Impact of the Financial Crisis on Banking Sector

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Impact of the Financial Crisis on Banking Sector
The current financial crisis, which started in the Unites States, has dominated the headlines all around the world since summer 2007. The world has been experiencing one of the most severe crises such as the Great Depression from 1929. This started as a subprime crisis with problems in the subprime mortgage market in the USA in 2007 which spread throughout the world. This subprime turmoil turned soon to a global financial crisis and turnaround to a worldwide recession (Calomiris, 2008). The effect of the financial crisis resulted in problems in the financial systems of many countries. The objective of this paper is to get an overview of the impacts of the current financial crisis on the banking sector in main regions of the world and also its impact on different industries. In this section some background information of the current financial crisis on banking sector will be discussed. The subprime mortgage market has experienced a boom in the United States during the last few years because of the attractive mortgage loan terms. In addition, subprime mortgage borrowers were a new market for banks in the USA even though in the U.K., larger mortgage loans were made available. Furthermore, homeowners borrowed more money against their homes to fund holidays, car purchases, home extensions and second homes etc. Second homes might be holiday homes or homes bought to let with the intention of making more money as house prices rose. In addition, lenders such as Northern Rock even loaned more than the value of the property. This boom ended with the start of the current financial crises. In addition, there were a lot of hidden risks and failures in the mortgage market like the liquidity risk, credit risk, and interest rate risk which makes the banking sector vulnerable (Calomiris, 2008).

Figure 1: U.S. and European Bank and Insurance Company Market Capitalization, Writedowns, and Capital Infusions According to Figure 1, the impact of financial crisis on banking sector is very harsh. Since the beginning of the crisis, market capitalization of global banks has fallen by more than 50 percent from $3.6 trillion to $1.6 trillion. The following subsections provide an overview of needy banks in different regions: First, after the primary indication of liquidity crisis in August 2007, the U.S. banking sector got strong signals in which successively, banks have closed down. In March 2008 the US problems at investment bank Bear Sterns hit the headlines. In addition, the Northern Rock was the first bank which seeks and receives a liquidity support from the Bank of England. Afterwards in January 2008, this bank became nationalized. Furthermore, the U.S. government takes over Fannie Mae and Freddie Mac. In addition, there was a big shock when Lehman Brothers Holding filed for bankruptcy protection (Anonymous, 2008). In other major events include the acquisition of Merrill lynch by Bank of America Corporation and partial nationalization of Fortis holding and lot of undeclared large loses in financial markets worldwide over September and October 2008. There are 58 small regional banks which have failed since January 25th, 2008 (Fletcher, 2009). The situation of US banking sector can easily be analyzed by the following chart in which the non-borrowed reserves show sudden negative trend for the first time since these statistics have been kept (Chernlawski, 2008).

Figure 2: Non-Borrowed Reserves of Depository Institutions
On the one hand, does it mean that US banking sector have not enough reserves even for its own stability and operations? On the other hand, the U.S. government says that the largest U.S: banks are strong enough to survive the recession, even if it gets worse. Federal Reserve Chairman Ben Benmnke said that nearly all the banks that were evaluated have enough capital to absorb the higher losses envisioned under the hypothetical adverse scenario (Kurata, 2009). The same crisis...
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