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Analysis from the Existing Financial Disaster together with the Banking Industry

Analysis from the Existing Financial Disaster together with the Banking Industry

The existing monetary disaster began as section within the world liquidity crunch that happened around 2007 and 2008. It truly is believed that the disaster had been precipitated through the wide-ranging worry generated thru economic asset providing coupled having a gigantic deleveraging on the financial establishments in the important economies (Merrouche & Nier’, 2010). The collapse and exit belonging to the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by premier banking institutions in Europe as well as the United States has been associated with the worldwide money disaster. This paper will seeks to analyze how the global finance disaster came to be and its relation with the banking field.

Causes in the personal Crisis

The occurrence on the world monetary disaster is said to have had multiple causes with the key contributors being the finance institutions also, the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced from the years prior to the financial crisis increased the http://azwritingservice.com/proofreading attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and financial institutions from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to financial engineers with the big fiscal establishments who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was that 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 of the banking establishments experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices with the property market and as such most borrowers who had 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 by the central banks in terms of regulating the level of risk taking in the economical markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest 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 economic crisis.

Conclusion

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

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