Global financial crisis can be seen around the world in different countries. The financial crisis which was hit in the year 2008 was noted as one of the worst financial crisis after the great depression which was noted in the year 1930, and the world is still suffering from that crisis. The banks started to face loss from the year 2007 itself but it wasn’t made clear to the world till United States allowed Lehman brothers to go bankrupt. Nobody knew how big the losses were until Lehman brothers went down. When it was seen that Lehman brothers were going down it was believed that every bank was having an opinion to be risky. The threat of having a high risk of global financial crisis made the governments in western countries to inject more and more capital into the banks so as to prevent them from collapsing. But it was believed that it was late from preventing the global economy to go into the crisis. When the business and consumer confidence was collapsed the credit flow to the private sector was stopped. And this is how the crisis started (Elliot, 2011).
The essay is structured in four parts. The first part talks about the causes due to which the financial crises started followed by the current and the emerging trends in the financial markets. The second part is about the recent and the future key economic indicators and its impact on global financial market. The next section is about the financial regulations and supervision followed by the effects of the recent changes in financial regulations on the financial markets and banking sector.
THE REASONS FOR FINANCIAL CRISIS:
Securitization and the subprime crisis: The subprime crisis came into existence because of securitization where banks would put off risky loans onto others by bringing together their diverse loans into sellable assets. For e.g. in order to create more securitization banks borrowed more money to lend out. (SHAH, Anup, 2010) “The originate-to-distribute model” was mishandled at many points to finance subprime mortgages through securitization and hence this model itself became a massive risk instead of managing the risk. (HOFFMAN, Damien, 2010) Whoever bought the securities was in the problem of bad loans because securities were sold as loans. Due to increase in house pricing banks offered credit in terms of loan to the households hence many people were able to purchase houses they couldn’t afford. Many banks were inviting problems for themselves by taking on huge risks including off-balance-sheet exposures. (SHAH, Anup, 2010)
Lack of risk management: Weakness of global financial system can also be analyzed as a result of poor risk management by issuers as well as investors. There were many major defects in private-sector risk management along with risk controls. Investors were excessively dependent upon credit ratings in the case of structured credit products. Among other problems, most of the financial firms were putting all eggs in one basket and therefore this led to poor risk diversification. This problem also affected institutions that were neither large nor “too-big-to-fail”. Examples include deterioration of underwriting principles for commercial real estate loans, together with poor management of concentration risk and other risks by commercial real estate lenders. Small and large firm could go ahead with subprime lending. (HOFFMAN, Damien, 2010) Regulator like fed lacked authority to control over all systemically important financial institutions. Adding onto this, since many agencies in US were responsible for a specific class of financial institutions no agency was well placed to supervise emerging system. (JICKLING, Mark, 2010)
Housing Bubble: An increase in interest rates and contraction of credit standards caused less demand for housing and hence this led to housing bubble to burst. For e.g. in 2008, there was wealth destruction due to housing bubble in U.S and hence in 2009 the largest financial...