Impact of the Global Financial Crisis

This assignment delves into the multifaceted consequences of the Global Financial Crisis. It requires students to analyze its effects across diverse spheres such as finance, corporate investment, banking globalization, sovereign spreads, and poverty levels. Students are expected to evaluate policy responses implemented in the aftermath of the crisis and assess its long-term implications for global economic development.

Running Head: CORPORATE FINANCIAL MANAGEMENT
Corporate financial management
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction:..............................................................................................................................2
Discussion:.................................................................................................................................2
Possible causes of financial crisis:.............................................................................................2
Possibility of repetition of financial crisis:................................................................................2
Financial crisis impact on different countries economics and Nepal:.......................................2
Impact of financial crisis on share market and housing industry:.............................................2
Reforms for reducing financial crisis:.......................................................................................2
Conclusion and recommendations:............................................................................................2

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Introduction:
Global financial crisis (GFC, 2008-2009) is regarded as worth economic disaster since the
economic depression that took in year 1929. The primary cause for occurrence of such crisis is
attributed to financial industry deregulation. GFC led to the evolvement of great recessions
resulting in rising of unemployment and falling of house prices. Eruption of GFC is believed to
happen in year 2007 due to liquidity crisis in light of declining confidence of US investors in
value of subprime mortgages. Financial crisis worsened due to high volatility and crash of global
stock market by September 2008. GFC was triggered due to housing collapse in US market and
it led to fall in worldwide remittance flow from 2008-2009 by 6% (Ojo 2016). It has been
ascertained that according to update of IMF (International monetary fund) outlook economies of
both developing and developed countries was engulfed by financial crisis and shrinking the
global level of output at 2.2% in year 2009 (Attig et al. 2016). Nepal is perceived to have not
been directly impacted by GFC and there are several indirect impact.
Discussion:
Possible causes of financial crisis:
Some of the possible causes of GFC are as follows:
Global saving glut- One of the main reasons behind sharp rise in price of asset was current
account deficit prevailing in US and global saving glut. Countries had modest current account
and trade deficits before the crisis, there was substantial increasing in saving, and foreign
borrowings were curtailed instead of becoming lender to US. Developing countries were saving

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rather than buying into the capital market of world and this reversal has resulted in producing
global saving glut. Advanced countries capital market were in search for investment and
increasing demand resulted in rising price of assets in US including housing and stock market.
Housing prices- Substantial decline in housing price was one of the major economic
shocks that triggered global financial crisis. During 1996-2006, there was increase in price of
housing due to lower interest rate and demand pressures of new economy. In between middle of
year 2006 and middle of February 2009, housing price started declining making it largest decline
since year 1987 (Balakrishnan et al. 2016). This fall was because mortgage lending was mainly
directed to rich and were not saddled to increasingly debt burdens of large mortgage.
Bubble burst of housing price:
(Source: imf.org 2018)
Rising interest rate and subprime lending- Housing price rose further due to
increasingly lax standards of lending and lower interest rate that is associated with saving glut.
Borrowers who took out loans were largely subprime lender and the mainstream standards could
not be met due to their poor credit worthiness. Fed increased rate of interest that helped in

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softening softly and made borrowing more costly (Dungey and Gajurel 2014). Furthermore,
housing price was severely impacted due to mortgage rates moving from low rates to higher
market rates.
Credit booms- Large role played up for triggering financial crisis is the rapid credit
expansion. Credit access grew at faster pace that accelerated boom in real estate market in
countries such as Spain, Ireland, UK, Iceland and some other European countries. There were
large cyclical fluctuations within economy due to coinciding of rapid growth in credit. Housing
indebtedness rose rapidly in US after 2000 although accelerated credit growths were not much
pronounced and this reflected slow growth of credit (Bauer and Thant 2015). Financial
innovation, increased mortgage financing and low interest rate historically were all contributing
factor in expansion of housing indebtedness.
Possibility of repetition of financial crisis:
As per business cycle theory, there is possibility of repetition of global financial crisis. It
can be seen that there can be possibility of occurrence of financial crisis as the global financial
system is on the expansion stage and this would lead to the chance that economy would further
fall and it will reach a stage of depression.

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Business cycle:
(Source: Balakrishnan et al. 2016)
Financial crisis impact on different countries economics and Nepal:
Financial sector effects- Health of financial sector, macroeconomic performances and
exposure to foreign capital market differs substantially from one country to another. The adverse
impact of foreign direct investment and capital flows has adversely influenced economy of
country such as India. Largest current and fiscal account deficit has affected Sri Lanka in terms
of low capital inflow from outside and there was rise in spread of bond of country. Adverse
impact of global financial crisis was also evident on Nepal as they are emerging from low growth
situation. Fall in international fuel and food price, inflation was at its peak and financial
indicators such as low capital adequacy and non-performing loans have contributed towards very
weak financial sector of Nepal (Albertazzi and Bottero 2014).

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Impact of remittance- GFC led to decline in flow of remittance from 2008-2009 by 6%
and countries that were list hit are that of Asia pacific region at 2% compared to fall in Latin
America, sub Saharan Africa ,Central Asia, Caribbean, north Asia and Middle east.
Glow remittance inflow:
(Source: Vazquez and Federico 2015)
Growth of remittance flow to Nepal:
(Source: lib.icimod.org 2018)

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However, case of Nepal was not usual and it did not experience flow of remittance. Flow
of remittance to Nepal never declined from 1998 to 2010. It was the fifth largest remittances
recipient in terms of worldwide share of GDP.
Foreign exchange reserve- Corporate sector of developing and emerging economies
were significantly affected by financial crisis as there were increased funding problems and
leading to foreign exchange loss. For lowering the overall funding needs of marketer, it is
required to curtail the funding of foreign exchange activities of merging economies. Foreign
exchange reserves of Nepalese banking system during financial crisis decelerated due to
slowdown of interest income and inflow from remittance. Growth of Foreign exchange reserves
in terms of 17.3% to USD $ 3.64 billion in year 2008-2009 and 21.9% to US $ 3.1 billion in year
2007-2008 (Abraham and Rajan 2014).
Impact on macroeconomic balances- The term of trade stocks has led to worsening of
macroeconomic balances of South Asian countries. For the past few months during the time and
after financial crisis, commodity prices were falling. Current account tends to be hurt by
slowdown of remittances and earning from exports (Vazquez and Federico 2015). Due to falling
prices, there is likelihood that revenue earnings will also decline.
Import- The downward trend in the commodity price especially in terms of fuel and food
is one of the redeeming features in terms of import. A further reduction on prices of commodities
is caused due to recession in OECD countries and south Asian countries will be positively
impacted by it.

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Impact of financial crisis on share market and housing industry:
Effect on housing industry- From the implications of real economy, downside impact of
financial sector crisis are much substantial and direct in nature. Financial crisis created a biggest
disruption in housing industry. It can be explained as follows:
Investment- The combined effect of increased non-performing assets in domestic banks
and slowdown of foreign funding poses the main risk to growth as investment is adversely
impacted by it. This will owe low profits for companies that are producing export market
products. Availability of domestic financing for the purpose of investment was reduced and there
was slowdown in domestic investment rate. Growth and investment in South Asian countries was
reduced due to slowdown of foreign capital and export earnings (Boychuk et al. 2012).
Impact of GFC on share market-
Financial crisis brought high degree of volatility in the stock market and the transmission
of volatility varies from one financial market to another in terms of stock severity arising and in
terms of magnitude. Global crisis of US in year 2009 resulting from subprime mortgage market
collapse has led to liquidity crisis that contributed to collapse of stock market. It has been
ascertained that this many countries were engulfed in this crash of stock market. During the
financial crisis, shock that arise from US market has increased the volatility of New Zealand and
Australia stock market. Stock market of US, Japan and Germany were identified with volatility
transmission pattern. Stock market of these countries was influenced by the commencement of
global financial crisis. This volatility in the stock market pushes up the borrowing cost that might
result in losing of confidence of investors and it would affect the investment market in stock
effect country (Bénétrix et al. 2015).

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The financial sector of country like Nepal is not closely related to global financial system
and they are not plagued with the adverse impact of financial crisis in the first instance. Share
and investment market of Nepal does not have direct link with global investment market and it
has second and third round of repercussions in terms of falling exports, declining tourisms,
additional debt servicing burden and loss of foreign aid and all this had worsened trade deficit of
country. It is viewed that possibility of being victimized of there is higher degree of integration.
Funds available in banks of Nepal is more than what is needed by nation and vulnerability of
such reserves was attributable to indirect impact of financial crisis such as weakening consumer
spending and declining aggregate demand (Cayon et al. 2017).
Reforms for reducing financial crisis:
Countries and financial system should retain some core principles for avoiding
occurrence of global financial crisis. The possibility of reduction of impact of such financial
crisis can be done by adopting some appropriate measures and they are as follows:
Capital planning and stress testing- Largest banks should have forward looking capital
planning and stress testing. Federal reserve has designed annual comprehensive capital analysis
and review that would help in the assessment of lending capacity of large banks at the time of
economic downturn for continuing lending to companies sand household. Stress testing is
another regulatory regime and conducting this test will help in making a forward looking and
more dynamic risk based framework of capital (Obstfeld 2015). All this will help in creating
transparency in the capital market of different countries.
Heightened capital regulations- Risk based capital requirement of banks should be
heightened and they should have significantly more common equity in relation to risk-weighted

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assets (Haas and Lelyveld 2014). There should be higher capital standards for banks, regulations
concerning capital should be based on risks, and they are required to have more equity capital
against riskiest assets.
Tools formation for facilitating reorganization and failure of complex financial
firms- A new specialized revolution should be created for complex and large financial banks
(Kemp 2015). Some of regime such as single point of entry, orderly liquidation authority and
total loss absorbing capacity would ensure that losses associated with any failures should be
borne by long-term debt holders and not the taxpayers.
All these reforms are considered as major step and it is because of two reasons. Problems
related “to too big to fail” will be addressed by the introduction of such reforms and the implicit
guarantees for benefitting financial firm’s pre crisis will be reduced. The likely of large financial
firm to undergo an orderly failure has increased and this will make economic les vulnerable to
crisis (Claessens and Van Horen 2015).
Conclusion and recommendations:
The report prepared deals with demonstration of causes and impact of global financial crisis
on different countries with particular reference to Nepal. It has been ascertained that global
financial crisis had created impact in second and third round in terms of remittances flow,
tourism, foreign exchange reserves and commodity prices. Financial crisis created a cascading
impact on economy of Nepal related to non-investment in productive sectors and unemployment.
Financial system of Nepal has not been directly impacted by financial crisis. There was a
downward impact on growth rate of country due to fall in global demand for manufactured
product of Nepal. Service industry of country has also been adversely impacted by recession and

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global slowdown. Furthermore, stock market of different countries crashed and this limited the
growth of stock market. From the above discussion, it can be inferred that global financial crisis
influenced the financial structures of many countries and hampered small and medium firms
along with large investment. High-income countries as well as developing countries experienced
trauma of financial crisis in terms of declining of use of long-term debt and financial leverage of
firms. It is required by large institutions and banks to adopt an implement above-mentioned
reforms that will help in reducing the chances of occurrence of such crisis.

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References list:
Abraham, V. and Rajan, S.I., 2014. Global Financial Crisis and Return of South Asian Gulf
Migrants. India Migration Report 2012: Global Financial Crisis, Migration and Remittances,
p.197.
Albertazzi, U. and Bottero, M., 2014. Foreign bank lending: evidence from the global financial
crisis. Journal of International Economics, 92, pp.S22-S35
Attig, N., Boubakri, N., El Ghoul, S. and Guedhami, O., 2016. The global financial crisis, family
control, and dividend policy. Financial Management, 45(2), pp.291-313.
Balakrishnan, K., Watts, R. and Zuo, L., 2016. The effect of accounting conservatism on
corporate investment during the global financial crisis. Journal of Business Finance &
Accounting, 43(5-6), pp.513-542.
Bauer, A. and Thant, M. eds., 2015. Poverty and sustainable development in Asia: Impacts and
responses to the global economic crisis. Asian Development Bank.
Bénétrix, A., Lane, P.R. and Shambaugh, J.C., 2015. DP10325 International Currency
Exposures, Valuation Effects and the Global Financial Crisis.
Boychuk, G.W., Mahon, R. and McBride, S. eds., 2015. After'08: Social Policy and the Global
Financial Crisis. UBC Press.
Cayon, E., Thorp, S. and Wu, E., 2017. Immunity and infection: Emerging and developed market
sovereign spreads over the Global Financial Crisis. Emerging Markets Review.

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Claessens, S. and Van Horen, N., 2015. The impact of the global financial crisis on banking
globalization. IMF Economic Review, 63(4), pp.868-918.
Dungey, M. and Gajurel, D., 2014. Equity market contagion during the global financial crisis:
Evidence from the world's eight largest economies. Economic Systems, 38(2), pp.161-177.
Haas, R. and Lelyveld, I., 2014. Multinational banks and the global financial crisis: Weathering
the perfect storm?. Journal of Money, Credit and Banking, 46(s1), pp.333-364.
IMF. (2016). IMF’s Response to the Global Economic Crisis. [online] Available at:
http://www.imf.org/en/About/Factsheets/Sheets/2016/07/27/15/19/Response-to-the-Global-
Economic-Crisis [Accessed 18 Jan. 2018].
Kemp, P.A., 2015. Private renting after the global financial crisis. Housing Studies, 30(4),
pp.601-620.
Lib.icimod.org. (2018). [online] Available at:
http://lib.icimod.org/record/26979/files/c_attachment_767_6007.pdf [Accessed 18 Jan. 2018].
Obstfeld, M., 2015. after the Global Financial Crisis. POLICY CHALLENGES IN A
DIVERGING GLOBAL ECONOMY, p.383
Ojo, A.O., 2016. Corporate governance and risk management in the financial industry: changes
after the global financial crisis.
Vazquez, F. and Federico, P., 2015. Bank funding structures and risk: Evidence from the global
financial crisis. Journal of banking & finance, 61, pp.1-14.