Analysis in the Active Financial Crisis as well as the Banking Industry

The active finance disaster started as part of the international liquidity crunch that occurred among 2007 and 2008. It really is thought that the crisis had been precipitated from the considerable stress created by means of finance asset selling coupled which has a huge deleveraging with the financial establishments on the main 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 key banking institutions in Europe and therefore the United States has been associated with the global economical crisis. This paper will seeks to analyze how the worldwide money crisis came to be and its relation with the banking trade.

Causes belonging to the financial Crisis

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

The risky mortgages were passed on to personal engineers while in the big finance establishments who in-turn pooled them together to back less risky securities in form term paper help of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was the property rates in America would rise in future. However, the nationwide slump with 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 from the banking institutions experienced 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 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 via the central banks in terms of regulating the level of risk taking during the fiscal markets contributed significantly to the crisis. Research by Merrouche and Nier (2010) suggest the low policy rates experienced globally prior to the crisis stimulated the build-up of fiscal imbalances which led to an economic recession. In addition to this, the failure through 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 disaster.

Conclusion

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