Corporate Finance Assignment | Management Assignment

Added on - 28 May 2020

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Running head: CORPORPORATE FINANCE MANAGEMENTCORPORATE FINANCE MANAGEMENTName of the StudentName of the UniversityAuthor’s Note
1CORPORATE FINANCE MANAGEMENTTable of ContentIntroduction......................................................................................................................................4Discussion........................................................................................................................................5Possible causes of global financial crisis (GFC).........................................................................5Possibility of occurrence of GFC................................................................................................7Impact of GFC in economies of various countries......................................................................8Examples of financial crisis events............................................................................................10Indentifying some of the proposed reforms that eventuated during GFC.................................11Conclusion.................................................................................................................................11References......................................................................................................................................13
2CORPORATE FINANCE MANAGEMENTIntroductionThe assignment provides an overview about the causes and impact of global financialcrisis (GFC) among various countries. The study also focuses on the examples of the GFCevents that occurred during this period. The financial crisis during the period 2007-2008, alsotermed as GFC and is also considered as the worst crisis since the occurrence of great depressionof 1929. It is the most significant economic catastrophe that adversely influenced severalcountries in the world (Ait-Sahaliaet al.2012). This crisis started in the year 2007 with thesubprime mortgage crisis in the US, which further developed into international banking crisisalong with collapse of investment bank named as Lehman Brothers. Owing to this subprimemortgage crisis, several investors in US lost their confidence in making their investment inbusiness, which in turn caused liquidity crisis. This GFC had also worsened owing to crash andhigh volatility of the stock market. In fact, huge bail out of the financial organizations and othermonetary as well as fiscal policies had been integrated by the policymakers in order to preventcollapse of the global financial system (Berkmenet al. 2012). This global crisis was followed bythe economic downturn also known as Great Recession. In fact, the individuals having fear oftheir wealth also contributed to this GFC by demanding that the financial institutions as well asbanks repay their money as much as possible. By meeting the demand of customers causes thesebanks to liquidate financial assets holdings. In fact, some of the reforms that eventuated duringthis period are also highlighted in this study.
3CORPORATE FINANCE MANAGEMENTDiscussionPossible causes of global financial crisis (GFC)The global financial crisis was mainly caused owing to deregulation in financial sector. Thisallowed the banks and financial institutions to engage in trading hedge fund with the derivatives.The banks in turn demanded higher mortgages in order to support profitable derivatives sale. Infact, these banks in turn created interest on loan, which became affordable to the borrowers(Barakova, Calem and Wachter 2014). In the year 2004, this nation’s Federal Reserve increasedthe funds rates on these mortgages reset. The housing prices began to decline as supply of housesoutpaced demand. This in turn trapped those households who couldn’t afford to make thepayments as well as sell their residence. However, when these derivatives value deteriorated, thebanks and financial organizations stopped lending the money to each other. The four underlyingreasons that caused global financial crisis includes-Deregulation- Historical evidences reflected that the regulation of bank based on Basselaccords motivated unconventional business practices and this reinforced financial crisis.There are some cases where the laws had been changed in the parts of financial system.For example, in the year 1999, the president of US has signed a law (Gramm-Leach –BilleyAct) that repealed Glass Steagall Act provisions, which restricted the bank holdinginstitutions from owing other organizations. This repeal in turn removed division, whichexisted previously between the investment banks and the depository banks. However,investment banks trusted into competition with the scheduled commercial banks. Thus,this repeal contributed to GFC.Housing bubble growth- During the period 1998-2006, the house price increased by nearabout 124%. This resulted to numerous homeowners to refinance their residence at lower
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