Assignment on Corporate Finance | Global Financial Crisis
Added on 2020-05-28
12 Pages3032 Words56 Views
FinanceEconomicsPolitical Science
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Running head: CORPORATE FINANCECorporate FinanceName of the Student:Name of the University:Authors Note:
CORPORATE FINANCE1Table of ContentsIntroduction:...............................................................................................................................2Discussing the possible causes of the financial crises:..............................................................2Identifying possibility in the second occurrence of GFC:.........................................................4Depicting the impact of GFC on other countries and in Australia:............................................6Depicting the proposed reforms used in controlling the financial crisis:...................................7Conclusion:................................................................................................................................8Reference and Bibliography:....................................................................................................10
CORPORATE FINANCE2Introduction:The aim of the assignments is to evaluate the overall impact of financial crisis oncompany’s performance and country's economic condition. The assessment mainly identifiesthe overall causes of financial crisis, which led to the decline of world financial market. Inaddition, assessment also aims in identifying the possibility of another global financial crisiswith could incur in future.Moreover, the impact of financial crisis on the economic conditionof Australia also analyzed, which could help in identifying the problems faced by Australiancompanies. Furthermore, the relative measures taken by the Australian government forcurbing the overall financial crisis is also depicted in the assessment.Discussing the possible causes of the financial crises:There were many factors which could be identified as be possible cause for the rise ofthe financial crisis. These factors are depicted as follows which paved the way for financialcrisis.Increment in interest rate:The rise in interest rates was one of the main factors that led to the rise of 2007financial crisis. The rising interest rates directly increased the overall payments that wereconducted on mortgages, which in turn increased installment value of the borrower. Thisincrement in the overall interest payment lead to mass defaulting of borrowers due tounavailability of relevant income to support the expenses. Previously the overall interest ratesmaintained by FED was low as compared to the industry during the financial crisis. Theinterest rate during the financial crisis mainly rose to the levels of 5.25%, which wassubstantially high and increased default rate from borrows (Armantier et al. 2015). This highdefault rate from mortgage borrowers directly reduced credit rating of the mortgage Bond
CORPORATE FINANCE3held by Financial Institutions. They were not able to acquire the required level of paymentsfrom there borrowers, which in turn hampered the capability to smoothly conduct theoperations. Increment in securitization of funds:The second major factor which boosted the rise of financial crisis was thesecuritization funds that was conducted by Financial Institutions. In addition, the use ofmortgage backed securities and credit default swaps securities was used by the financialinstitution to convert bank loans into mortgage bonds, which was then resold in the financialmarket. The provision that was provided to Financial Institutions to convert their loans intoone mortgage bond, which was rated by credit agencies. Companies were buying theMortgage bonds such as MBS and CDS, as AIG Insurance Company supported them. Theuse of credit default swaps was mainly helpful to bank in generating adequate capital forsupporting more loans. problems related to securitization mainly increased when credit ratingon mortgage bonds work fixed by banks, which led to the accumulation of junk securities inportfolios of organization (Benetrix, Lane and Shambaugh 2015). Therefore, the start ofdefault rate by borrowers declined value of assets and revenue generation capacity ofcompanies, which led to the augmentation of financial crisis.Deregulation of different laws:The deregulation of different laws in US mainly reduced the restrictions on banks,which led to the unethical measures conducted by financial institution to support their profitgoals. The deregulation of Glass Steagall Act of 1933 and Commodity Future ModernizationAct mainly led to the foundation of the financial crisis. These deregulations directly reducedcontrol on banks who accumulated high risk assets and raise their risk to reward ratio(Drydakis 2015). Now the banks were accumulating high risk assets, which they eventually
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