U.S. Tapering on Emerging Market Banking Sector

This Capstone project looked at monetary policy normalization in developed countries (principally, in the U.S.) and attempted to forecast what impact it will have on the banking sectors of emerging market countries, out to the end of 2015. Specifically, the Capstone team analyzed select banking sectors in Sub-Saharan Africa (Nigeria and South Africa), Asia (China, India, Indonesia, and South Korea), Europe (Russia and Turkey), and Latin America (Brazil and Mexico). The Capstone focused on the aggregated balance sheets and income statements of each country’s banking sector, to include their foreign exchange exposures and maturity profiles. The Capstone developed a model to test the first-order impact of various changes in interest rates, yield curves, and exchange rates (both together and in isolation) on banks’ net interest income, as well as on the marked-to-market valuations of their assets and liabilities. The team found that most regions' banking sectors stand to lose from tapering, except for Latin America, which may actually benefit from it. In the case of Europe and Asia, the losses are expected to be small and insignificant, respectively, and in Africa, they are expected to be manageable. Today, banks in emerging markets are generally well capitalized and conservatively run, and are well positioned to make the adjustment to a tighter global monetary environment.