Analysis on the Current Financial Disaster as well as the Banking Industry

Analysis on the Current Financial Disaster as well as the Banking Industry

The latest economic crisis commenced as piece of the international liquidity crunch that happened among 2007 and 2008. It truly is thought that the crisis experienced been precipitated from the broad panic created as a result of financial asset providing coupled which includes a massive deleveraging in the personal institutions of your important economies (Merrouche & Nier’, 2010). The collapse and exit within the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by primary banking institutions in Europe in addition to the United States has been associated with the worldwide finance disaster. This paper will seeks to analyze how the worldwide finance crisis came to be and its relation with the banking community.

Causes within the economical Crisis

The occurrence belonging to the world wide economic disaster is said to have had multiple causes with the foremost contributors being the personal institutions and therefore the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced around the years prior to the finance disaster increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and fiscal establishments from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to economical engineers during the big finance establishments who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was the property rates in America would rise in future. However, the nationwide slump while in the American property market in late 2006 meant that most of these collateralized debt obligations were worthless in terms of sourcing short-term funding and as such most banks were in danger of going bankrupt. The net effect was that most for the banking institutions experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices while in the property market and as such most borrowers who had speculated on future rise in prices had to sell off their assets to repay the loans an aspect that resulted into a bubble burst. The banking institutions panicked when this transpired which necessitated further reduction in their lending thus causing a downward spiral that resulted to the worldwide economic recession. The complacency with the central banks in terms of regulating the level of risk taking while in the fiscal markets contributed significantly to the crisis. Research by Merrouche and Nier (2010) suggest that the low policy rates experienced globally prior to the disaster stimulated the build-up of finance imbalances which led to an economic recession. In addition to this, the failure via the central banks to caution against the declining interest rates by lowering the maximum loan to value ratios for the mortgages banking institution’s offered contributed to the economic disaster.

Conclusion

The far reaching effects that the fiscal disaster caused to the global economy especially while in the banking market place after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul of the international finance markets in terms of its mortgage and securities orientation need to be instituted to avert any future economical disaster. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending inside the banking sector which would cushion against economic recessions caused by rising interest rates.

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