemption on the part of the borrower, ensuring that they get their assets back.

According to Tollers Solicitors, this is the most secure and comprehensive type of security that is available to the lending bank and it is thus the most preferred.33 This is given the fact that the legal title of the asset is transferred to the lender, or the mortgage, and this ensures that the mortgagor is unable to deal with the asset so mortgaged when it is still subject to the mortgage.

A legal mortgage is only taken over assets that are already in existence, and owned by the mortgagor at the time of borrowing. This means that future property is exempted from this form of security. However, there are special circumstances where a mortgage can be drawn over future property. This is however referred to as equitable mortgage, where the mortgage becomes equitable mortgage over the said asset when it becomes to existence and owned by the mortgagor, or borrower.

There are several formalities that are undertaken in the process of creating a legal mortgage. When it is created over land as the preferred asset, it must be executed by the use of deed between the lender and the borrower. When the mortgage is to be created over chattels such as a factory and the equipment therein, it is not necessary to come up with formalities to effect the mortgage. This is provided the fact that the two parties have come to a valid agreement and share a mutual intention to create the legal mortgage. The latter can be provided for on the mortgage document, an indication of the agreement between the two parties.

Equitable Mortgage

An equitable mortgage, according to Tollers and Berger et al comes into existence under special circumstances. First, it may arise when the formalities that are needed to come up with a legal mortgage are non-existence, or one of the parties has failed to comply with them if they were in existence. Alternatively, an equitable mortgage can arise when the lender and the debtor have formally agreed to create a legal mortgage on a future asset. This is when the asset is not yet in existence, or is not owned by the mortgagor, but there are assurances that the asset will come into existence and will be owned by the mortgagor.

Finally, an equitable mortgage can be created when the &..property that is (intended) to be mortgaged is recognised as such only in equity&... This is for instance rights that are recognised under contracts, in other words the right of an individual, for example the lender, to enforce a debt against another individual, for example, the borrower.

Equitable Charge

In this form of charge, the lender who is a secured creditor has the legal authority to obtain a given asset owned by the debtor when the latter defaults on loan payments (Kennedy, 2010). The secured creditor can enforce this right by the use of the power of sale conferred on them by the law or by appointing a receiver who will act on their behalf as far as the asset is concerned. It is noted that this is the form of security that is common, and banks usually take it over the assets of the borrower.

This type of security interest is non-possessory, meaning that the charge, or the beneficiary of the equitable charge (in this case the lending bank), needs not take into possession the asset that is so charged. There are circumstances under which this form of security interest is referred to as a bill of sale. This is when an individual [who Tollers (2009) refers to as a natural person] provides a security that is equal to a charge. This form of charge is regulated under a different set of legislation, which Veneziano refers to as bills of sale legislation.

Floating Charge

This is another form of security interest that bears some resemblance to fixed equitable charges. The similarity is in the charges effect, and it is more evident when the fixed equitable charges are crystallised. The crystallisation takes place when the chargee, or the lender, initiates liquidation proceedings against the chargor, or the borrower.

The floating nature of this form of security interest is evident before the crystallisation. This is given the fact that the charge do not attach to any of the properties owned by the borrower. Unlike in the case of a legal mortgage, the borrower is at liberty to deal with or dispose the property before crystallisation. As such, the charges are merely floating, without any attachments to property.

Toohey v. Gunther: A Decided Case in Mortgage

This is one of the classical cases of security interest agreements in Australian law. This case was decided by the Australian high court in 1928. The facts of the case were that, Astby, who owned a hotel in Australia, used it as a mortgage in 1901. This is in an agreement he entered into with Tooth & Co., and the hotel was used to secure a loan. Additionally, the mortgage obtained a tie that was supposed to be in effect for a period of 34 years, ending in 1935. In this agreement, it was purported that the mortgagors successors in title were bound in it. The asset (the hotel) was subsequently sold by Gunther in the year 1926. However, the buyer, Toohey, refused to purchase the hotel when he realised that a tie was in existence. As a result of this, Gunther forfeited the deposit that had been made by Toohey. The latter felt that Gunther was in no position to forfeit the deposit, and the sale contract that was drawn should be rescinded. Toohey further claimed that the defendant had not shown a good title, and as such, they should return the money that the appellant has given them.

The court deliberated whether the agreement would have bound Toohey, and if he was bound, it was within his right to refute the title shown by Gunther. Other cases decided after this one has also supported this view. A tie that is attaching to licensed property such as the hotel by Gunther through a mortgage has the possibility of enduring beyond the redemption. A case in point is Abbot v. L.D. Northern and Co., a case under the jurisdiction of New Zealand courts.

Negative Pledge

According to Sykes, a negative pledge can be conceptualised as provision in a contract which is supposed to safeguard the property of one of the parties. One of the parties in the contract is prohibited by this clause to create any form of security interest on some assets that are named in the clause. For example, the clause may provide that the provider of the security, such as the borrower, is not allowed to create security interest out of the same property or asset that they have already used as a security by another lender.

These pledges are provided for in security documents that are drawn between the two parties. The aim is to safeguard the interests of the lender, or the beneficiary of the security interest. This is given the fact that, if the grantor of security interest happens to create another interest over the same asset, it may rank pari passu with the security of the original secured creditor, in this case the lending bank. Ranking pari passu means that the second security will compete with the first one, putting the initial beneficiary of the security interest at risk of losing their rights over the asset. Negative pledges provide the bank with the confidence of lending out money to corporations. This is given the fact that their interests are secured under the clause.

Sykes and Law Commission of England and Wales [LCEW] holds the view that these form of clauses are common in contemporary unsecured commercial loan agreements. The aim is to make sure that a debtor who has taken out an unsecured loan is prohibited from taking out another loan in the future with a different bank and securing this with the specified property. If the debtor happens to do this, the interests of the original lender will be put at risk. This is given the fact that the new lender will have first call on the specified assets when the borrower happens to default on the loans.

Registration Requirements for Securities and Charges

Overview

Banks are always lending to corporations and other forms of companies. This lending needs security, just like any other form of lending to individuals or otherwise. It is noted that the bank needs to properly register the securities that they are creating over assets that are held by a company. This is to ensure that the securities are enforceable against liquidators and administrators in the event of a default.

The requirements for this registration are to be found in the Corporations Act section 262. When a security is not registered, it is ranked below others which are registered when it comes to prioritising. When a liquidator or an external administrator is appointed under the law, it is noted that the securities that are not registered are likely to be disregarded, putting the lending bank at a disadvantage.

Requirements for Registration

The following are the charges that are required to be registered under section 262:

  1. A floating charge that is drawn on a property or undertaking held by the corporation. This includes even charges drawn on parts of properties
  2. Also, a charge that is drawn over a share capital that is uncalled should also be registered
  3. A charge drawn on a call on shares which are made but which have not been paid
  4. The banks should also register a charge that is drawn on a personal chattel. This includes future chattel, but does not hold for a ship that is registered under the Australian legislation on title to ships
  5. The banks should also register a charge made on goodwill, patent, trademark copyright or such others
  6. A charge on a book debt should also be registered under the Australian Corporations Act, section 262
  7. A security that can be marketed, and which the bank has created a charge, also needs to have such a charge registered.
  8. Charge on crop and on an instrument that can be negotiated but which is not a marketable security as provided for above

Remedies of Secured Creditors

Overview

There are several remedies that a secured creditor may resort to when a debtor defaults on a loan. However, it is noted that the creditor can only enforce against the borrower the rights and remedies that are contained in the security agreement that they signed before the loan was granted.

Remedies for a Secured Creditor

The following are just some of the remedies for a secured creditor. It is noted that the list below is not in any way exhaustive.

Mortgage

When the security is a mortgage, the lender has the following option:

Foreclosure

This is whereby the bank or any other secured lender repossesses the mortgaged asset and disposes of it, through selling or otherwise, to recover the borrowed amount. To carry out this remedy, the lender usually engages the services of a lawyer, who will initiate the foreclosure process. The mortgaged asset is valued to assess its market worth.

If the worth of the property fails to meet the money that the mortgagor owes the bank, the lawyer for the bank may request the court to make the debtor meet the shortfall.

Repossession of a Security through the Courts

The secured creditor may also seek the intervention of the court in repossessing the security. This is referred to as replevin, which may take two forms.

Exparte Replevin

This is when the lender repossesses the asset without giving notice to the borrower. This form of repossession is not common in most jurisdictions. It is provided for in special circumstances, given that many jurisdictions require that the borrower be notified of the intention to repossess. This is for example in special circumstances where the security agreement provides for the creditor to take such an action.

Ordinary Replevin

This is whereby the debtor is notified by the creditor before repossession. It starts by having the creditor making a formal complaint to the courts.

In a nutshell, the remedy of the creditor is executed through the courts. The creditor has the option of informing the debtor, or repossessing the security without any notice given. This is in accordance with the provisions of the law and the security agreement between the two parties.

Problems of Enforcement

Overview

It is a fact beyond doubt that a secured creditor is better placed when it comes to recovering their money. The security means that the risk of shortfalls and losses are greatly reduced. However, there are several challenges that the secured creditor encounters when they are trying to carry out the remedies they are entitled to.

Problems of Enforcement

The following are some of the challenges that secured creditors face when they are trying to repossess assets secured or to execute the remedies they are entitled to:

Debtor is a Protected Species

It is noted that the debtor in most jurisdictions is protected under the law. There are rights and privileges that they enjoy, and which should not be violated by the creditor. As such, as much as the secured creditor has the right to repossess the security, there are legal provisions that tie their hands down, reducing their options in recovering their investment. It is noted that the debtor is a protected species under the law.

Debtor Protection: The Case Study of Home Owner and Debtor Protection Act of 2010 in Scotland

Scotland provides for a classical analysis of debtor protection under the law. According to this act, all the repossession cases should be settled in court, meaning that exparte replevin is denied to the creditor. The creditor has to go through the courts, and it is the court that should approve the repossession of security.

The bank, or any lender who wishes to repossess, is required to prove to the court that they have tried other channels in recovering their debt to no avail. In other words, the secured creditor should prove that they have no option but to repossess the asset secured. The law further recognises that the home owner, or the ordinary debtor, may be intimidated by the court process during the repossession hearings. As such, there are provisions that the home owner have a legal representation in the court, and this greatly affects those secured creditors that would wish to repossess a debtors home.

Undue Influence

If it is proved in a court of law that undue influence was exercised by one party in the signing of the security agreement, the bank may be unable to repossess or execute the remedies it is entitled to. This is especially so if the debtor is able to prove that they were subject to undue influence from the bank. It is noted that undue influence exists where one party in an agreement exploited the other party, and if the exploiter happens to be the lender, the debtor may obtain a court injunction voiding the security agreement that they signed with the bank. For the security agreement to be annulled by the court, the debtor must be able to prove that they suffered negatively from the provisions of the agreement.

A case in point is that of Lloyds Bank Ltd v. Bundy, a court of appeal case in 1975. In this case the court found that the banks managers has exerted undue influence on the defendant, making him provide his only house as security to his sons company. The bank wanted to repossess the defendants house, but the court found that the bank had no rights to do so. This is given the fact that the defendant was unduly influenced by the bank managers.

Another is National Westminster Bank v. Morgan in 1985, where the court found that a bank manager had unduly influenced Morgans wife into agreeing to sign for the house as a security to Morgans business. The bank manager did not advice the wife to get an independent advice regarding the matter.

In both cases above, it is noted that actions by the lender when drawing the security agreement are seminal in informing their right to remedy.

Unconscionable Conduct

Unconscionable conduct is said to have taken place when the terms and provisions of a contract are found to be very unfair to one party in the agreement. In the case of a security agreement, the terms may be unfair to either the lender or the borrower.

This is another challenge that faces a bank or any other lender in the process of executing their remedy. If the debtor is able to prove to the court that the security agreement is an unconscientious dealing, the court may negate the agreement, and grant the debtor the right to escape the agreement.

A case in point in Australia is that of Commercial Bank of Australia Ltd v. Amadio, which was decided in 1983. The facts of the case were that the Amadios, an elderly Italian couple, had secured debts accrued by their sons business which was failing. The couple had poor command of the English language, which was used in the contract. The son misled t

Introduction

Spain is in South West of Europe. It has an area of 504,750 square kilometer. It had estimated population of 40,341,000 as of 2005.Its capital is the largest city namely Madrid. Some important cities in Spain are Valladolid, Burgos, Salamanca, Toledo and Badajoz. Great regional diversity is being displayed by the Spanish people. Chief languages spoken in Spain are Castilian, Catalan, Galician and Basque. Spain has a sizeable Muslim minority population of about 1 million. Agriculture is the chief occupation of Spaniards. Spain is the global leader in the production of Olive oil. Further, it is the largest producer of oranges, lemon and strawberries in the EU. At Rio Tinto, copper is expansively mined. Iron & Steel, textiles, automobiles, chemicals, electric motors and machinery are the chief industries in Spain. (The Columbia Encyclopedia).

Spain is in South West of Europe.
Figure 1. Spain is in South West of Europe.

Though, Spain has achieved many great economic strides in the recent years but it is still trailing behind majority of Western Europe. Since 1950, Spains industry sector witnessed rapid development and Spain is having massive trade imbalance as of date.

Since 1975, Spain is having a constitutional monarchy. Cortes is the Bicameral legislatures which are elected once in every four years through provincial elections. Cortes is having power to approve, cancel or reform laws and to endorse international treaties. (The Columbia Encyclopedia).

Spain Banking System

The continuous economic crisis that started in 1975 had a devastating effect on the small private banks in Spain. As the result, many of such private banks have to be rescued by the Bank of Spain. Some small banks were merged with healthier and bigger banks. Market share of Spanish banks were under threat due to Spains accession to EC in 1986 and this had opened the doors for foreign banks to extend their operation in Spain. As an economic reconstruction process, streamlining of regulations and liberalizations was announced which was followed by mergers and new marketing strategies to attract depositors.

Merger was carried in such a massive scale that there were more than hundred private banks in the early 1970 which were reduced to just over thirty private banks by the mid -1990s.

The biggest merger was the merger between Banco de Bilbaoand Banco de viscaya and between Banco Hispanoamericano and Banco Central. The government owned Banco Exterior was merged with the other financial institutions in the public sector which was known as Banco Argentaria. Further, Banesto, a small private bank which was in trouble was acquired by Banco de Santander. Thus, these merged banks are called now as big four.

Before this consolidation of small private banks, Spain had large number of branches as compared to any other nations in the EU. Further, Spanish branches employ on average fewer staff than other nations and hence, the productivity in terms of clients per employee is high as compared to other banks on global basis. Further, retail banking has been the mainstay of the Spanish banks since bank and building society deposits still account for over half of the household savings in Spain.

During the recession in the early 1990s which had significant impact on Spanish banks as they have minimized their margins and to account for more bad debts. Due to siphoning of funds by Mario Conde in 1993, Spain banking system had almost collapsed and due to this, Banesto went to near verge of bankruptcy.

The year 1995-96 witnessed some improvements in the performance of Spanish banks. Further, net interest margin which is the difference between interest paid and interest earned was absorbed by the increased competitiveness as the ratio of capital and reserves to total assets was high by European standards and then profits have recovered drastically. Now, Spanish banks have also of late increasing their stake in strategic sectors in the areas of telecommunications and electricity. (Rodgers: p. 48).

Fully integrated with international financial markets, Spain has a diversified modern financial system. The financial system of Spain includes stock, credit and financial markets and precise derivatives market which include futures and options supported on diverse properties.

The Spanish legal framework has undergone transformation in banking and insurance services due to the creation of the EU single market. EU edicts controlling the solvency ratio and equity of credit institutions, and the Second Council instruction on banking synchronization has been perused by Spain. Spain has also embraced EU edicts on the insurance services and sureties market.

The banking industry of Spain has witnessed the improvement due to improved Spains economic climate. Interest rates in Spain are very low as compared to other member countries of EU. Due to cut throat competition in the banking market, interest rates in Spain have been brought down. Spanish banks are having good capital base.

It is to be observed that the richest private banks in Spain like Banco de Bilbao, Banco de Santander Central Hispano and Banesto have invested their funds in the radio, television and press. (Stanton, p. 99).

In Spain, the retail banking is dominated by two big banks namelyBanco Bilbao Viscaya Argentaria (BBVA) and Banco de Santander Central Hispano (BSCH). In less than 10 years, the above banks turned to be the largest commercial banks owned by foreign companies in Latin America and positioned themselves as largest bank in the new single European market for financial services. It is to be observed that since 1994, the Spanish banks have acquired poignant market shares and assets in Latin America. In EU region, both BSCH and BBVA are among the four largest banks in regard to their market capitalization. (Guille 202).

Adventurism of Spanish banks in Latin America is not only path breaking but also breathtaking since very rarely banks tried to influence mass-market retail banking in so many foreign nations. (Tschoegl, 1987).

Development of Banking Law in Spain

Spain economy is being influenced by three top forces namely the church, the military and the banks. (Munoz 1969). In the Franco regime during 1940 banking laws were enacted in such a way that banks in Spain could not attain growth in domestic level except through acquisition. The new banking law that were enacted in 1962 facilitated Spain banks to venture into other financial services and to have to stake in other manufacturing and media companies. This universal replica ultimately facilitated the top banks to structure business groups around them. The new banking law of 1962 also facilitated for the growth of cooperative banks, savings banks and credit institutions with robust regional roots. Further, during 1960, Spain government also established scourge of private banks namely the official credit institutions as its policy decision to develop agricultural and industrial activities. In 1994, the development of Law of Autonomy offered the Bank of Spain more powers and autonomy to bring monetary stability to Spain. It is to be noted that Spanish banks were ushered a high degree of independence and rights and due to this, they turned to be one of the founding pillars of support for the Franco regime. (Perez 1997 60). The Royal Decree 1245 dated July 14, 1995 regulates the Spanish legislation pertaining to the incorporation of banks. As initiated by legislation issued during March 1994, executing the Secondary EC command on coordination banking, the Credit financial establishments have been authorized to function in Spain. (Guille 204).

Spains Financial System

Financial system of the Spain could be grouped as per details given below:

Bank of Spain (Central Bank of Spain)

The Central bank of Spain occupies the pivotal part in the administration and management of commercial banks and fixed deposit-accepting financial institutions. The Bank of Spain functions as an investment banker to the banking system and government, oversees maneuvers of other credit institutions and commercial banks, and oversees the information system that is being centralized, and standardizes controlling measures of foreign exchange and markets for foreign exchange. Through the amendment to the Law 13/1994 which was amended by Law 12/1998, which makes sure that full consolidation of the Central Bank of Spain in to Central Bank System of the Europe. As per the schedule of implementation by Monetary Union of Europe, since January 1999, the Central Bank of Europe has had sole accountability over exchange policy and monetary transactions. Before nationalization, Bank of Spain was known as BANCO DE ESPANA.Though this bank was nationalized in 1962, it is however now out of control from the clutches of Spain government and now it is functioning with autonomy and freedom. It is the nations central bank and is under the governance of the provisions of Ley de Autonomia del Banco de Espania. As the central bank of Spain, it is responsible for controlling the foreign currency reserves and to determine the exchange rate policy. It also supervises the role of the clearing banks in Spain and may levy sanctions on those banks which do not adhere with its policies and regulations. It also controller of issuing coins and notes and is the official bank of the autonomous regions and state. (Truscott & Garcia, p. 27)

Private and savings banks

Commercial banks in Spain include the following categories:

  • Savings banks
  • Spanish and foreign banks
  • Rural savings banks or Credit cooperatives

Savings and private banks are significant due to their dimensions of trade and since their transactions envelop all sections of the economy. As of December 31, 2004, the register of Bank of Spains contains 349 credit institutions. The credit institutions comprise credit unions, savings banks, private banks, financial institutions, foreign banks branches including 2 U.S. banks which are headquartered in non-EU countries. These abovementioned banks own about 17,501 branch offices with a mean of a dozen offices per each 10,000 dwellers over than two decades. Merger between the many Spanish banks have taken place so as to consolidate their part, their standing in tune with the single market for whole of EU for banking services. Many of these Spain banks also stretch their global existence, particularly in Latin America.

Majority of Spanish banks offer a wide spectrum of services both to individual customers and corporate, international financing which consists of loan disbursements and collections.

The Confederation of Savings Bank in Spain is consists up of 12 regional savings bank federations and46 confederated savings banks, with about sixteen thousands branch offices. Savings banks are entrenched banks drawing a considerable quantum of personal savings in Spain. Savings bank in Spain lend mostly to private customers by way of loans and mortgages. These savings banks are also vigorous in funding major private and public works by purchasing and subscribing debt securities with fixed-income.

The Royal Decree 1245 dated July 14, 1995 regulates the Spanish legislation pertaining to the incorporation of banks. At the suggestion of the Bank of Spain, the Ministry of Economy gives its authorization to carry out banking activities. Foreign banks already permitted to function in a different EU member nation do not require permission from the Central Bank of Spain to establish a representative office or branch in Spain. For both Spanish and foreign companies, the circumstances of access to the Spanish financial system are the same. (U.S Embassy Trinad)

Banco Zaragozano

Banco Zaragozano is the eleventh largest private banking group that operates all over the Spain. It was established in 1910. It has around 361 branches all over Spain. In the year 2002, Zaragozano had posted a net profit before tax of ¬ 67 million. It has a high rank of loan portfolio with approximately half of its lending in mortgages and has a very low quantum of non-performing assets to total loans as contrasted with the average standard for any Spanish banks. Zaragozano was acquired by Barclays Bank S.A in Spain in July 16 2003 which is a subsidiary of Barclays Plc. (Form 6-K 2003).

Barclays Bank S.A

Spains tenth largest private sector bank is the Barclays Spain bank as of December 2002. It is strongly distinguished for its strand brand image and track of innovation. It established in the year 1974 its first representative office in Spain. It has now more than 165 branches of its bank all over the Spain. Barclays Spain bank is rather distinguished from its innovative products like Unit Linked Products, money market account, a remunerated mortgage and guaranteed funds associated to the IBEX 35 INDEX. In the year 2002, Barclays Plc posted a net profit before tax of ¬ 59 million.

Barclays Bank SA has also a strong presence in Spain mainly through Barclaycard International and chiefly by channelizing through its investment banking arm namely Barclays Capital. Barclays Capital was successfully raised capital of ¬ 7.2 billion and was adjudged as the first in debt financing in Spain for the second consecutive year.

Thus, the acquisition of Banco Zaragozano by Barclays Bank SA symbolizes the Barclays strategic precedence which is to make inroads into both commercial and retail banking presence in chosen European markets. The interlinking of banking operations of Banco Zaragozano and Barclays Spain SA will get together two identical business , fostering a strong countrywide distribution mechanism ,enabling the present customer of Barclays Spain base and net work of branches. Immediately after the merger, Barclays Spain S.A has become the sixth largest bank in Spain on assets basis and facilitates Barclays victory in the Spanish marketplace. (Form 6-K 2003).

Banco Catalana

This bank is located in Baleares and Cataluna and about 95% of its share capital is held by the Banco Bilbao Vizcaya. (BBV). It was founded by Catalan nationalist leader Jordi Pujol in 1958.

Banco Bilbao Vizcaya Argentaria (BBVA)

This bank is actively engaged in all key aspects of banking and was established in 1989 due to merger between the Banco Vizcaya and Banco de Bilbao. It was established in 1856 as an issuing and commercial bank mainly serving the banking requirements of business communities and traders in the Vizcaya which is the northern industrial and port city name after which it was christened. It had become active banker for the steel making Basque Country. Both Vizcaya and Bilbao turned to be full-fledged commercial and industrial banks during the 1960s as Spain turned to be manufacturing economy by then. (Torrero 1991). The bank also made further acquisition of bankrupt banking institutions in the early 1980s. (Guille 209).

Banco Central Hispano (BCH)

This bank has more than 4000 branches almost in all parts of Spain. This bank was established in 1991 due to merger between the Banco Hispanoamericano and Banco Central. (Truscott & Garcia: 27) Due to its weaker capitalization, it mostly relied on joint ventures. However, this bank has been merged with the Santander. (Guille 209).

Banco Santander

The annals of Spanish banking witnessed most intriguing aspect when top three banks that dominated the pivotal roles in the expansion on the international level during 1990s.They are BCH, BBV and Santander. (Guillen and Tschoegl 2000).

Banco Santander was established in 1857 as a commercial bank specializing in the Spanish American trade expansion through the northern port city of Santander. Despite of existence of post war regulatory limitations, Santander witnessed amazing growth between 1940s and 1950s through consolidation, acquisition and had consolidated a network of bank branches on national level as late as 1970s. During 1980s, Santander competitors were in trouble due to issues relating to their acquisition. Santander used this opportunity to offer competitive products by breaking the cartel that existed between major banks in Spain. Between 1993 and 1999, Santander transformed the Spains retail banking by marketing mutual funds, high-yielding savings accounts and low interest bearing mortgages. Santander introduced first telephone banking in Spain in 1993. Banco Santander Group was able to climb top of the domestic banking in Spain due to its acquisition of Banestos assets which had high density of bank branches in rural Spain.

Santander started its international expansion in 1980s. It has acquired Banco de Comercio e inustria of Portugal in 1990s. In 1991, it acquired about 14% of Firs Fidelity Bancoroporaton for $ 650 billion in U.S.A. (Guille 208).

Other Credit Organizations

  • As initiated by legislation issued during March 1994, executing the Secondary EC command on coordination banking, the Credit financial establishments have been authorized to function in Spain. These are credit entities are dedicated in some specific asset products and theses institutions cannot accept public deposits and other can engage on in lending, leasing, factoring and loans of mortgage.
  • (Institute for Official Credit).ICO is the designated institute which functions as the Spain governments investment bank and agency of finance. (US Embassy Trinidad).

Organizations Dealing with Investments

  • Cooperative organizations for investment:

These are companies which are trading in profitable securities and dealing in assets and properties.

  • Speculation funds: money market assets, marketable instruments, mortgage securities, assets & properties, retirement funds and plans.
  • Business seed capital (venture) companies and funds.
  • Investment organizations of other types.

Spain has initiated various measures to enhance its brokerage and investment institutions. Financial reporting to the public is made compulsory by the regulations governing investment entities. Regulations also extend its surveillance to novel characteristics of investment entities like seed capital (venture) companies and funds. Moreover, Spain has established tax holiday or concession initiatives to eradicate the additional tolls concerned in employing this mechanism for investments.

In Spain, funds for property investment do also subsist and thus carrying out the method of adjustment to and homogeny with such collective investment instruments. (US Embassy Trinidad).

Spains Money Market

Bank of Spain has issued of short-period instruments which is offered through Spains money market which are subscribed by finance companies, banks and operators of money market.

Due to the greater flexibility and increased liberalization of the financial system of Spain, the market for money has become more and more significant. In Spain, the states debt instrument also plays a significant role and both foreign investors and resident are the major players in this sector. Spain is considered to be an attractive market for Spaniards living in foreign countries as constructive tax schemes for investments in these financial instruments is likely to fetch more financial incentives to them. (US Embassy Trinidad).

Market for Credit in Spain

The market for credit in Spain is maneuvered through private banks, which lure many corporate and private savings and employ their finances to offer funding for the projects in private sector. These Spanish private banks also function as underwriters and investors in the nations securities market. They regulate their debt repaying ability both by money market and transactions by inter-banks. Spanish companies feel comfort to obtain financing from abroad due to liberalization of capital movements in the EU.

Spanish Securities Market

Stock Market of Spain is made up of 4 major stock exchanges. Stock exchanges in Spain have sustained a process of overhaul by expanding other than dealing only in stock and bond issues which have introduced new means of functioning and novel varieties of financial securities.

Top Spanish banks and notorious private companies have listed their shares on the Spanish stock market. The Spanish branches of foreign banks have also listed their promissory notes, guaranteed bills issued and certain foreign companies shares. In the Spanish market, some non-resident entities are authorized to issue bonds denominated in euros which is known as matador bonds.

Market regulation in Spain system is footed on a U.S.A / British replica. Its main goals are to safeguard the Spanish market and small investors. Spanish stock exchange operates on a single computerized system and it is a centralized continuous stock market. Insider trading is an offense and offenders will be penalized. Spanish stock exchange system is supervised by a National Stock Exchange Commission and it involves itself in developing its regulations.

The Spanish stock market operates in an aggressive financial instrument market which has a 3 day system for settlement. New warrant options, index and hedging instrument are accessible and trading on credit is permitted. Moreover, the government has introduced more comprehensive and stricter rules and regulations in respect of takeover bids. In Spain, some other headstart growths for the securities market which include the institution of industry for swaps, futures and options and there exist an unauthorized secondary market for dealing especially in fixed-revenue assets. These new developments have ushered the Spanish financial market safer and apparent.

The collective Securities Exchange in Spain, which includes Bilbao, Barcelona, Madrid and Valencia comprises of either the fourth or fifth top-most stock exchange in EU and either eighth or ninth in global based upon which index it is registered. (US Embassy Trinidad).

Control Measures of Foreign Exchange Transactions in Spain

The liberalization of the Spanish financial sector has been achieved by the espousal in latest periods of necessary EU ordinances. For instance, capital movements and exchange controls are now fully relaxed. Spain implemented many key Royal Decrees (RD) from 1991 to 1999 and they were:

  • Spanish investment abroad (RD 664/1999).
  • Foreign dealings through directives made by RD 1816 during December 1991 updated in by RD 1638/1996.

Some of the salient characteristics of Decree by Royal through 1816/1991 are:

Clauses regarding protection

Under outstanding scenarios, the Spanish law permits the government of Spain to limit or prohibit some non-residents financial transactions. If the transactions influence Spaniards stakes or if they influence the relevance of procedures perused by international agencies of which Spanish government is one of the member. If find it necessary, these safeguards can be invoked by The Ministry which looks after economy or the Council of Ministers in the national interest of Spain.

Documenting transactions

Spain banks must document foreign exchange money transaction mainly for statistical purposes.

Declaration to the Bank of Spain

When some transactions happen between Spaniards and non-residents such as: funding and receipts for over a period of twelve months, and deferral of payments, offsets of inward remittances and outward remittances on financial and commercial dealings and funding or loans received from foreign residents , in such cases , information must be given to the Bank of Spain.

Prior notification in case of certain foreign exchange transactions

This regulation demands advance notification for the export of Spanish currencies, coins, and checks payable to bank on presentation, in either foreign currency, or local to non-E.U. nations for amounts whenever it exceeds ¬6000 per trip, per person. Advance information is also needed for foreign exchange remitted into Spain if it is more than ¬6000.

Advance permission for export of Spain currencies

Advance authorization from administration is needed for the export of Spain currencies, coins, and checks payable on presentation, in either foreign currency or local, for sum over ¬30,000 per trip, for each person.

Bank Transactions

Foreign companies and individual not residing in Spain can open accounts in Spain banks under the analogues stipulations and terms as applicable to residents. The only prerequisite is to execute proper documentation. However, residing outside Spain status has to be documented while opening of the account in Spain banks.

It is to be observed that for the purpose of exchange control purposes, residents are:

  • Corporations with their registered offices in Spain.
  • Persons who live in Spain.
  • Subsidiaries or branches of companies of foreign origin or of persons living in foreign countries.

Table 1. Details of US banks in Spain.

Name of the Bank Name of the city
Bank of America, N.A. Madrid
Citibank Iberia, S.A. Alcobendas (Madrid)
Citibank, N.A. Madrid
JP Morgan Chase Bank Madrid

Table 2. Spanish Correspóndenos

Name of the Bank Name of the city
(BBVA)Banco Bilbao Vizcaya Argentaria Madrid
Banco Popular Español Madrid
Banco Santander Central Hispano (SCH) Madrid
La Caixa Barcelona

General Availability of Bank Financing

In Spain, for short and long-term capita needs, Banks are the primary source. It is some what easy to avail short-term financing. Spain banks are very vigilant about lending long-term and medium funds. Very big corporations with good financial track record can easily avail these kinds of loans.

Some of the short term loans advanced by banks in Spain are 1) polizas de credito, a short term loan agreement 2) efectos financieros, loans advanced against bills drawn.

Trade instruments and commercial bills are normally enchased or discounted if an overall credit line has been established upon by its client and by the bank. Banks normally advance these types of credit for maximum period of twelve months and favor that short-term paper of one month, 45 or two months is passed through the line.

Savings banks in Spain offer chiefly financial assistance for projects well within jurisdictions. Credits thus advanced are intended for the financing of agriculture and long-term housing and for those schemes that generate more fresh jobs and enhance the base structure of the province.

The Spain government supported agency namely Official Credit Institute (ICO) advances special terms on loans for smaller firms and for industrial restructuring. European Investment Bank offers credits in Spain and these loans can be availed for investment schemes intended to the growth of chosen regions and sectors.

Export Financing Availability and Insurance Coverage

For exports to Spain, many Spain based private banks and clandestine financial institutions such as forfeiting, confirming services and factoring are available for financing their exports. Various agencies of federal, local government and state in U.S.A offer various categories of schemes for exporter. Some export assistance schemes are guarantee schemes that demand the involvement of a permitted lender. Other U.S government export programs offer grants or loans to a foreign government or the exporter.

Spain based commercial banks employ insurance schemes and government guarantee to minimize the risk connected with loans to exporters.

Conclusion

Spain economy is being influenced by three top forces namely the church, the military and the banks. (Munoz 1969). In general, banks will develop in direct relation the size of their nations economy. Hence, a bank is required to support a nations economic development. Spain banks not only help the economic development but also help to nourish both agricultural and industrial sector of Spain. Thus, role of banks in economic development of Spain is to be appreciated and lauded.

References

  1. Spain. The Columbia Encyclopedia. 6th ed. 2007. Questia.
  2. Farrell, Mary. Spain in the EU: The Road to Economic Convergence. New York: Palgrave, 2001.
  3. Form 6-K. 2003.Details of Acquisition by Barclays Bank Plc.
  4. Guillé, Mauro F. The Limits of Convergence: Globalization and Organizational Change in Argentina, South Korea, and Spain. Princeton, NJ: Princeton University Press, 2001.
  5. Ize, Alain. Capitalizing Central Banks: A Net Worth Approach. IMF Staff Papers 52.2 (2005): 289+.
  6. Kumbhakar, Subal C., Ana Lozano-Vivas, C.A. Knox Lovell, and Iftekhar Hasan. The Effects of Deregulation on the Performance of Financial Institutions: The Case of Spanish Savings Banks. Journal of Money, Credit & Banking 33.1 (2001): 101.
  7. Menendez-Alarcon, Antonio V. The Cultural Realm of European Integration: Social Representations in France, Spain, and the United Kingdom. Westport, CT: Praeger, 2004.
  8. Ortiz-Griffin, Julia L., and William D. Griffin. Spain and Portugal Today. New York: Peter Lang, 2003.
  9. Rodgers, E.J. Encyclopedia of Contemporary Spanish Culture. London: CRC Press.2002.
  10. Stanton, Edward F. Culture and Customs of Spain. Westport, CT: Greenwood Press, 2002.
  11. Truscott Sandra and Garcia, Maria J. A Dictionary of Contemporary Spain. London: Taylor & Francis.1998.
  12. U.S Embassy, Trinad. 2008. Doing Business in Spain. A Country Commercial.
  13. Verdier, Daniel. Moving Money: Banking and Finance in the Industrialized World. Cambridge, England: Cambridge University Press, 2003.

Appendix

Financial 1: Financials of Bank De Espano ¬ in Millions

Posted in Uncategorized

Introduction

Economic performance is attributed to the association between various socio-political and legal institutions that have specific contributions to gross domestic products (GDPs) of different countries. The role of institutions in the society has been studied in different disciplines including social sciences, economics, philosophy, politics, and geography. This essay provides a critical insight into the meaning of institutions by critiquing the evidence of their formal effects on economic performance.

What are Institutions?

The term institution has been broadly used in social sciences as mirrored in the emergence of intuitional economics. Many definitions have been put forward about the term institution. However, this paper adopts the Norths definition of institutions as humanly devised rules constraints that shape peoples interactions. They are rules of the game prevalent in the society that control human interactions (Efendic, Pugh, & Adnett, 2011). Also, North elaborates institutions as formal constraints comprising laws, formal rules, and constitutions. It also comprises informal constraints encompassing norms of behavior conventions and code of conduct (Efendic, Pugh, & Adnett, 2011). The formal and informal constraints have enforcement characteristics. Additional works of literature show that the rules are devised by humans with a view of constraining and enabling specific actions. Indeed, a substantial amount of literature reveals a consensus that institutions have a great influence on the economic performances of nations. Institutional determinants of economic growth fall under political, legal, executive and social categories as manifested through the international trade openness, court systems, financial regulation, corruption, democracy, protection of property rights, and general market principles. The institutional factors have been deemed as crucial contingencies that leverage the economic performances of different countries around the world. Efendic, Pugh, and Adnett (2011) suggest that the economic parity that exists between the developed and less developed nations is contingent on the aforementioned institutional factors. An effective institutional environment is characterized by the economic integration that results in a generally positive performance.

Institutions are significant elements that shape the degree of economic freedom in many countries to create an ample and conducive environment for progressive macroeconomic growth (Tamilina & Tamilina 2014). Various empirical studies that have analyzed the relationship between economic freedom and economic growth confirm their positive effects on macroeconomic performance. A measurement of the economic growth is obtained from the gross domestic product (GDP) per capita income of a country (Elgin & Oztunali, 2014). In this regard, countries that have favorable economic freedom portray higher GDP dynamics compared to those countries whose institutions have not created a favorable climate for economic freedom. Policymakers in different nations across the world influence the degree of economic freedom. Those policies can either improve or reduce the economic freedom. This state of affairs affects the economic development (Elgin & Oztunali, 2014). The following is an in-depth analysis of institutional implications on economic performance as empirically manifested in selected countries.

Political Institutions

Political institutions have a sound effect on the economic performances of diverse countries. The effect of political stability has been shown empirically to influence economic performance. For instance, several studies carried out in Greece during 1960-1995 revealed that the relationship between economic performance and political instability was negative. However, political stability had a positive correlation with economic development. Political institutions that are characterized by political strikes, coups, assassinations, and terrorist attacks have shown negative economic growth (Efendic, Pugh, & Adnett, 2011). This observation can be explained economically in that both local and foreign investors tend to avoid countries where the political climate is unfavorable for business operations. Investment is contingent on the prevailing political temperatures of a country. In countries where terrorism is a major challenge, venture capitalists scare away to politically viable countries. In such countries, the unemployment rate remains high given the low rate of investment. In such situations, investments that lead to job creation in politically unstable environments tend to below. Instability has local implications in that the producers and feeders of the countrys economy only seem to care about their lives rather than the economic activities. Political regimes dictate the legal systems of a country (Tamilina & Tamilina 2014).

Effect of Financial Institutions on Economic Performance

According to Ahmed and Mmolainyane (2014), financial policies can stimulate or slow the economic growth of a country. Financial liberalization can leverage the economic performance of a country to a great effect (Ahmed & Mmolainyane, 2014). It refers to the policy of removing regulations that restrict how the financial systems operate (Compton & Giedeman, 2011). Financial liberalization encompasses numerous reform-based aspects that have been deemed the major contributors to the economic emergence in China. This part brings an evidence-based overview of the effect of financial liberalization on the economic performance of China. First, diversification of financial institutions is a phenomenon experienced in the country. For instance, in 1978, the formal financial system consisted of one bank, the PBC, whereby deposit receivership, acceptance, and channeling was a government credit allocation policy development (Ahmed & Mmolainyane, 2014). The following three decades saw a major reform of the financial system with the emergence of the four state-owned banks (SOBs), urban credit cooperatives, regional shareholding banks, rural credit co-operatives, and city commercial banks. Also, China joined the World Trade Organisation (WTO), the joint-stock reform of state-owned banks. Secondly, China experienced the development of a financial legal framework that facilitated the transition from a bureaucratically controlled system to one with a high degree of transparency, particularly under the impetus of policies to scale monetary relations internationally (Law & Azman-Saini, 2013).

Moreover, the reform of credit quotas was a noticeable milestone in China that realized a change over from a centralized tool of the government to an autonomous credit allocation role of the state-owned banks in 1984. The specialized banks had a degree of freedom in the use and allocation of funds although it was not until in 1998 that the PBC scrapped the credit quotas altogether to adopt the state-owned banks. This reform was a major boost for the local Chinese investors who wished to seize loans and credits. The deregulation of the interest rate is an inevitable reform that propelled the economic growth of China (Compton & Giedeman, 2011). In this regard, the state-owned banks were allowed to vary rates within a band that was slowly broadened and eventually relaxed in 2004. The deregulation of the SOBs gives them an autonomous status in determining the interest rates. This situation improved the flexibility that extended to borrowers and prospective investors. More people were encouraged to access the funds for economic development.

Over the recent decades, China has intensified its openness to the rest of the world. This significant achievement was realized through the relaxation of strict foreign exchange controls. This relaxation encouraged foreign direct investment (FDI) for fourteen coastal cities during the 1984-85 as part of the opening process to the rest of the world. Under the impetus of the world trade organization (WTO), Chinas membership was outspread to encompass its banking, foreign exchange, and capital markets (Compton & Giedeman, 2011). From the foregoing, it is worth noting that countries whose financial institutions are characterized by liberalization experience a far higher economic performance than those that have strict financial regulations. In the 1950s and 1960s, it was widely perceived that maintaining interest rates artificially low induced economic development (Law, S & Azman-Saini, 2013).

Protection of Property Rights

The protection of private property rights is a vital component of economic institutions. The degree of its effectiveness can either stimulate or derail the economic performance. For instance, the effective protection of private property rights enables economic players to make viable plans as it gives them sufficient incentives to invest in capital. Also, it shrinks transaction costs both in the economic transactions and political decision-making (Qerimi & Sergi, 2012). The economic actors are willing to enter exchanges that they anticipate reaping mutual benefits. In this regard, well-protected property rights in conjunction with interference-free markets are enough reasons to woo the economic investors to venture confidently as the retrieval of gains remains certain. This situation extends the economic values to the society who benefit from more jobs, increased productivity, and availability of goods. Economic theorists such as Sahakyan and Stiegert (2012) assert that economic growth holds that the actions and interactions of human resources are productive. A regime that acknowledges the significance of well-defined property rights is an important incentive for people to indulge in productive behavior and trade rather than in disparaging, manipulative, and purely redistributive practices (Sahakyan & Stiegert, 2012). As a result, a system that provides favorable policies regarding the protection of property rights aligns the investors interests with the societys preferences to encourage cooperation; hence, it fosters the economic growth (Qerimi & Sergi, 2012). On the other hand, predatory behavior limits economic growth for the levels of productivity is low.

Property rights are deemed secure when the industry actors are entitled to use and transfer what they rightfully own without any aggression whatsoever including the government itself. They are manifested in different perspectives including a cluster of institutions that ensure efficient enforcement against public and private predation such as constitutional restrictions to expropriation, taxation limitations, and parliamentary procedures. Sahakyan and Stiegert (2012) positively correlate property rights with the economic performance of a country. However, various pieces of literature have also revealed that such correlations are weak or non-existent. The improvements in property rights rankings do not correlate with economic performance since different countries exhibit varying results that are crucially contingent on other economic parameters (Sahakyan & Stiegert, 2012). All in all, a strong government should enforce the property rights to promote social and economic interactions. However, the strength of the government or political regime cannot be overlooked as it has the potential of influencing policies regarding property rights. Some regimes can pose a threat to the property rights that it is supposed to safeguard. This situation is well-explained when the actions of a new regime seem to reverse the actions of the previous regime (Zoogah, Peng, & Woldu, 2015).

This practice can encompass imposing restrictions that infringe peoples freedom of ownership of private property thereby posing a threat to the industry actors who can view the constraints as mechanisms to narrow their profitability margins and scaling. The ultimate impact of such reversal practices is reduced economic growth as employers reduce the workforce expenditure in a bid to retain their profitability. This situation results in unemployment in the society and country as a whole. Countries where property rights are highly respected post promising economic growth statistics compared to those countries with weak policies.

Separation of powers and change of political regimes are two crucial topics of discussion as they influence the protection of private property rights (V+tola & Senfelde, 2012). The existence of veto powers that determine the change-over of political powers can leverage the decision-making processes of important economic policies in the country. Indeed, many institutional veto players existing in the incumbent political regime of any country tend to derail the decision-making processes besides increasing the transaction costs involved in the government policy formulation processes. This slow process adversely affects the economic growth since some policies can take too long before a consensus is reached. In contrast, other researchers such as V+tola and Senfelde (2012) associate many veto players in decision-making with favorable outcomes on the part of the formulated policies because different viewpoints are brought into consideration. In such situations, many inclusive policies are likely to be discussed. V+tola and Senfelde (2012) posit that the more veto players get involved in the government decision making processes, the higher the chances of coming up with favorable policies that can stimulate economic growth, as bad policies are strongly resisted by a bigger representation.

It is undoubtedly true to say that policies made by a single veto player have a high probability of influencing the economic growth negatively as the levels of consultation are low in the decision-making process. The structure of property rights and the presence of perfection of markets determine the willingness of people to invest in both human and physical capital. Protection against the expropriation is a great incentive to invest, particularly in physical capital and durable assets. In this regard, regimes that manifest a proactive support for the physical and intellectual property rights can pull tech-savvy industries that complement specialized and durable assets. Numerous qualitative studies indicate that institutions have a profound impact on the physical capital compared to human capital accumulation and productivity.

How Political Rights and democracy Leverage Economic Growth

Political freedom has both direct and indirect impacts on foreign direct investment (FDI). Political rights and civil liberties have typically been conflated under political freedom. They have divergent implications on a countrys economic growth. The economic importance of foreign investors and international trade cannot be underrated. For a country to maximize benefits from these two international relations aspects, it has to hold political rights highly important as they influence the decisions made by international traders and investors in a particular country. The participation of a country in international trade is important as it contributes greatly to the earning of foreign exchange that in turn boosts its balance of payments (Islam, 2012). The magnitude of foreign direct investment (FDI) and international trade is contingent on the degree of political rights (Islam, 2012). A country whose political institutions are highly associated with autocratic practices will scare away investors. This situation hampers its economic development. However, democratic political processes tend to be attractive even to investors as their level of confidence in the country remains high.

Effect of Corruption on Economic Performance

According to North (1991), another institutional determinant of economic freedom and development is the quality of governance exhibited by the country itself. Governance that is highly defined by corruption has been empirically shown to hamper economic development (Ionescu, 2014). Corruption slows down the economic growth in several ways. First, it diminishes investment in physical capital and human capital levels. Secondly, corruption promotes political imbalance. Foreign direct investment is hampered when investors are aware of corruption motives of the incumbent government. The investors express a high degree of uncertainty of reaping proportionate returns on their investment undertakings in the country (Ionescu, 2014). When corruption stands out in the economy, additional supplementary costs are feasible as investors undergo bribery procedures to obtain particular favors from the government. The costs are not low as some scale up to approximately a quarter of the projected profitability of the firms awarded with those favors over others. For example, in some African countries, the exploration of oil that is done by multinational corporations and the awarding of tenders has been deemed highly corrupt and costly for the winners. Bad governance takes the ultimate blame for the adverse effects of corruption on economic growth (Ionescu, 2014). This situation happens when the rate of market openness is higher than the rate of institutional improvement necessary to regulate the transaction costs and address market deficiencies.

Corruption, which is an institutional attribute, affects the economic growth adversely by taking out monetary resources that can be attainable under rightful circumstances for economic scaling. Once perpetuated in subsequent government or political regimes, the effects move from worse to worst as more economic resources are utilized for personal rather than entire economic gain. Resources that can be deployed profitably in the country are dispersed poorly to attract personal gains at the expense of the countrys economy. Institutions marred by corruption are characterized by undemocratic processes whereby decisions are made and implemented by top officials only. Such decisions are unquestionable by the public despite the deteriorating effects they have on the economic growth of the countries. Corruption can influence the amount and configuration of public costs in ways that intimidate the development besides increasing inequality (Ionescu, 2014). Corrupt deals can be traced in the spheres of monopolistic powers and public procurement deals that encompass enormous costs and intricate technologies.

Some authors have associated corruption with beneficial economic effects. They hold that it enables citizens to elude inefficient and bad governance. Corruption stimulates the public quest for governance issues and the quality of leadership. In some situations, the citizens of countries with corrupt regimes and poor governance have been manifested engaging in reform-based demonstrations. Most of the widespread demonstrations have been an economic turning point for some countries since corrupt governance is exposed and eluded (Ionescu, 2014). Some African countries such as South Africa have reached the economic heights due to the exposition of corrupt political institutions. Nevertheless, the benefits of corruption are perceived to decline gradually as the economic institutional settings advance. As institutions shift towards achieving the economic freedom that marks the optimum point of attaining high economic performance, the demand for corruption diminishes (Lorisio & Gurrieri, 2014). The prevalence of corruption in governance is a sure sign of unsatisfactory institutional quality and shortcomings intensifying them through the irregular compensation for optimal standards and implementation procedures. In this regard, it negatively affects the decisions of economic actors via misrepresentations (Ionescu, 2014). Corruption is beneficial when economic freedom is irrelevant. In contrast, when the economic freedom is significant, corruption curtails economic performance.

According to North (1991), the quality of governance is an important determinant of the national and/or regional economic performance. The link between corruption and economic growth is determined by political economy attributes, configuration, and the prevailing degree of development. If corruption is highly centralized or configured in the government or regimes, the economic performance for such the country will remain low and highly inhibited as there exist no incentives for investment and trade. The governments that deal with corruption effectively can attract foreign direct investment besides setting up domestic and international trade involvements (Kova
evi & Borovi, 2014). The ultimate result is improved economic development in the country. Highly developed countries including the western European countries and the United States have comparatively lower levels of corruption as opposed to the underdeveloped countries that occupy higher positions in the global corruption ranking. According to annual reports on economic and corruption indices, political corruption is the prerequisite to the economic underdevelopment of countries that take the higher corruption positions (Kova
evi & Borovi, 2014). Most of the significant development projects that determine the economic growth of a country are controlled by political powers. In this regard, given a corrupt incumbent government, the levels of economic growth will continue to be very low (Lorisio & Gurrieri, 2014).

Legal Systems and Law Enforcement Institutions

According to North (1991), the economic performance is determined by the government institutions of countries including the legal systems such as the courts (Cappiello, 2010). The legal system is charged with the responsibility of overseeing the allocation of resources. The equitable allocation of resources can foster an ample economic environment that can stimulate more growth and high performance. Cappiello (2010) posits that the features and attributes of the legal systems of countries have both direct and indirect effects on the peoples economic behavior. A legal system is a system of inter-related formal institutions converging to execute three important functions including setting up rules and standards through laws and regulations for the country, reconciliation procedures, and law enforcement (Heckelman & Wilson, 2013). The legal systems extend to cater to international rules of the game including foreign market entry procedures, labor market outcomes, overseer of unofficial economies, and stock market development (Cappiello, 2010). The characteristics of the legal systems are correlated with economic performance based on a causality perspective in that their extent and functionality determine the resultant economic outcomes in those countries. The effectiveness of legal systems in countries in matters about land rights among other owners of property rights determines the peoples level of confidence and motivation to engage in economic activities that contribute towards economic growth (Qerimi & Sergi, 2012). The judicial system whose primary roles encompass conflict resolution through court cases can affect the economic development through fair and timely determination of cases. Cases that take too long can affect the economy of the country adversely, particularly when they involve investor-related issues. Unfair judgment can also scare away prospective investment activities; hence, prevent economic influx (Heckelman & Wilson, 2013).

Effects of Culture on Economic Growth

While substantial literature emphasizes the role of institutions on economic growth, Chambers and Hamer (2012) assert culture mirrors peoples way of lives including norms, beliefs, and values regarding human behavior that defines their actions. These norms have been shown to have significant effects on a countrys economic growth. The relationship between culture and economic development dates back to the Weberian Protestant ethics among other schools of thought. Weber held that the rise of Protestantism was an important event in modernizing Europe (Chambers & Hamer, 2012). Protestantism was perceived as an opposition to Christian norms that inhibited the economic accumulation and growth. It was regarded as an erosion wave of the highly held Christian norms and values of obedience, faith, and trust that characterizes the preindustrial economies with little or no economic growth (Chambers & Hamer, 2012). The emphasis of preindustrial economies was that economic development only occurred at the expense of someone else. The social-economic status and social positions in this cultural setting were regarded as hereditary and ascribed rather than achieved as suggested by the protestant ethics.

Today, these primitive cultural beliefs are still inherent in many societies. Such societies are underdeveloped and not willing to indulge in economic practices that go against the sacredly held beliefs against economic accumulation. Countries in which such cultural tendencies and practices are common to portray low economic performance. They rely on simple farming that is influenced by seasonal weather patterns. This way, the countries are marked by high levels of poverty, hunger, and little infrastructural development. Due to the globalization effects that are revolutionizing human behavior today, the primitive tendencies are declining rapidly as people embrace modernity and change. As a result, there has been a marked economic growth in such countries since people focus on personal achievement through capitalism (Chambers & Hamer, 2012).

On the other hand, Weber stressed the importance of Protestantism whose effects are experienced today by the highly developed economies such as the Western European countries and emerging economies including China and Taiwan among others. Repressive cultural norms and values have been confronted by capitalistic practices such as capital accumulation, intense individual, and firm competition over resources and markets. Modern Europe manifests the reality of Protestantism and opposition of the medieval Christianity. Individual wealth accumulation was no longer rejected mainly among the Protestant regions of Europe. The situation resulted in a subsequent economic dynamism. Similarly, it is worth noting that due to the reformative protestant effect in Europe, the Industrial revolution and development took place entirely in the Protestant regions. Webers concept has been accepted and acknowledged by many economics scholars for proving an important insight on the cultural factors that influence the economic performance. Today, it is inevitable that there exists a cultural parity between the developed economies and developing economies. Developed countries manifest cultural acceptance and significance of savings, population control, and employment of technology in production whilst underdeveloped economies still debate on practices such as population control mechanisms based on cultural beliefs and values.

Chambers and Hamer (2012) reveal that cultural parity is the reason why identical formal institutions functioning similarly in terms of positions, policies, regulations, and procedures to achieve different economic heights in Europe and other countries around the world. Moreover, factors such as urbanization, literacy levels, and access to information can be utilized to explain the differences in economic performances among countries operating under the same formal institutions. For instance, most countries colonized by the European countries use the same structure of formal governance, legal, and social institutions. However, the countries cannot match the economic development and performance of the respective colonial masters due to cultural factors (Chambers & Hamer, 2012). For instance, long after the European colonization, most Africans have not changed some cultural practices that inhibit economic growth such has corruption and uncontrolled demographic dynamics. The urbanization rates, as exemplified in the modernization theory, remain slow in the underdeveloped countries due to stubborn cultural factors that act antagonistically towards globalization and modernization. As a result, individual, national, and regional economic statuses remain away below par as compared to the developed countries (Chambers & Hamer, 2012).

Effect of Geography on Economic Growth

The subject of economic growth disparity among nations can be considered incomplete without bringing forward the geographical factor that takes a central role in international economics. Geography is a natural determinant of climate, endowment of natural resources, transportation costs, infrastructural development, disease burden, sharing of knowledge, and diffusion of technology among nations (Clipa, PohoAc, & Clipa, 2012). This part analyses how geography directly or indirectly affects the economic performance of countries about the aforementioned institutional factors. Tropical countries exhibit an average income per capita of approximately only a third that of non-tropical countries (Clipa, PohoAc, & Clipa, 2012). First, geography can have inevitably influence the incomes through its effect on agricultural production and morbidity. Geography affects the accessibility of a region particularly by sea, which gives some countries a competitive advantage over others. For instance, landlocked countries have to depend on those that have coastlines for transportation services that attract heavy transportation and custom tax costs. Goods have to pass through the countries that have seaports before they undergo other handling undertakings before transportation to the landlocked countries. Even with increasing and advancing air cargo industry, shipping services, and sea transport remain for use in the modern international trade (Clipa, PohoAc, & Clipa, 2012). Countries with access to water transport are economically better placed than landlocked countries. This situation creates an economic disparity between the two groups of nations.

Also, agricultural productivity highly depends on geographical factors. For instance, the temperate and tropical ecological zones are deemed to have an economic advantage due to their favorable agricultural climatic conditions, weather patterns, and soil features. Due to the geographical factors, different regions and countries are favored to produce particular raw materials and agricultural products that other countries cannot. This difference in resource endowment brings a disparity in the economic progress of the countries in the different ecological zones. Furthermore, due to their geographical location, some regions are characterized by natural disasters including earthquakes and hurricanes. Once such disasters occur, they cause disparaging effects on the peoples lives and the countrys economy at large. Various catastrophic effects have been caused by hurricanes and earthquakes that have crippled the countrys economies including the Haitian and Chilean earthquakes of 2010 that left the countries in dire economic needs. Endogenous growth models view natural disasters as the causal agents of negative growth progress to the affected economies. For instance, they cause massive damage to expensive infrastructural developments including roads and railways that are the backbone of the countrys trade and industry.

Besides, it leads to the death of populations of people resulting in loss of intellectual property, workforce, and leaders. According to the endogenous growth models, natural disasters result in slower growth and sometimes the economies affected consequently suffer from a deviation from the growth paths. Contrastingly, the neo-classical growth models predict that natural disasters destroy both physical and human capital. However, they do not affect the rate of technological development. They result in the convergence of nations as they display their technological capabilities in a bid to help raise the fallen economies. Geography determines disease and vector presence in different ecological zones. Governments for countries geographically positioned in areas prone to dangerous killer diseases such as Malaria spend more percentages of their GDPs on disease control and treatment. The expenditure on healthcare, which sometimes is enormous, can otherwise be utilized on other development projects.

Abstract

Many students undergo a significant change in diet and lifestyle upon entering the university. Among these changes include excessive drinking, close contact with a large number of people, and late nights. Many health experts accuse these changes in the lifestyle of causing short-term treatable illnesses while the changes in diet have been reported to have both short and long-term effects on students health.

This research seeks to establish the underlying relationship between the changes in students diet and the decision making and the influences that underpin this. In this study, both qualitative and quantitative research designs will be used, where interviews, questionnaires, and case studies will be used as the main data collection tools.

Introduction

Research contacted by various scholars has indicated that many students undergo several changes during their stay at the university. Some of the changes associated with university life include; excessive drinking, exposure to varied groups of people from different social and economic backgrounds, and changes in the time for sleep. For example, research has indicated that many university students use a good part of the night either entertaining themselves or socializing with fellow students.

As a result, therefore, the students will return to bed late in the night. These changes in the lifestyle of students during their stay in the university have been reported to have both short-term and long-term effects on both the health and social life of students.

This research focuses on the changes in students diet investigating the decision making and the influences that lead to this. The research draws its evidence from interviews contacted with eight no marketing students. It employs the techniques of group discussion which includes the elements of both qualitative and quantitative experimentation.

Basing its argument on the evidence gotten from individual research and other sources such as case studies, government publications, and health authority journals, the report will develop a market social marketing strategy to address the problem. The research specifically focuses on developing a localized plan to address students throughout England and Wales. It will make use of behavioral change theories and models to give an evidence based approach to the problem. It will go further and provide a range of tools for implementation of n intervention.

According to the health policy agenda in the UK, the promotion of healthy eating is highly recommended. However, several types of research have indicated that young people especially those in the university are more prone to poor eating habits. This discovery is very worrying given the fact that young people are an important group in society.

Establishing poor eating habits in young people means that the ill practice will be carried over to adulthood. This is a potential cause of cardiovascular and other health-related illnesses later in life. Based on this fact, this research will focus on the changing lifestyle and dietary trends among university students across the UK and Wales. It will propose some policies that need to be put into practice to develop and implement effective interventions for and with young people. The research aims at providing a summary of evidence that can be used to develop, implement, and evaluate the possible innervations to promote healthy eating amongst university students.

Literature review

Dietary trends in the university

Research into students eating habits has indicated that men are more likely to eat foods highly rich in proteins. This has been attributed to the need for male students to improve their body sizes. For instance, it has been discovered that fish and chips are among the fast foods preferred by male students. According to Dr. Ricardo Costa, male university students are prone to disordered eating patterns.

Hertfordshire confesses that the many obesity cases in the UK have been brought by poor dietary habits of children and adults. However, he is much categorical that the diet of many people changes immediately they enter the university. He gives this as his own experience and that of the majority of his colleagues to justify that living a students life will greatly affect the dietary habits of a person.

Dr. Costa, claims that male scholars are more centered on their physique not just to meet their sporting requirements but also to appear good for women. This is the current trend in the university and has influence significantly on the dieting of a university student. Instead of achieving masculine bodies through a balanced diet and exercise, Costa reports that university students are resulting in disordered eating. The scholars are said to be using a good quantity of their financial resources on dietary complements such as protein, amino acids as well as a cretin. Their diet is characterized by high proteins, low-fat meat, and eggs without the yolk. Research conducted at the University of Aston indicated that most of the students were not keen on consuming fruits and vegetables. Some students confessed that they only ate fruits for convenience.

In the UK, parents income has nothing to do with the dietary choice of their children in the university. This is because the university is a level playing ground allowing students from any social background to decide on what to feed on. The education of parents did not influence the students dietary. Apart from eating an unbalanced diet, a study including 8 undergraduate students from the UK found that three-quarters of them never took breakfast. This habit of skipping breakfast has been associated with increased risks of obesity among university students, especially to female students. Many university students in the UK use vending machines and are fond of snacking on chocolate bars and crisps. This may be reasons contributing to their habitual skipping of meals.

Health effect

Disordered eating habits by university students can serious health problems especially when continued for a long period. Costa cautions that these pitiable eating inclinations will make the liver and kidney of the scholars fail in their functions which involves breaking down the surplus of protein. This may eventually lead to liver and kidney failure. Furthermore, the bodies of the students may suffer from a lack of good-quality fats, leading to cardiac problems.

In addition to these physical problems, students who engage themselves in poor eating habits to gain masculine bodies are at risk of suffering from mental disorders. This will arise if the student fails to achieve their set goals. The student may start seeing themselves as inadequate and failures. They may as a result not interact well with others especially the ladies. Students who engage in alcoholism may have problems socializing with people in the long run. For instance, they may ignore their responsibilities and end up wrecking their life and that of their families.

Many university students have been discovered to have very low cooking skills. This has been associated with the availability of ready foods and takeaways in the university. The research still indicates that female students are better than male students in cooking and planning on their diet. Male students were discovered to have the highest possibility of relying on ready meals with a very low percentage of them consuming the five-a-day fruit and vegetables as recommended by health professionals.

Alcohol consumption

Research contacted by Costa to investigate the drinking rates of university students indicated that drinking rates in the university were higher than recommended by the government. According to Costa, the scholars went out once or twice per week and subsequently drank between either one or fifteen units at a distinct sitting. This was against the governments regulations, which recommends no more than two to four units for the males and two to three for the females. Unlike in France and Spain, students in the UK were unlikely to drink with a meal.

Current research indicates that social drinking is becoming common among undergraduates. This has been attributed to peer group influence within the university environment. Many undergraduates are aware of the short term effects of consuming alcohol but do not consider the long term effects. As a result of this, a high percentage of undergraduates are becoming careless about their daily responsibilities as students. They have always had quarrels with their instructors over late submission of assignments or even not attending classes in time.

Factor in Dietary Change

Changing from a home environment to the university one has been identified as a major factor influencing the change in lifestyle and dietary of university students. Studies have linked the change in lifestyle and dieting to the new responsibilities assumed by the youth as they shift from the home environment to that of the university. These responsibilities include meal planning and preparation and this has proved to be quite challenging for students who are doing it for the first time.

This discovery has been supported by the observation that students who commute from their homes to the university usually maintain a healthier dieting lifestyle compared to students living in the university environment. Results from a study conducted in five universities in the UK indicated that cooking skills were limited to undergraduates. Only the mature students proved to be competent in cooking and planning for their meals.

Results from the case study also indicated that family background and the education of parents did not affect the dieting of university students. Arnot (2010) indicates that the lifestyle adopted by students in the university is only a phase that students come out of naturally.

Babbie (2010) also suggested that the change in dieting habits among university students was due to the students transition from adolescence to adulthood. With this assertion, dietary change may be seen as consistent across all young people and not limited to undergraduates only. However, the stress caused by the transition from the home or secondary school environment and the exposure to people from different backgrounds holding different opinions concerning dieting makes the situation more complex for undergraduates. Peer pressure and its effects should also be put into consideration when discoursing about a lifestyle change among university students (Arnot, 2010).

Barriers and Facilitators to Healthy Eating

A systematic analysis of researches conducted by Adriaanse (2009) found that the main inhibitors of healthy eating include the availability of healthy foods, their prices, and personal preference. Going by this research analysis, many university students have a high preference for fast foods irrespective of whether the foods are healthy or not. Given the fact that university students have the responsibility of selecting their meals, it is evident that a combination of barriers contributes to unhealthy eating among university students. For instance, research conducted by Adriaanse (2009) suggested that while university males were motivated by media images and the need to look good for ladies, this did not contribute to their healthy eating (Adriaanse, 2009).

Instead, it increased their disordered eating with a majority of them increasing their use of supplements such as protein powder and amino acids. The need to look good also led to the consumption of protein-rich foods at the expense of fruits and vegetables by university students. Although the family background and the education levels of parents proved to not influence the choice of die by university students, availability and cost may be important factors.

The systematic review by (Papadaki, A. et al , 2007) indicated that support from parents and friends, interest, and desire to maintain a certain appearance and cooking skills were important factors contributing to eating habits in the university. The age of the student was also identified as an important factor contributing to the choice of meals among university students.

Methodology

A review of the literature above demonstrates that extensive research has been carried out to establish the cause of eating disorders among undergraduates in the UK and Wales. However, this information is limited to only a few factors, giving room for further research to arrive at a good understanding of the underlying factor influencing the change of behavior among university students. This information is however crucial if effective interventions in the change of lifestyle among University students are to be disseminated.

Research aims

This research aimed to investigate the factors influencing the decision-making process which underpin the decision of university students about lifestyle change. This also includes the factors that influence the dieting of the undergraduates. This research can be used alongside other publications to come up with a social marketing strategy to improve healthy eating habits among undergraduates in the UK and Wales. His research is significant to both local and national levels.

Study sample

A total of eight non-marketing students from Aston University were recruited to take part in the research. A random sampling method was applied during the recruitment of participants in the research. Non-business students were picked randomly to participate in the research. A sample of four male students and four female students was obtained to ensure gender balance. All current non-business undergraduate students had equal chances of being selected to participate in the study. Given the large population of students in the university, it was difficult to identify every member of the population. This means that the pool of the subjects available was biased (Babbie, 2010).

This method may therefore not produce a true representation of the population. It may also be not wise to generalize the results obtained to the larger population. However, this proved to be the most effective sampling method given the scarcity of resources and the limited duration of time provided to complete the research. The exclusion of business students from participating in the study would also indicate some elements of biases in the study.

Focus Group Methods

Focus groups are most helpful when one wants to expand knowledge about customers and prospects. Focus groups were therefore used for the collection of data from the study samples. In this field of marketing, the use of focus groups was inevitable because they give an understanding of the impacts of the marketing stimuli. In this study, focus groups were particularly useful because they allowed for an integrated analysis of the relationship between the factors influencing the change in lifestyle and their reactions to marketing material (Capacci, et al, 2011).

The focus group was planned for a four hour session under the moderation of a supervisor. The sessions were video recorded for future references. This would also allow for further analysis of the interviews in the future. The respondents were assured of the confidentiality of their responses and they were alerted before any recording was done. The participants were educated first on the aims and objectives of the study and were given opportunities to seek any clarification. They were welcomed to ask any questions concerning the research before they were asked to give their consent for participation (Croezen, 2009).

To familiarize themselves with the participants, the focus group began by introducing themselves by asking short questions (Dodd, L.J. et al, 2010). After the introduction, the focus group then proceeded to the topic of interest: change in students diet and potential influences. The focus group used guided questions that were prepared to guide the respondents to give the most relevant information. The focus group questions included:

  • What is your favorite meal?
  • How many meals do you take in a day?
  • What type of food do you prefer to eat the most?
  • Do you eat any snacks? What type of snacks do you eat most?
  • Are you aware of anything that influences your daily eating habits?
  • Is your eating habit uniform across the week or do you eat differently on different days of the week?
  • Are you comfortable with planning for and cooking your food?
  • Is there any difference between the way you eat now and how you used to eat before joining the university?
  • Are you concerned about how you eat?
  • Do you think there is any relationship between how you eat and your health?
  • Does your physical posture influence your eating?
  • What influences you in selecting what you want to eat?
  • Are healthy foods readily available and affordable for you to purchase?
  • Does your family background affect the way you eat at university?

Study results

An analysis of the results from the focus group indicated that all the students interviewed experienced a significant change in their dieting upon entering the university. Although there were variations in daily variations in the eating patterns of the participants, it was evident that al ea a less balanced diet since leaving home. It came out clearly that regular meals were eaten less often. For instance, six out of the eight participants interviewed reported that they skipped breakfast regularly. Al the participants reported that they eat regular meals based on convenience rather than at regular times in a day.

All the participants agreed that their eating patterns differed across the week. They all admitted that they followed more regular eating patens during the weekends. All the participants reported that they engaged themselves in excessive consumption of alcohol and snacking over the weekends. Most participants reported that they relied on takeaways during the weekends. The participants generally agreed that there was a considerable difference in their dieting when at home and the university. They all agreed that they returned to healthier eating when they return home during the weekend and on the holidays.

The types of food preferred varied widely across the participants. While some participants reported a liking for fruits and vegetables, others confessed that they consumed fruits and vegetables only when they came across them. Five of the participants reported that they consumed six portions of fruits and vegetables per day while the remaining three respondents reported consuming only two portions in a day. Six of the participants reported that they ate convenience foods and takeaways regularly and it was discovered that these were usually calorie-dense high-fat foods.

All participants admitted that they ate snacks regularly as a supplementary to regular meals. They also reported that they ate snacks mostly whenever they skipped breakfast. Two of the participants reported that they thought snacking on fruits, nuts and seeds was healthier than snacking on chocolate bars and crisps. The small sample size and the procedure selected however limited us from determining whether the differences in dieting could have been caused by the characteristics of the participants such as gender and age (Health Canada 2004).

The focus group identified several factors that influenced food choice among the participants. A common factor reported by all the participants was convenience. The meals to be consumed were largely depended on the time required to prepare such a meal. Accessibility of the healthy foods which could be purchased and eaten within the university environment also came out as a major factor. Five of the participants admitted that their choice of food was largely influenced by its cost.

Three of the four male participants reported that their low levels of cooking ability contributed to their healthy eating. Although the rest of our participants were competed in cooking, convenience, cost and preference were major barriers to eating healthy foods. Seven participants agreed that they enjoyed fast foods and three of them reported that they preferred unhealthy foods to healthy ones. Despite this preference, three participants reported that were trying to limit the rate at which they were consuming fast foods. They reported that they were aware of the dangers associated with relying much on fast foods.

The focus group discovered that the food choice of a majority of the participants was not influenced by their health concerns. Although all the participants acknowledged that they were aware that their dieting could affect their health, they valued other factors such as convenience and cost. Four of the participants agreed that maintaining their physical looks influenced their dietary choices.

Social marketing strategy design

This is the application of marketing techniques using communication and delivery to influence behavioral change. It follows a sequential planning process which includes market research and analysis, setting objectives, and coming up with appropriate strategies to meet these goals (HM Government, 2010). This strategy has been utilized in the literature review and focus group discoursed above. The remaining components of this strategy discourse below.

Marketing segmentation

This is usually performed according to geographical or demographical distinctions. However, this study could not be segmented geographically due to the limitations of the available information. It was also unclear whether there were differences in the attendance of the university. Based on the fact that this research was contacted in only one university, the demographics of the students could also be largely shared. From the literature review, the social background had no influence over the dieting habits within the subpopulation sampled. There is also limited evidence of any difference between genders (Jaime. et al ,2009).

A better way of segmenting this subpopulation would be based on psychographic characteristics. In this respect, the market is segmented according to shared knowledge, attitudes, and believes about changing lifestyles. This may be guided by the stages of change model proposed by Prochaska and DiClemente. According to this model, any behavior change is assumed to occur in six steps. These steps include pre-contemplation, contemplation, preparation, action, maintenance, and termination stages (James, 2008).

According to (Papadaki, A. et al 2007), those in the pre-contemplation stage have no problem with their behavior. A market campaign strategy can therefore target this segment of the subpopulation to increase their knowledge. However, increasing knowledge may not significantly improve dieting habits because of the many factors influencing its choice. Instead of teaching people the importance of eating more fresh foods, additional practical information should be incorporated into the campaigns (Kolodinsky, J.et al 2007).

Campaigns such as the 5 A Day campaign which encourages eating more fruits and vegetables should be put in place. Unlike in the first stage, those in the contemplative stage are aware that they need to change although they may not be willing to. Targeting a market campaign on this group may yield very minimal results (Lake, A.A.et al 2009).

On reaching the action stage, individuals start making and maintaining changes in their lifestyles. This trend continues up to the terminal stage (Litosseliti, L. 2003). A market campaign strategy would be most effective if set to target individuals in the preparation stage. This is because individuals in this group are willing to change, but may not know how to initiate such changes. The market strategy here should be aimed at improving knowledge as well as providing effective ways in which the behavior change can be effected.

Strategy objective

The objective of this strategy is to improve the dieting behavior of undergraduates across the UK and Wales. This has been evidenced by the information generated by the focus group alongside that from other documented research. Campaigns such as the 5 A Day have been put in place as strategies for improving the diet of undergraduates (Noar, S.M. 2006). The major challenge facing undergraduates according to the focused study is on choosing unhealthy foods and skipping meals due to convenience and cost. This should therefore be the main target of the market campaigns. From this realization, two objectives can be drawn:

  1. To reduce the number of undergraduates practicing disordered eating patterns.
  2. To increase awareness within the undergraduates on the risk of over-relying on takeaways and other junk foods.

National plan

To achieve the above objectives nationally, a strategy involving two branches can be put in place. In this regard, the first branch of the strategy would be the establishment of an educational campaign targeting the segments of the market discussed above. The education should be specifically designed to provide practical information to assist the undergraduates to adopt healthy eating habits. Providing undergraduates with specific information that is directly relevant to their lifestyle can bear positive fruits (Papadaki et al 2007). An example of such information is the 5 A Day initiative.

Running these campaigns through national media will increase the knowledge of university students and result in to change in their behavior (Tomlin et al 2004). Previous studies have shown that online and media campaigns are the most effective when targeting university students. Mounting these campaigns using Twitter and Facebook can reach a significant number of students across the UK and Wales.

The campaigns may also offer information on how to choose healthier snacks at the minimum cost. It may also offer tips on how to prepare such snakes at home to cut down on cost (Serlachius, A. et al, 2007). The undergraduates should be fed with information related to convenience and cost-effectiveness that will help them change their snacking behavior.

The second branch of the campaign should target government authorities. These campaigns should push the government to implement regulations on the type of food offered to university students. However, this can only be possible where food is offered by the university authorities. With only healthy foods being provided by the university, the undergraduates will have no option but to eat healthy foods.

Localized intervention

Piloting a local project at the University of Aston to provide food preparation workshops can help change the dieting of undergraduates. This strategy has been arrived at from the observation that most of the students who participated in the focused study faced challenges in planning and preparing their meals. During the workshop, the undergraduates can be educated on how to prepare healthy food in the cheapest ways possible. Students can also be advised on where to eat while in the university environment. This will address the issue of the availability of healthy foods to the undergraduates (Papadaki A. et al 2007).

Conclusion

From the above report, it is evident that students change their lifestyle including their dieting behaviors upon entering the university. Many scholars attribute his change in lifestyle with the transition from childhood o adulthood. However, the change in dieting has been greatly influencing by cost and convenience alongside other factors. Disordered eating habits have proved to be a major cause of various diseases to the students.

Targeting students who are willing to change their diet, giving them specific information on how to prepare healthy foods will help solve the problem of cost and convenience thereby improving the dieting behavior of undergraduates.

References

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Arnot, C. (2010) Male students eschew balanced diet in favor of supplements. The Guardian.

Babbie, E.R. (2010) The Practice of Social Research. Belmont, CA: Wadsworth, p. 192.

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Abstract

Transportation is one of the key factors that drive any countrys economy. An industrialized nation such as the US relies heavily on transportation and logistics system for its economic growth. Statistical findings indicate that the system contributes about 10 percent to the US GDP. The developments in the US economy together with the adjusting trading patterns have largely influenced the modifications in the transportation and logistics structure.

Despite the importance of transportation and logistics to the American economy, the witnessed underinvestment in the system has ended up harming the economy. If no proper mechanisms to revamp the sector are implemented, the future of the US will be endangered. This paper reviews the US economy, specifically the impact of transportation and logistics system on the economy. It proposes some of the measures that can be adopted to improve the economy through proper transportation and logistics management.

Introduction

The Problem

The field of transportation and logistics has a key role to play in sustaining the growth and development of a states economy. Focusing on the US, the topic of transportation and logistics is important because it influences all economic activities. The sector contributes about 10 percent to the US Gross Domestic Product with respect to spending by customers, government, and companies. Furthermore, if household contributions were also computed, transport would account for 18% of the US economy. Conversely, the American population is anticipated to grow steadily in the next 30 years. In the next three decades, the population is expected to hit 380 million.

Similarly, a projected growth of 2.8% annually is expected. The US has not exhausted its investing potential in the transport sector. The existing transport infrastructure is poorly maintained. The current transport demand is not being satisfied and hence the doubt whether the existing transport and logistics will sustain the expected demand in the future decades. Experts have cited the need to invest $1.6trillion to revamp for the sector to meet the demand capacity. With a good transportation system, America is assured of creating and retaining jobs for its citizens. Besides promoting business growth, the system will reduce the cost of household items.

Research Question

Based on these highlights, this paper seeks to answer the question, Will America rely on the current status of its transportation and logistics sector to sustain its growing population and economic demands?

Definition of Terms

Infrastructure: This term refers to a system that a country puts in place to encourage productivity, creativity, high returns, affordable goods and services, and ultimately a healthy competition.

Logistics management: This term refers to the section of supply network that processes, executes, and guides the proficient, effectual forwarding and overturning the movement and storage of commodities and services starting from their initial places to their required destinations and usage.

Literature Review and Background

The US Economy and Transportation

Over the past years, the US economy has relied heavily on transportation to build and sustain the growth of its economy. Initially, ports that are located on the East Coast offer a quick connection with other regions such as Europe and West Indies that in turn attracted investors, migrants, and capital. Other water bodies such as the Mississippi River and the Great Lakes invited traders from regions such as Midwest and the Great Plains. Moreover, as Snyder (2006) reveals, the transcontinental railway network promoted the efficient transportation of goods for traders in the East to buyers in the West and vice versa.

In the 20th century, America successfully constructed national interstate highways with the aim of harmonizing the diverse communities while at the same time promoting national security and easy flow of freight and movement by citizens. Governors also invested heavily in constructing subways and commuter railway networks within their jurisdictions to encourage economic growth.

The government also invested in the air transport sector to promote a long-distance movement of valuable goods with low weight and travelers. Moreover, to help in the transportation of large cargo, the US utilized containerization. According to Crews and Bhatia (2012), the rapid rise in the number and size of ships promoted international trade, which expanded the American economy, particularly because of the high returns from the global sales. The diagram below shows the share of various US transportation mechanisms.

Americas Public Transportation Systems.
Fig. 1: Americas Public Transportation Systems. Source: Glass, Kenjegalieva, and Sickles (2013)

Commentators such as Casey and Heliums (2008) reveal how the current transport system has transformed in unison with the urbanization and transformation of the US economy from an agricultural state to an industrialized state. Investment in the transportation sector has not only been limited to highways, but also marine, air, and rail transfer to accommodate the diverse demand for traders, consumers, and the government.

Currently, the US is seen to own the most widespread transport system globally. Whether the existing transporting system will accommodate the changing economy in the near future is a matter that is debatable as Wallace and Heliums (2008) observe.

The US economy has undergone various changes due to a convergence of numerous drifts. Products and services are no longer only traded in the domestic market. A growing trend of companies has been witnessed in terms of their choosing to go international and/or seek the rich market and other jurisdictions. As Wallace and Heliums (2008) claim, this observation implies that the US economy is to greatly affected by the export and import of raw materials from other countries. Furthermore, the economy has grown from an agrarian market to an industrialized one.

Besides, the country is also beginning to focus more on service provision and innovation than on manufacturing products. Consequently, the finding implies that America relies on technology and expertise more than natural resources. While the initial economic development was more in the Northeast region than other areas, current records indicate that the South and West have an impressive economic growth rate.

The country is witnessing an increased rural to urban migration and development as people seek jobs and services. The labor force is experiencing more diversity because of the immigrants who hail from various regions around the globe. The elderly population has undergone a significant growth in the 20th century. This class is expected to hit 80 million by 2050. According to Cassidy (2013), the aging population comes with several social and economic challenges.

A strong link exists between transportation demand and the US economic growth. Over the past 30 years, the American economy has witnessed impressive growth, rising from $2.7trillion back in the 1980s to a GDP of $17.7trillion in 2015. Economists such as Cassidy (2013) approximate that this GDP will rise to $22.4trillion in 2020.

Moreover, the US contributes about 17% to the worlds GDP, with its economic strength surpassing that of any other developed country. The US is home to worlds largest financial market. The state is ranked the second when it comes to manufacturing services. Despite the monetary turmoil back in 2007-08, America was able to recover and maintain its steady growth. This impressive growth has largely attributed to its hi-tech transportation network. For instance, as shown in figure 1 below, it deployed strategic machines to do its container loading and offloading to save time at the ports.

Machines for Loading and Offloading Containers
Fig. 2: Machines for Loading and Offloading Containers. Source: Glass et al. (2013)

However, although the countrys economy depicts such an impressive progress, it is facing fierce competition from other industrialized states in Asia, especially China. China has the fastest-rising economy in the world, with an average growth rate of 10 percent. At the onset of the 21st century, China was ranked the seventh-largest economy globally. However, due to its skyrocketing rate, it is expected to rank second in 2020 to the extent of surpass the US by 2050 (Snyder, 2006).

Commentators such as Crews and Bhatia (2012) believe that the transportation system has become more dependable and affordable because of a number of factors. First, economic deregulation in the 1980s transformed the freight transportation sector. Besides increasing competition, it also led to the reduction in the cost of shipping. Secondly, the construction of interstate highway minimized the cost of cargo transportation. The emergence of advanced technology such as the intermodal freight containers, as well as satellite communication, had a substantial impact on making freight processes efficient.

Shippers have utilized the cheap transportation of goods to focus on transforming their logistics culture from an inventory-oriented supply chain to a replenishment-oriented one (Crews & Bhatia, 2012). Three decades ago, traders preferred inventory-based supply chains to replenishment- oriented ones since suppliers sold raw materials to the manufacturers who in turn supplied the manufactured goods to distributors who would then ensure that the products trickled down to the ultimate consumers. Traders had to maintain a huge and expensive supply of vital products to avoid the consequences of a stock out (Crews & Bhatia, 2012).

Currently, the pattern has changed. Traders deploy the on-demand supply chains and restock the products that are ordered by clients. To ensure that they remain with adequate stock, companies choose to study their consumers, determine their demand capacity, remain in tandem with their consumers interest, and keep their stocks in fewer locations.

The process of delivering all the inventories and replacing them soon after they have been transported to the consumers ensures that businesses transport smaller sizes of cargo as they go by order. The goal is to maximize returns. This trend has encouraged the transport sector to prefer keeping its products in transit, rather than on stockrooms. On-demand supply chain system is efficient to both clients and traders. Clients are assured of more goods at a cheaper price. On the other hand, as Mothorpe, Hanson, and Schnier (2013) reveal, businesses are assured of an increased demand for their products.

However, the challenge of the on-demand supply chain is that it depends highly on the just-in-time (JIT) transport of lesser cargo. Therefore, the failure of the cargo transportation network is detrimental to the shipper. A minor delay while goods are in transit might inconvenience several players, including suppliers, consumers, and carriers.

A hurricane in the Gulf can easily interrupt several supply chains, thus leading to losses, which can eventually reflect in the countrys economy. Essentially, the contemporary supply chain requires a highly reliable and affordable transport mechanism. Nevertheless, the logistics cost has recorded an increasing tendency in the past two decades as Wallace and Heliums (2008) confirm.

In the 1970-80s, the cost of logistics was evidently high, particularly because of the high-energy cost, interest rate, and low productivity. The investment in interstate highways was affected. Technical expertise among other factors reduced the cost of logistics to an approximately 8.6 percent of the GDP. Such a reduction had a positive impact since customers could get affordable goods.

Traders could easily penetrate the international market. However, the cost of logistics is increasing again due to the upsurge in fuel cost. Besides, congestion at the ports, roads, and railway stations has led to delays and an increased cost of delivering goods. If the transportation system is not rectified, the logistics cost may keep rising to the extent of deterring the easy flow of freight, hence eventually hampering national economic growth.

The international market has been the main source of income for most traders, especially with the persistence of globalization. Traders need to keep up with the level of competition in the international market for them to maintain their profitability. Unfortunately, in overall, logistics rates have been on the rise in the US. However, other developed nations such as Germany and France are recording comparably lower transportation logistics costs.

A prolongation of this drift will harm the American economy since most of the US businesses will be disadvantaged in the global market. The changes have not been limited to freight transportation since passenger transportation has undergone several adjustments. There has been an increased movement with the Vehicle Miles Travel (VMT) rising at double the rate of population growth. Although the VMT has occasionally declined because of high fuel charges and the aging population, it keeps reviving because of the increasing population, as well as the individual income. Therefore, the transportation sector must be adjusted to accommodate the anticipated rise.

For instance, analysts such as Scheid (2014) assert that the increased urbanization will lead to a huge population of Americans in the metropolitan areas, a situation that will have an influence on the countrys productivity. There will be a need to have a proper transportation network to cater for the population for the country to fully utilize its full potential (Scheid, 2014).

Rural dwellers will also have a great impact on the American economy since the aging population that will be searching rustic amenities will require reliable transportation systems. The tourism industry is projected to boom with an increase in both local and foreign visitors. Nonetheless, if the rising congestion is not handled promptly, it will hamper the expected economic growth (Snyder, 2006).

Transportation and the US Industries

Cassidy (2013) presents Americas economy as very competitive, thanks to its education system, the huge market size, creative citizens, business originality, and transportation systems. The above systems have enabled the US industries to have a competitive advantage in the international platform where they serve a huge market globally.

The US industries have controlled most of the global markets mainly because of a reliable transportation system, although every system has a specific demand for transportation. Four main sectors drive the US economy. They include agriculture, the manufacturing industry, the retail market, as well as service sector. They control 84% of the economy (Crews & Bhatia, 2012).

These sectors have a fluctuating demand for transportation and logistics. The agricultural sector, for instance, requires more transportation services than the manufacturing and retail sector. Recent statistical observations by Crews and Bhatia (2012) have indicated that transportation accounts for 7% of agriculture budget while the manufacturing sector only spends 3.2 % of its budget on transportation and logistics. The service sector, which involves the delivery of services, spends about 1.8 percent of its budget on transport (Waldorf, 2015). The subsequent paragraphs provide a detailed discussion on the linkage of transport to the US industry.

Agriculture and Natural Resources

Despite the industrialization of the US, Americans have not quit farming. The demand for agricultural materials and natural resources has not declined. The main demand comes from three sub-sectors, namely forest harvesting, crops animals, energy, and mining. According to Waldorfs (2015) statistical findings in 2006, the agriculture and natural resources industry contributed a total of $13, 246.6billion to the US economy. However, much of this contribution came from the energy industry, which accounted for $407.6billion (Waldorf, 2015).

Agriculture and natural resources form the cornerstone that supports other sectors of the economy. The industry offers food, construction materials, and raw materials that form the ingredients of other essential products such as plastics, chemicals, and medications among a myriad of other products. It is anticipated that the demand for agricultural products will increase in the near future as the American population and economy expands.

In particular, the energy sub-sector is anticipated to increase at a quicker rate than other industries because of an increased demand for fuel. The industry employs more than 2.6million Americans. However, experts such as Snyder (2006) assert that the number of local employees is likely to decline as more activities become automated. On the other hand, the demand for agricultural products will keep rising as the population rises (Snyder, 2006).

The US is a leading exporter of agricultural products in the international market, serving the world with quality meat and grains. By 2006, the country was exporting agricultural products worth $69billion. However, it is receiving stiff competition from other countries such as China and India that utilize advanced technology in their farming practices. In fact, the largest exporter of agricultural products to the US is China (Waldorf, 2015). The agricultural and natural products are transported to various locations, both within the country and to foreign states.

Furthermore, since most of these products are transported over long distances, the price of these products often reflects the transportation costs. For instance, every dollar that is charged for American agricultural goods contains eight cents to cater for the transit. Thus, the costs of agricultural products are often influenced by fluctuation in transportation costs, as well as its reliability. Unlike other sectors, the agriculture and natural resources industries are fixed because crops have to be produced where the land is fertile. Mineral and energy products must be produced where the deposits are sufficient.

Since the production sites are inflexible, transportation has to be organized in a way that traders can access the site or reach the consumers conveniently. According to Shacklett (2014), most of the transportation systems in the US are organized to enhance the access to agricultural and natural resource production areas.

Nonetheless, the demand for transportation has been adjusting as new production areas and markets are discovered. For example, the discovery of the Powder River Basin as a rich resource of clean-burning coal that can be used in manufacturing natural gas has inspired the government to restructure its railway network to make the production site more accessible (Scheid, 2014). A reliable and low-cost transporting system is vital for the survival of the agricultural industry in the international market.

Countries such as Brazil that can export cheap products are quickly taking control of the global agricultural market. Brazil has been successful mainly because it has invested heavily in infrastructure that connects the agricultural industries and the terminals for exporting purposes (Shacklett, 2014). The country should strive to adjust the infrastructure at the ports to avert the delays that lead to a damage of agricultural products. Most ports do not operate in a 24-hour working system at a time when progress can only be achieved through a 24-hour economy.

Short operating hours exacerbate congestion and delays in the ports. Economic rivals such as China and Brazil have an impressive infrastructure at the ports that discourage congestion. Hence, goods reach their destinations in time. At this rate, the US will be outwitted if it chooses to continue under-investing in its infrastructure (Shacklett, 2014).

The Manufacturing Sector

For many centuries, manufacturing has remained the bastion of the countrys economy, with a huge dependence on its textile, steel, and car industry. Today, it remains a global leader in the manufacturing industry, with most consumers across the relying on the US for its quality and affordable products. The industry employs more than 14million Americans. The figures translate to about of 10% of the US labor force. It also accounts for over $13billion of the US GDP. Despite its global leadership, it is receiving fierce competition from Japan and China.

Thus, it must strive to produce quality and reasonable services to retain its positions. Reliable and supple transportation system is essential for ensuring that the manufactured cargos reach their desired destinations within a reasonable time (Crews & Bhatia, 2012). Currently, the US manufacturing has maintained its leadership in the sector mainly because of the good interstate highway transportation system and trucks, which help in sorting all the logistics. Furthermore, as Hill (2014) reveals, the railway, ports, and aviation industry provides an easy means through which it can transport its items to foreign states.

However, as America becomes more mobile than in the previous years, the highways are becoming crowded, thus increasing the time and cost of transporting goods. Furthermore, the manufacturing sector relies on a skilled labor force. A huge number of these workers are residing in the urban areas as the rate of urbanization keeps on rising. Subsequently, manufacturing companies will have to set their premises close to the metropolitan areas. For workers to operate efficiently, they need an affordable and reliable passenger transportation system, a matter that is debatable in contemporary America.

The security regulations that seek to ensure proper scanning of contents before they are moved into the country make it difficult for manufacturers to import raw materials for their production purposes. It is imperative for the challenges that manufacturing sectors face with respect to transportation to ensure free flow of manufactured goods in and outside the country. In particular, the country needs to develop clear freight transportation investment guidelines, as most states in Europe and Asia do, to ensure proper investment in the transportation and logistics sector (Mothorpe et al., 2013).

The Retail Industry

The retail industry is made up of firms that focus of vending commodities. It accounts for over 7% of the US economy. It employs more than 11% of the American labor force. Most of the retail firms are located around the towns and areas that have a big population of Americans. While the retail industry often involves consumers who come to the retail shop premises to buy the merchandise they desire, the introduction and growth of the internet has reduced this trend as a huge number of retailers vend their goods online.

Online shopping has increased the trend for home delivery by retailers themselves or by agents such as the United Parcel Service and DHL. Furthermore, the industry is affected by other factors such as consumer debt that slows consumer purchase patterns, poor quality of products imported from oversea companies, the declining value of dollar, and the unreliable transportation network (Glass et al., 2013).

Transportation plays a key role in the retail industry since it ensures that products from various destinations are availed to the customers in retail shops within a convenient time. Retailers sell a variety of products that can be bulky, heavy, perishable, and flammable. For instance, where the retailer is dealing with perishable products, he or she has to ensure that he or she uses a quick means of transport so that the products reach the market before they expire. Consequently, the retailer relies on accessible, reliable, and efficient transportation systems that keep them in good connection with their distributors (Hill, 2014).

The Service Industry

The service sector is the largest industry in the US. It employs almost 50 percent of the US workforce. It accounts for about 50 percent of the GDP. It comprises a myriad of industries. Since it is the hub of the US economy, the government needs to pay close attention to ensure that it promotes its sustainable growth. Indeed, as Glass et al. (2013) reveal, the industry depends heavily on the transportation sector for the sake of transportation of workers and clients. Nonetheless, the current transportation system has derailed its growth. Congestion raises the cost of service delivery.

It makes it less effective. For instance, poor transportation system influences negatively the tourism industry since congestion causes delays while at the same time increasing the cost of tourism to cater for the extra transportation expenses. Evidently, the government must reinvest in the transportation sector not only to improve the infrastructure but also to attract visitors (Hill, 2014).

Results/Discussion

As aforementioned, it is evident that the transportation system in the US has a great link to the performance of the American economy. An efficient freight and passenger transportation system assures the country of good returns and high productivity. Economists such as Crews and Bhatia (2012) approximate that the US economy will grow by double in the next 30 years if no major havoc occurs such as economic recession. The population is anticipated to increase by 80 million. The US citizens are anticipated to become wealthier with an estimated per capita income of $66,000. The society will become more mobile, with the VMT rising by 80 percent.

Commercial passengers are anticipated to rise to a billion by the end of 2015. This figure translates to a 36% growth in a decade. Conversely, the currently strained aviation industry will have to serve more clients as Americans and the world become more mobile. Globalization has encouraged international trade with business to transport their freight to long distances because of the efficiency of operations. The US is not an exemption. It is estimated that freight transport will grow by 89% in 20 years, as the country will be transporting 26 billion tons of cargo. Indeed, according to Snyder (2006), transporting such tons of cargo will be a proof of an effective transportation and logistics system.

While the demand for reliable transportation and logistics system is on the upsurge, the condition of the transportation system is being given a score of D (Shacklett, 2014). Two main issues have caused the deprived status of the American infrastructure. The first one is the increasing disproportion in the supply and demand while the second one is the aging infrastructure. Most of the American bridges are almost half a century old. The current commuter rail cars have served the country for close to two decades while the commercial planes are approximately ten years old. Indeed, as Cassidy (2013) confirms, this infrastructure is drained.

More exacerbating is the fact that the level congestion is mounting as the infrastructure continues to wear out. The impact of congestion cannot be ignored. Americans who reside in the metropolitan areas lose up to 4.2 billion hours as compared those who are affected by the congestion. Furthermore, $78 billion is wasted with respect to the fuel that is lost during the congestion. Unfortunately, the rate is increasing with urban areas being the most affected. To cope with competition from other industrialized states, the US has to solve the congestion problem (Waldorf, 2015).

Freight system performance is also an alarming trend. While Interstate Highway System has improved the freight transportation, the high demand for goods is surpassing the capacity of the available infrastructure. The situation has resulted in congestion and unexpected losses. To remain in business, traders are compelled to increase the cost of their products to counter the delays that are caused by the unreliable transportation and logistics system and holding inventories. High prices lead to an increased cost of living and reduced consumer spending.

Eventually, the economy becomes less industrious as well as competitive. The impact of congestion on the US economy is evident in the ports. For instance, APM Terminals Company that runs over 50 workstations globally has opted to move most of its terminals in the US to inland areas because the ports are crowded. Thus, the available space cannot accommodate APM containers that need to be shipped to other countries or be carried by trucks to inland buyers. However, to ensure that inland terminals are operating efficiently, APM Terminals must innovate to ensure a proper link between its inland locations and the harbor. These linkages can only be achieved by having proper road and rail networks to facilitate the transportation of cargo into the inland terminals (Waldorf, 2015).

Nonetheless, highways are also highly affected by congestion, particularly in specific zones where the volume of vehicle surpasses the capacity. Most of congestion occurs in the metropolitan interstate interchange, thus causing losses worth $4 billion. The persistent growth of the economy and the population will ignite more pressure on the current infrastructure to the extent of exacerbating the level of traffic in the country. Experts approximate that although the highways serve 10,500 trucks daily, the figures will increase to 22, 700 by trucks 2035. This huge number of cargo trucks will share the roads with other commuter vehicles because of the increase of wealth among Americans following the projected economic growth (Glass et al., 2013).

The railroads system has for several years enjoyed a surplus capacity, which has often been utilized to accommodate an excess volume of cargo and passengers who cause congestion on the highways. Nonetheless, as shown in figure 1, the railway system is also gradually running out of capacity.

A train carrying two layers of containers to overcome the increase container supply. Source: Shacklett (2014)
Fig. 3: A train carrying two layers of containers to overcome the increase container supply. Source: Shacklett (2014)

Indeed, the government has initiated several projects to renovate the railway network. More of the renovation must be initiated, as more cargo will be transported via railway to avoid the traffic in the highway. The impact of the overcrowded railroads and highways has affected the water transportation sector too, as more demand for water transport has increased.

Water transport provides a convenient means to transport contents to their required international destinations. With the growth of the international trade, the demand for goods in overseas areas has increased impressively. Moreover, for water to become a reliable medium for transporting cargo, it has to be supported by a strong network of railroads and highways. Nevertheless, while the use of the water transportation in the US has increased, statistical findings indicate that the current ports can barely support the number of contents that are being transported across the waters (Waldorf, 2015).

Another challenge for water transportation is the channel depth. Most of the ports have a channel depth that cannot harbor mega-container ships. Therefore, to avoid congestion in the ports, most containers are transported to the inland zones before their owners can clear with the ports. However, to get to the inland terminals, trucks must t

Introduction

Background

The banking sector remains one of the most important industries that have a significant impact on other industries within a countrys economy. According to Cornée, Karmi, and Safari, the banks provide finances needed by other sectors to run normally (498). They provide a platform for trade among large scale-businesses that cannot afford to make or receive payments in cash. The banking sector in Europe has experienced massive growth over the past five decades as the world transforms into a global market place. As new firms emerge in this region, the services of these financial institutions become even more relevant. However, Agapova and McNulty note that the existence of these firms largely relies on their profitability (155).

Profit is one of the three main pillars of sustainability, the other others being the environment and people. For a company to continue operating, it must make profits consistently because it needs the revenue to finance its revenues. The profitability of a firm is affected by several factors that can broadly be classified as internal and external factors. Among the external factors is the gross domestic product (GDP) which studies have suggested has an immense impact on a firms profitability. It is important to determine the relationship between gross domestic product and the profitability of financial institutions. This relationship will help in establishing the impact of the gross domestic product on the profitability of financial institutions. In this study, the primary aim is to determine the effect of GDP on commercial banks profitability in Austria.

Statement of the Problem

Austria is one of the members of the European Union and its economy is often affected by the events taking place in the Euro-zone. The country has one of the vibrant economic sectors in this region that supports its economic growth. However, the recent events in this economic block and the entire world have shown that the banking industry is very vulnerable. According to a report by Le, Austria was one of the nations whose economies were affected by the 2008 global economic recession (21). The banking sector was one of those that were most affected by this economic recession. Jobst also notes that the decision of the United Kingdom to leave the European Union has also had some impact on the countrys financial sector (77).

This is a clear demonstration of how fragile this industry is to the external economic forces. Its significant role to other sectors within the economy means that it has to be protected at all costs despite these challenges. Lehman Brothers, once a leading global financial institution, ceased operations in 2008 and it had a massive impact on numerous business entities and companies that had their money invested in the institution. The case of this giant bank that collapsed when its clients had high expectations about it demonstrates how significant the financial sector is to a countrys economic progress. Austria, just like any other country around the world, is keen on protecting the profitability of this industry. That is why it is important to determine how various external factors, specifically the countrys GDP, affects its profitability.

Purpose of the Study

The purpose of this paper is to determine the impact of GDP on commercial banks profitability in Austria. The study will look at the banking sector in Europe in general, and that of Austria in specific. The researcher will also look at the GDP of Austria before focusing on the profitability of commercial banks. This will culminate in determining the relationship between GDP and profitability of commercial banks. Through this investigation, the researcher will identify specific aspects of GDP that directly affect the profits of these banks. Through this analysis, it will be possible to come up with suggestions on how these institutions can adapt to changes in a countrys GDP without significantly affecting their profitability. Such adaptations can make it possible for these banks to be less vulnerable to economic forces within the external environment.

Effect of GDP on Commercial Banks Profitability in Austria

Banking Sector in Europe

According to Beck, Europe has one of the most competitive banking sectors in the world (40). The European Union is a single market that allows firms to trade freely and without any restrictions in terms of tariffs or any regulatory policies that may hinder their success. Most of the top banks in Europe are in the United Kingdom and France. Jobst notes that out of the top ten largest banks in Europe, ten are from these two countries (78). The only other two countries which have their banks in this top ten list if Germany and Spain. It is important to note that following the Brexit vote of 2016, the United Kingdom will leave the European Union market. It is not clear how the financial sector of this country, which had dominated the European Unions market in the past, will be affected after leaving the union. However, the vote is not yet implemented, which means that technically the United Kingdom is still part of the European Unions trading block.

According to Le, Europe has one of the most advanced banking systems in the world (107). Competition in this industry is often very stiff as large multinational corporations such as HSBC Holdings, BNP Paribas, and Deutsche Bank compete fiercely for the market share will small firms in the region. The recent global economic recession of 2008 that majorly affected North America and Europe was clear proof that the banking sector in this region is vulnerable to the economic forces within the market. A study by Lin shows that the financial sector was one of the worst-hit sectors by this recession (20). The increase in bad loans, inflation, and reduced savings was among some of the factors that affected the banking sector in Europe during the recession.

These three factors, and other economic factors associated with GDP, will be further discussed in detail in the subsequent sections of this paper. A report by Jung shows that many banks such as Alliance & Leicester, Roskilde Bank, HBOS, and UBS were some of the European financial institutions which were not able to make it through during this tough economic situation and had to be acquired by other larger banks (118). The larger banks were not spared either in this great recession. Lloyds TSB Group and the Royal Bank of Scotland are some of the financial institutions that had to get direct aid from the bank because their position within the economy made it necessary for them to be rescued from imminent fall.

Currently, the banking sector in Europe is in a recovery mode. Most of the banks have come out of the problems related to the 2008 economic recession. The European Union has also experienced a relatively stable economic growth over the past seven years which has been a major boost to the industry. Most of the European banks such as HSBC and Barclays Bank have continued to expand their operations outside the Euro-zone as they seek to increase their market share. On the other hand, foreign firms from other countries, especially North America, are also finding their way into this market. Jobst says that the future of the banking sector in Europe is relatively bright despite the recent decision by the United Kingdom to leave the European Union (122).

According to Le, following the formation of the European Union as a trading block, the 28 states agreed that for the region to achieve the desired success, it was necessary to come up with a central bank (93). This was necessary because the countries had already accepted the use of a single currency (Euro) in all the countries. It is only the United Kingdom that continued to actively use its currency (Starling Pound) while the other member states considered the use of the euro as the standard currency in the region. The formation of the European Central Bank in June 1998 was a major step not only to the economic growth of the region but also in stabilizing the banking sector in the region. The countries knew the importance of banks in the economic progress of the economic block.

For the union to operate as a single economic block, it was necessary to have a bank that would help in enhancing stability in the regions financial sector. Since its establishment in 1998, this bank has played a critical role in enhancing the success of financial institutions in the region. Its regulatory policies help in ensuring that banks do not come up with exploitative interest rates that would harm growth in the other sectors of the regions economy. However, the policies are also meant to protect the commercial banks by ensuring that they can make reasonable profits for their success in the market. European Central Bank played a critical role in helping to protect financial institutions in Europe from collapsing during the recent recession that significantly affected the European economy.

Banking Sector in Austria

Austria is one of the countries in Europe that has attracted massive attention to financial institutions both from the region and beyond. According to Fonteyne, for a firm to be successful, it is important to have a strong economy (88). With a population of about 8.8 million people, Austria may not be the most populous country in the region compared to other European nations such as Germany and the United Kingdom (Jobst 51). However, the banking sector does not necessarily rely on the population of a country to achieve prosperity. It relies on the population that has the actual capacity to make use of the services of banks. Sometimes a country may be very populous, but only a small fraction of the entire population can make savings, borrow, or use the services of a bank in any way. A good example is India, the second-most populous nation in the world with over 1.2 billion people. However, over 45% of this massive population has never used services of financial institutions, rendering them inconsequential in the operations of the banks in the region. In Austria, a good number of the population can use financial services because of their level of income.

The banking sector in Austria has achieved tremendous growth since the end of World War II. Soon after the end of the Second World War, the country came under the control of the United States, Great Britain, France, and Russia. Economic growth during the Cold War was slow because the country did not directly align itself fully to either side of the warring nations. The banking sector during this period also had a sluggish growth, a reflection of what was happening to its economy. However, following the fall of the Soviet Union, Austria joined the European Union and aligned itself to the West. It was during this period that the financial sector started achieving rapid growth (Feldman and Hayes 27).

Local banks emerged through mergers and acquisitions of a small financial institution or as independent fully-fledged banks. Some of the top local banks in Austria include Austria Wirtschaftsservice Gesellschaft (AWS), Bank Austria Creditanstalt, and Austrian Anadi Bank (Jung 121). Local banks are facing stiff competition from large foreign banks which have also found their way into the local economy. Some of the foreign banks currently operating in Austria include Deutsche Bank and American Express Bank Ltd. The European Union has made it possible for these foreign firms to operate in the Austrian market without facing any restrictive laws that may affect their profitability. Most of the foreign financial institutions in the country are from European Union countries that enjoy the common market. However, some American financial institutions are also successfully operating in the country.

According to Temesvary, the Austrian banking industry is changing due to the changes taking place in the field of technology (240). As shown in the above paragraph, competition in the market is getting stiff and some financial institutions are struggling to remain profitable. As such, banks in this country are willing to do everything within their powers to ensure that they attract as many customers as possible. A study by Jobst shows that the mode of banking in the developed economies is changing (60). The middle class and the rich, who make the largest and most attractive market segment for the financial institution, lack time to visit the brick and mortar banking outlets as was the case before. They are so busy in the corporate world that they cannot afford to spend time in queues waiting to deposit or withdraw their money from banks.

Financial institutions in Austria appreciates the fact that under the new forces in the environment, it is important to find a way of serving these clients in the best way possible and without having them straining to get the banking services that they need. As such, online banking has become very popular in the region. Online banking is meant to ensure that people can have full control of their bank accounts irrespective of their locations around the globe. They can make withdrawals, transfer money, or make a payment without having to visit their banks. According to Feldman and Hayes, firms that are quick to effectively adopt emerging technologies are the ones that often survive when competition becomes very tough in the market (41). In Austria, most of the major banks, both local and foreign banks, have come to appreciate that it is necessary to embrace the new technology that makes the process of banking simple.

As competition becomes stiff, commercial banks in Austria are doing everything that they consider creative enough to earn them the profits they need in the market. According to Hsing and Krenn, the population of Muslims in Austria is almost negligible (71). However, Austria often receives several Muslims who visit the country as tourists or to engage in trade. Some financial institutions are now targeting the small population of Muslims who are in the country, either as tourists or business persons, with products that are specially designed to meet their needs. In 2016, BAWAG PSK became the first Austrian bank to start offering Islamic bank accounts for its clients.

This was a calculated move that was meant to target a small but very attractive market segment. According to Feldman and Hayes, most business entities are often followers, waiting for the industry leaders to make the first move in a given direction before they can all follow them (72). However, the move by BAWAG PSK to start offering Islamic banking products may result in many other financial institutions doing the same. This is because the target population is relatively small. The recent influx of refugees from Syria and Iraq into European countries may increase the target market, especially if these refugees get to settle in Austria. This is so because the majority of this population are Muslims. It may see a few more banks developing products that will target this population.

GDP of Austria

According to Deeg and Donnelly, gross domestic product refers to the total value of services and products, in dollars, produced over a specific time (601). It is the actual size of a countrys economy. For a long time, GDP has often been used as an indicator to gauge the health of a countrys economy. In this paper, the focus was to determine the effect of GDP on commercial banks in Austria. It is important to look at the economy of this country for the past few decades and how the growth has affected the profitability of commercial banks in the country. According to Jobst, Austria is one of the countries in Europe that have registered impressive growth in the GDP following the end of the Second World War (60). The figure below shows the GDP and growth rate of the GDP from 2005 to 2010.

GDP and growth rate of GDP in Austria.
Figure 1: GDP and growth rate of GDP in Austria. Source (Jung 45).

It is clear from the above figure that Austria had consistent growth in its GDP from 2005 to 2008. An analysis of the growth rate shows that problem with the countrys GDP started in 2007. From 2005 to 2006, there was an impressive growth rate of the GDP. From 2006 to 2007, the growth rate was positive, but it had slightly reduced compared to the previous year. From 2007 to 2008, the rate of growth became negative. Even though the overall GDP increased within that period, it was clear that the country was heading towards an economic crisis. From the year 2008 to 2009, there was a sharp drop in the growth rate of the countrys GDP. For the first time in almost over one decade, the country registered a drop in its GDP in the year 2009. The recession had hit the country and it was facing serious challenges, just like its European neighbors. From 2009 to 2010, there was a sharp increase in the growth rate of the countrys GDP. In 2010, the country had recovered from the economic recession and registered a growth in its GDP. A study by Denene shows that after the 2008/2009 economic recession, Austria has registered impressive economic growth (6).

According to Belke and Gros, GDP is a good measure of the wealth of a country because it measures the value of all products and services produced by a given country (360). However, sometimes it becomes necessary to determine the per capita of the GDP to determine how much of the countrys wealth is distributed to its citizens. GDP per capita looks at how wealthy individuals within a country are based on the GDP and the countrys population. This estimation may be very important for a firm that is planning to choose a region that should be targeted by a given product. For instance, China has the second-largest GDP hence it is considered the second-largest economy in the world. However, it is also true that China has the largest population in the world. It is home to over 1.3 billion people in the world. When the GDP per capita of countries is determined, China ceases to be second from top and becomes one of the middle-income economies, way below that of Austria. A financial institution would be interested in setting up branches in places where people have enough income to consider using banking services. Conducting a comparative analysis of the GDP per capita of specific regions will help banks to know areas that they should target with their products. The figure below shows a comparative analysis of the GDP per capita of the European Union, Austria, and Vienna which is the capital city of Austria.

GDP per capita of EU, Austria, and Vienna.
Figure 2: GDP per capita of EU, Austria, and Vienna. Source (Jung 41).

The comparative analysis above shows a very unique trend that the above three regions have registered from the year 2000 to 2012. Generally, there has been a consistent growth of GDP from 2000 to 2010. However, the per capita of EU, Austria, and Vienna were affected in 2008. Austrias per capita and that of European Union was affected significantly by that recession. However, Vienna was not as much affected by that economic recession as the other two regions. The graphs above also show an important trend in the spread of wealth in the three regions. It is apparent that Austrias per capita is below that of European Union. It means that an average European is slightly richer than an average Austrian. However, then Viennas per capita is introduced into the analysis, a new picture comes out. An average resident of Vienna is richer than an average European or Austrian. Being the capital city of Austria, most of the wealth is concentrated in this region, making it a very attractive market for financial institutions. At this stage of analyzing the countrys GDP, it is necessary to look at the sources of wealth that makes GDP per capital of Vienna higher than that of the countrys average.

Agriculture

Agriculture was once a major economic activity in Austria. According to Feldman and Hayes, agriculture still plays a significant role in defining the countrys economy (55). Currently, the agricultural sector provides 80% of the food needed by Austrians. The other 20% is imported from other parts of the world. Dairy farming still remains a major source of income in the country. The area around mount Schneeberg is one of the regions where cattle rearing are still very common. Using modern technologies, the locals around these regions have been successful in using small pieces of land to keep relatively large heads of cattle for meat and milk.

These products are often sold in the local markets in Austria after processing. In most of the cases, the processing is often done at the farm. Sheep and pig production is also doing very well in this country. There is a ready market for these products locally, a fact that has motivated many farmers to continue keeping these animals. Only a small piece of land is needed to keep pig and sheep. The maintenance cost is also relatively low, making it easy for the farmers to increase their production without having to incur great costs. Poultry farming is also very popular in Austria. Chicken and turkey are particularly common among poultry farmers. Other common animals kept for commercial purposes in this country include horse and goats.

Farming is also a major contributor to the countrys GDP, besides animal keeping. The locals often plant corn and other cereals such as wheat, rye, sunflower, sugar beets, and barley. Wheat is very important crop in Austria because of the booming hospitality industry in the country. The local restaurants need wheat flour to make various products for their clients. In supermarkets, wheat flour is one of the major products purchased by individual shoppers for their domestic use. Corn is not very popular, but it is also a major crop that is common in the country that is used both in the industrial and domestic sectors. It is also an important crop among those who are keeping animals such as cows, goats, sheep, and even poultry farmers who use the cereals to feed their birds. Barley is actively used in the bear manufacturing industry hence it is another important crop. Soybeans are also very popular among the locals and it is one of the major cash crops in Austria. A study by Mireille, Lemzeri, and Ory show that Austria is one of the global producers of wine, accounting for over one percent of the worlds total wine production (1350).

According to Lin, there has been a consistent reduction of the percentage that agriculture contributes to the nations gross domestic product (62). Soon after the Second World War, agricultural sector in Austria became very vibrant and it was one of the leading income earners in the country. However, this has changed over the last five decades. Currently, agriculture is estimated to contribute about 3% of the countrys GDP. There are indications that this percentage may drop further as the economy continue to rely more on the service industry which has become very vibrant. As would be expected, service industry is more active in the urban centers and agriculture is more active in the rural areas.

In the comparative analysis of the GDP per capita that was done above, it was established that Vienna, the capital city of Austria, has a much higher value of per capita compared to the average per capita of Austria. In fact, while the average for Austria was below the average of European Union, the per capita of Vienna was higher than that of European Union. This is a sign that people living in the city of Vienna are richer than the countrys average. It was concluded that urban dwellers are richer than those living in rural set-ups. The dropping significance of agriculture as a major contributor to the countrys economy may be a possible reason for this drop. As the sector of agriculture become less significant in contributing to the countrys wealth, those who rely on it as their main source of income become poorer compared to the rest of the population.

The banking sector is also not very active in the rural sector, which means that some of the low level farmers may not actively use banks when making financial transactions. According to Lin, banks often rely on masses to make profits (88). In places where people are sparsely populated, it may not be viable to operate a banks branch. The operations of such a branch will be more costly compared to the income it shall be generating. It means that such financial institutions will be making profits instead of losses. As such, banks often ignore such areas in favor of the major cities.

As these regions continue to be ignored, the locals find themselves using non-banking services when making most of their transactions. They sell their products in cash when clients come to pick them at their farms. When most of these transactions are made in cash without involving the banks, the profitability of these financial institutions gets to decrease. The fact that those in the rural sector has a lower per capita compared to those in urban centers has made the banks focus on expanding their market shares in towns than in rural areas, neglecting the rural dwellers even further. The emergence of online banking in Austria is yet to make any significant impact in increasing the population of the rural dwellers who use banks for their financial transactions.

Mining

Mining is a significant contributor to the countrys GDP. During the First and Second World War, metal mining was one of the major income earners in the country. However, iron mining was significantly affected by the rising cost of production that led to its decline after the two major wars. Currently, there is only one major iron mining company in Austria. However, graphite mining has remained steady over the past decades. Currently, Austria is ranked 10th among the leading producers of graphite, producing about 2.5% of the worlds graphite (Florian 122). It is considered to be one of the top producers of high-grade graphite in the world. Soapstone and talc are the other major minerals that this country produces in significant quantities. A study Jobst shows that production of limestone, dolomite, and marble has significantly increased over the recent past (27). The cement industry has largely been relying on these three minerals. As such, their production has been consistently rising over the years. Austria has one of the most vibrant real estate sectors in the region. This sector basically relies on the cement industry, which means that the three minerals are very critical in the development of real estate sector. Mining of gold, crude kaolin, pumice, gypsum, and calcite is also done in Austria in moderately low quantities.

According to Jung, the mining industry has a massive impact on a countrys gross domestic product (90). Most of the developing nations in Africa and Middle East largely rely on the mining industry for the growth of their GDP. Countries such as Nigeria (which is currently Africas largest economy, South Africa, and Libya rely on oil and gold which contributes to over 60% of their countrys GDP. Almost all the countries in the Middle East rely on oil as the main contributor to their GDP. These countries include Saudi Arabia, United Arab Emirates, Iraq, Iran, and many others. It is important to note that it is not only developing countries that heavily rely on minerals as the main source of income. There are other developed countries that also rely on oil for their sustainability. Russia is a good example. The country is among the major world economies, but it largely relies on minerals to support its industry. When the oil prices started dropping over the past one year, the country started experiencing a massive decline in its GDP growth. It is expected that with the continued drop of the international oil prices, it is likely that the countrys economy will slide further.

Mining industry has a ripple effect on other sectors of the economy, and that is why the government of Austria has been keen to support it despite some of the challenges it has been facing over the recent past. The industry is a major employer in the country. Those employed in the mines and those working in processing factories and transport sector depend on the industry to earn their living. According to Feldman and Hayes, despite the effort put in place by the Austrian government and the private sector to promote mining in the country, it is estimated that this industry accounts for less than 10% of the countrys GPP (42). Two factors are believed to have directly led to the decline of this sector as a major contributor to the countrys GDP. The rising cost of production, especially the cost of labor, is one of the main reasons why companies are opting out of this industry. The increase in production cost has lowered productivity and profitability. The other factor is the declining sources of these minerals. The more these minerals are mined in the country, the lesser their quantities become, making it necessary for companies to consider focusing on other sectors of the economy for the purpose of sustainability.

Tourism

Tourism is another major economic activity that contributes significantly to the countrys gross domestic product. According to Jobst, tourism has been one of the service industries in Austria which has experienced massive growth over the past five decades (74). As agriculture and mining industries experience decline in their contribution to the countrys GDP, tourism has been booming over the recent past. This is largely attributed to the improved security in the country, beautiful beaches, magnificent natural sceneries, and close proximity to major economies such as Germany and Italy where most of the tourists around the world come from.

Compared to other industries, the cost of operation in this industry is significantly low. It has attracted many young college graduates who are trying to come up with their own business units. According to Fonteyne, this industry is also attracting a significant number of those who have retired (79). Instead of keeping their wealth in the bank, a number of these retirees consider investing in tourism industry because of a number of factors. It is not involving as other industries. It does not require huge number of employees, especially if it is done in small scale. Above all, it offers these retirees opportunity to tour their country, remain active, and be very social instead of resting at home or in homes for the elderly. Even if they do not get huge profits from their operations, they get satisfaction of interacting with the world even at their advanced ages.

A study by Jobst shows that tourism accounts for over 10% of the countrys gross domestic product (112). The Austrian government has invested heavily on tourism as it becomes a major income earner in the country. Improved security, modern infrastructure, and maintenance of the natural sceneries are some of the ways through which the government is trying to improve tourism in the country. The city of Vienna, which was determined to have one of the leading GDP per capita in the entire region of Europe, is one of the top tourism destinations in Austria.

This clearly shows how significant tourism is to the countrys economy. Like the mining industry, tourism has a ripple effect on the countrys GDP. According to Lin, some of the tourists who visit this country spend more than one month (40). Instead of having their money in cash, they prefer having it in bank for the purpose of security. Some of the regular tourists who come from neighboring countries even consider having bank accounts with the local banks. As such, they are able to get money easily when they are visiting the country. When that happens, local banks get profits. Austria, just like many other countries in European Union, use euro as their currenc