Analysis of the Present-day Money Disaster and the Banking Industry

Analysis of the Present-day Money Disaster and the Banking Industry

The recent financial disaster commenced as portion within the global liquidity crunch that transpired among 2007 and 2008. It is really believed that the disaster had been precipitated through the comprehensive panic created thru money asset selling coupled by having a substantial deleveraging on the finance institutions belonging to the huge 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 serious banking institutions in Europe and also the United States has been associated with the global economical disaster. This paper will seeks to analyze how the global money disaster came to be and its relation with the banking industry.

Causes with the economic Crisis

The occurrence belonging to the world wide monetary crisis is said to have had multiple causes with the main contributors being the monetary institutions as well as central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that experienced been experienced inside of the years prior to the personal crisis increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and fiscal establishments from Europe into the American mortgage market where http://master-of-papers.com/buy-essay excessive and irrational risk taking took hold.

The risky mortgages were passed on to finance engineers from the big personal institutions 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 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 with the banking establishments experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices while in 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. The banking institutions panicked when this transpired which necessitated further reduction in their lending thus causing a downward spiral that resulted to the worldwide economic recession. The complacency through the central banks in terms of regulating the level of risk taking with the personal markets contributed significantly to the crisis. Research by Merrouche and Nier (2010) suggest that the low policy rates experienced globally prior to the disaster stimulated the build-up of economical imbalances which led to an economic recession. In addition to this, the failure with 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 personal disaster.

Conclusion

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

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