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Analysis of the Existing Money Crisis and the Banking Industry

Analysis of the Existing Money Crisis and the Banking Industry

The present-day monetary crisis began as part of the global liquidity crunch that transpired between 2007 and 2008. It really is thought that the crisis had been precipitated from the detailed stress produced by using fiscal asset providing coupled which has a significant deleveraging within the financial establishments in the big economies (Merrouche & Nier’, 2010). The collapse and exit in the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by leading banking institutions in Europe in addition to the United States has been associated with the global economic disaster. This paper will seeks to analyze how the global fiscal crisis came to be and its relation with the banking marketplace.

Causes in the financial Crisis

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

The risky mortgages were passed on to money engineers in the big economic institutions who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was the property rates in America would rise in future. However, the nationwide slump while in 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 within the banking institutions experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices with the property market and as such most borrowers who experienced speculated on future rise in prices had http://essaywhales.com/homework 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 by the central banks in terms of regulating the level of risk taking on the money markets contributed significantly to the crisis. Research by Merrouche and Nier (2010) suggest that the low policy rates experienced globally prior to the crisis stimulated the build-up of finance imbalances which led to an economic recession. In addition to this, the failure via 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 monetary crisis.

Conclusion

The far reaching effects which the finance disaster caused to the worldwide economy especially around the banking field after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul with the international money markets in terms of its mortgage and securities orientation need to be instituted to avert any future monetary 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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