Analysis from the Latest Financial Crisis in addition to the Banking Industry
The recent monetary disaster started as aspect in the world wide liquidity crunch that transpired involving 2007 and 2008. It is actually thought that the crisis experienced been precipitated because of the substantial stress produced by economical asset promoting coupled by having a large deleveraging around the finance establishments for the major economies (Merrouche & Nier’, 2010). The collapse and exit with the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by serious banking establishments in Europe plus the United States has been associated with the worldwide fiscal disaster. This paper will seeks to analyze how the global finance crisis came to be and its relation with the banking community.
The occurrence with the international financial crisis is said to have had multiple causes with the most important contributors being the economic institutions and therefore the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that experienced been experienced around the years prior to the money disaster increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and finance establishments from Europe into the American mortgage market where excessive and irrational risk taking took hold.
The risky mortgages were passed on to finance engineers around the big financial 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 on 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 http://buytermpapersonline.net as such most banks were in danger of going bankrupt. The net effect was that most from the banking institutions experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices from the property market and as such most borrowers who experienced speculated on future rise in prices experienced to sell off their assets to repay the loans an aspect that resulted into a bubble burst. The banking establishments panicked when this happened which necessitated further reduction in their lending thus causing a downward spiral that resulted to the worldwide economic recession. The complacency through the central banks in terms of regulating the level of risk taking inside economic 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 money imbalances which led to an economic recession. In addition to this, the failure with 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.
The far reaching effects the economical disaster caused to the global economy especially while in the banking trade after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul in the international monetary markets in terms of its mortgage and securities orientation need to be instituted to avert any future economical crisis. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending around the banking field which would cushion against economic recessions caused by rising interest rates.