Analysis of the Current Personal Crisis along with the Banking Industry
The present personal disaster commenced as section with the world wide liquidity crunch that happened involving 2007 and 2008. Its believed that the disaster had been precipitated with the wide-ranging panic produced by finance asset providing coupled accompanied by a large deleveraging around the fiscal institutions of the key economies (Merrouche & Nier’, 2010). The collapse and exit from the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by leading banking establishments in Europe plus the United States has been associated with the worldwide finance disaster. This paper will seeks to analyze how the global fiscal crisis came to be and its relation with the banking field.
Causes of your economic Crisis
The occurrence on the worldwide fiscal disaster is said to have had multiple causes with the main contributors being the fiscal establishments as well as the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced during the years prior to the finance crisis increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and monetary institutions from Europe into the American mortgage market where excessive and irrational risk taking took hold.
The risky mortgages were passed on to fiscal engineers inside 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 which the property rates in America would rise in future. However, the nationwide slump inside 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 with the banking establishments 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 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 institutions panicked when http://gurucasestudy.com/business this transpired which necessitated further reduction in their lending thus causing a downward spiral that resulted to the global economic recession. The complacency through the central banks in terms of regulating the level of risk taking within the financial 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 monetary imbalances which led to an economic recession. In addition to this, the failure because of 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 financial disaster.
The far reaching effects the economical disaster caused to the global economy especially from the banking market place after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul from the international money markets in terms of its mortgage and securities orientation need to be instituted to avert any future economic crisis. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending inside the banking field which would cushion against economic recessions caused by rising interest rates.