Analysis from the Existing Finance Crisis and the Banking Industry

The present-day money crisis commenced as section within the world liquidity crunch that occurred in between 2007 and 2008. Its thought that the disaster experienced been precipitated from the broad stress produced as a result of economical asset advertising coupled by having a enormous deleveraging on the monetary institutions for the premier 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 serious banking institutions in Europe and therefore the United States has been associated with the worldwide finance crisis. This paper will seeks to analyze how the worldwide monetary crisis came to be and its relation with the banking market.

Causes from the economic Crisis

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

The risky mortgages were passed on to fiscal engineers during 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 that the property rates in America would rise in future. However, the nationwide slump around 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 in 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 http://www.essays.expert/ banking establishments panicked when this happened 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 money 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 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 fiscal crisis.

Conclusion

The far reaching effects that the financial crisis caused to the worldwide economy especially inside of the banking marketplace after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul with the international monetary 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 around the banking marketplace which would cushion against economic recessions caused by rising interest rates.