Analysis belonging to the Present Economic Crisis additionally, the Banking Industry

octombrie 14, 2016 | Autor: | Posted in Uncategorized

Analysis belonging to the Present Economic Crisis additionally, the Banking Industry

The current finance crisis started as element from the world liquidity crunch that transpired concerning 2007 and 2008. It can be thought that the disaster had been precipitated by the thorough stress created via economical asset providing coupled which has a massive deleveraging in the fiscal establishments within the primary economies (Merrouche & Nier’, 2010). The collapse and exit of the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by huge banking establishments in Europe and the United States has been associated with the worldwide finance crisis. This paper will seeks to analyze how the global financial disaster came to be and its relation with the banking field.

Causes with the economic Crisis

The occurrence in the world finance crisis is said to have experienced multiple causes with the most important contributors being the financial establishments and also central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced inside years prior to the fiscal crisis increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and economical establishments from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to financial engineers around the big money 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 from 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 in the banking institutions had to reduce their lending into the property markets. The decline in lending caused a decline of prices within the property market and as such most borrowers who experienced 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 occurred which necessitated further reduction in their lending thus causing a downward spiral that resulted to the global economic recession. The complacency via the central banks in terms of regulating the level of risk taking inside finance markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest that the low policy rates experienced globally prior to the disaster stimulated the build-up of economic imbalances which led to an economic recession. In addition to this, the failure by 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 money crisis.


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


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