Analysis from the Active Monetary Crisis and therefore the Banking Industry

Posted by   on: October 17th, 2016

Analysis from the Active Monetary Crisis and therefore the Banking Industry

The up-to-date financial disaster commenced as element on the global liquidity crunch that transpired somewhere between 2007 and 2008. Its believed that the crisis had been precipitated through the intensive worry generated by using money asset promoting coupled which has a large deleveraging during the economical institutions for the key 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 main banking institutions in Europe together with the United States has been associated with the global personal crisis. This paper will seeks to analyze how the global economic disaster came to be and its relation with the banking market place.

Causes from the personal Crisis

The occurrence of the worldwide fiscal crisis is said to have experienced multiple causes with the major contributors being the money 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 in the years prior to the finance disaster increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and economical establishments from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to monetary engineers within the big monetary establishments who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009) The assumption was which 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 within the banking establishments 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 had 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 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 crisis stimulated the build-up of financial 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 monetary disaster.


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

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