Analysis of your Existing Economic Crisis as well as the Banking Industry
The current personal crisis commenced as element from the international liquidity crunch that occurred somewhere between 2007 and 2008. It is actually believed that the crisis had been precipitated through the thorough panic produced via monetary asset marketing coupled having a immense deleveraging while in the money institutions from the main economies (Merrouche & Nier’, 2010). The collapse and exit on the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by primary banking institutions in Europe and also United States has been associated with the global finance crisis. This paper will seeks to analyze how the global money disaster came to be and its relation with the banking field.
Causes from the personal Crisis
The occurrence in the world fiscal crisis is said to have experienced multiple causes with the main contributors being the personal establishments in addition to the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that experienced been experienced from the years prior to the financial disaster 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 money engineers inside the big economic 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 different 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 in the banking establishments experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices inside 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 establishments panicked when this occurred which necessitated further reduction in their lending thus causing a downward spiral that resulted to the global economic recession. The complacency via the central banks in terms of regulating the level of risk taking on the economical markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest that the low policy rates experienced globally prior to the crisis stimulated the build-up of money 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 money disaster.
The far reaching effects that the economical disaster caused to the worldwide economy especially within the banking sector after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul of your international finance markets in terms of its mortgage and securities orientation need to be instituted to avert any future money crisis. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending inside the banking industry which would cushion against economic recessions caused by rising interest rates.