Analysis for the Present Economic Disaster additionally, the Banking Industry

Analysis for the Present Economic Disaster additionally, the Banking Industry

The up-to-date financial crisis commenced as aspect for the intercontinental liquidity crunch that happened among 2007 and 2008. It’s always believed that the disaster had been precipitated with the detailed panic generated by financial asset offering coupled by having a large deleveraging while in the personal institutions for the premier economies (Merrouche & Nier’, 2010). The collapse and exit of the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by serious banking institutions in Europe also, the United States has been associated with the worldwide financial disaster. This paper will seeks to analyze how the global financial disaster came to be and its relation with the banking business.

Causes from the economical Crisis

The occurrence for the international economic disaster is said to have experienced multiple causes with the key contributors being the monetary institutions 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 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 fiscal institutions from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to financial engineers while in 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 that the property rates in America would rise in future. However, the nationwide slump from 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 of the banking establishments had to reduce their lending into the property markets. The decline in lending caused a decline of prices around the property market and as such most borrowers who experienced 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 institutions panicked when this occurred which necessitated further reduction in their lending thus causing a downward spiral that resulted to the worldwide economic recession. The complacency via the central banks in terms of regulating the level of risk taking on the monetary markets contributed significantly to the crisis. Research by Merrouche and Nier (2010) suggest which the low policy rates experienced globally prior to the disaster stimulated the build-up of finance imbalances which led to an economic recession. In addition to this, the failure by 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.


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

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