Analysis of the Current Money Crisis and the Banking Industry
Analysis of the Current Money Crisis and the Banking Industry
The recent fiscal crisis commenced as component of the global liquidity crunch that happened amongst 2007 and 2008. It is really thought that the crisis experienced been precipitated because of the intensive stress produced thru economic asset offering coupled which has a considerable deleveraging with the money establishments for the leading economies (Merrouche & Nier’, 2010). The collapse and exit in the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by principal banking institutions in Europe additionally, the United States has been associated with the global economical crisis. This paper will seeks to analyze how the worldwide finance disaster came to be and its relation with the banking market place.
Causes belonging to the fiscal Crisis
The occurrence with the intercontinental financial disaster is said to have experienced multiple causes with the key contributors being the fiscal institutions along with the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that experienced been experienced from the years prior to the economical crisis increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and personal institutions from Europe into the American mortgage market where excessive and irrational risk taking took hold.
The risky mortgages were passed on to monetary engineers inside the big economic 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 inside 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 of your banking institutions experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices on 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. https://celltrackingapps.com. 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 from the central banks in terms of regulating the level of risk taking during the economic markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest which the low policy rates experienced globally prior to the crisis stimulated the build-up of personal imbalances which led to an economic recession. In addition to this, the failure from 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 finance crisis.
Conclusion
The far reaching effects the financial crisis caused to the global economy especially on the banking industry after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul on the international finance markets in terms of its mortgage and securities orientation need to be instituted to avert any future finance crisis. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending in the banking community which would cushion against economic recessions caused by rising interest rates.
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