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Analysis in the Existing Economic Crisis as well as Banking Industry

Analysis in the Existing Economic Crisis as well as Banking Industry

The latest financial disaster began as piece with the world liquidity crunch that happened in between 2007 and 2008. It’s always thought that the disaster experienced been precipitated by the in depth panic produced by means of finance asset promoting coupled which has a significant deleveraging within the economical establishments with the leading economies (Merrouche & Nier’, 2010). The collapse and exit for the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by important banking establishments in Europe plus the United States has been associated with the worldwide personal crisis. This paper will seeks to analyze how the global financial disaster came to be and its relation with the banking community.

Causes in the economical Crisis

The occurrence within the worldwide economical disaster is said to have experienced multiple causes with the main contributors being the personal institutions in addition to the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced around the years prior to the monetary crisis 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 personal engineers while in the big personal institutions 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 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 for the banking establishments experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices with 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 institutions panicked when this occurred which necessitated further reduction in their lending thus causing a downward spiral that resulted to the global economic recession. The complacency by the central banks in terms of regulating the level of risk taking inside of the personal markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest 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 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 financial crisis.


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