Analysis from the Existing Economic Disaster in addition to the Banking Industry

Analysis from the Existing Economic Disaster in addition to the Banking Industry

The active money crisis began as half on the international liquidity crunch that transpired amongst 2007 and 2008. It is always thought that the crisis experienced been precipitated through the substantial stress produced because of monetary asset providing coupled with a massive deleveraging during the economical establishments of your main 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 uk assignments major banking establishments in Europe and the United States has been associated with the worldwide personal disaster. This paper will seeks to analyze how the worldwide economic crisis came to be and its relation with the banking industry.

Causes on the personal Crisis

The occurrence in the world-wide money disaster is said to have had multiple causes with the key contributors being the financial establishments as well as 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 money disaster increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and economical institutions from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to personal engineers around 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 during 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 on the banking institutions had 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 experienced 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 global economic recession. The complacency from the central banks in terms of regulating the level of risk taking with the economic 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 monetary 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 economic crisis.


The far reaching effects which the monetary crisis caused to the global economy especially during the banking sector 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 monetary disaster. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending during the banking business which would cushion against economic recessions caused by rising interest rates.

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