Global Financial Crisis: Causes and Impacts

This assignment delves into the Global Financial Crisis, requiring students to examine its root causes and analyze its far-reaching consequences. A selection of academic journal articles focusing on various aspects of the crisis, such as lending standards, regulatory failures, and cross-country economic impacts, are provided for analysis.

Running head: CORPORATE FINANCE
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Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Possible reasons of the GFC (Global financial crisis).................................................................3
Examples of financial crisis events..............................................................................................4
Impact of GFC in Pakistan and several other nations..................................................................5
Identifying few proposed reforms that occurred during GFC.....................................................8
Possibility of GFC occurrence in future......................................................................................9
Conclusion.................................................................................................................................10
References......................................................................................................................................11

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Introduction
The present report highlights on the cause and effect of GFC (global financial crisis) on
several countries that occurred during the year 2008 and 2009. This paper also aims to provide
an overview about the examples of financial crisis events, identification of proposed reforms and
possibility of its occurrence in future. The GFC also referred to as financial crisis occurred
during the year 2008 and 2009 has been considered as worst crisis since occurrence of great the
depression event in the year 1929. It is one of the economic catastrophes, which adversely
affected most of the nations in the globe. The GFC began in the last quarter of the year 2007
with the housing bubble in US and this in turn led to subprime mortgage crisis, collapse of
several investment banks including Lehman Brothers (Berkmen et al. 2012). However, the
persons staying in this nation had huge fear of getting their money back and thus demanded their
money from these financial institutions and investment banks. As a result, these banks adopted
several measures in order to meet the demand of these people, which in turn led to liquidation of
the holdings of financial asset by the banks. This event mainly worsened due to crash as well as
high instability of the stock market. This crisis was then followed by downturn in economy of
several countries, which is also termed as Great recession. The policymakers of some of the
countries also changed their monetary as well as fiscal policies for restricting huge downfall of
their global financial system (Frankel and Saravelos 2012). However, some developed nations
succeeded by adopting these policies while other developing economies and emerging markets
failed to adopt these. This study also elucidates on the effect of GFC on Pakistan and other
economies. The possibility of occurrence of this event is also analyzed in this report.

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Discussion
Possible reasons of the GFC (Global financial crisis)
The GFC is believed to have started in the year 2007 mainly due to three underlying
causes that includes- deregulation of the financial industry, mismanagement of risk in business
and interest rate level. The crumple of real estate boom in this country also triggered to as the
important cause of the GFC (Jarsulic 2012). This boom was usually developed on the borrowed
money. However, the lenders of this nation were highly geared and hence decline in value of real
estate pushed them into insolvency. In addition, these banks then strategized to engage in hedge
funding along with the derivatives, thereby demanded high mortgage rate for supporting sale of
profitable derivatives. The four fundamental reasons that caused GFC are given as under –
Housing bubble growth- The housing bubble increased by around 124% in the US during the
period 1998-2006. The individuals who had raised their wealth were spending huge amount on
increasing stocks. This increase in stock wealth led to consumption boom to purchase better
residence as they sought in buying new stock on housing. This rise in demand impacted on
triggering housing bubble as the supply of residence became relatively fixed (Barakova, Calem
and Wachter 2014). This caused several residence owners to refinance at low interest rate or
finance their spending by taking the mortgages. However, this larger amount of money sought
high yields with respect to that provided by the treasury bonds. This money was then connected
to the mortgage market by the investment banks. In 2003, the supply of mortgage exhausted,
which in turn reduced lending standards. During the GFC, the prices of residence again
decreased by 20%, thereby the borrowers faced huge difficulty in refinancing high payments

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relative to rate of interest. Thus, the housing prices decreased by their 30% from the year 2007 to
the end of 2008.
Predatory lending- This signifies to as the practice of unscrupulous lending that tempt the
borrowers to shift into insecure loans for some bad purposes. The banks in this nation gave loans
to numerous borrowers for their illegal business practices. As a result, this caused GFC in this
nation.
Deregulation- Recent study reflects that the bank regulation that relied in the Bassel accords
encouraged unconventional practices of business, which in turn armored into GFC. The US
president in the year 1999 had signed the law, which repealed provisions of Glass Steagull Act
and this in turn prohibited the financial organization from holding other institutions. However,
this repeal eliminated division between the investment banks and other depository banks. This
led to GFC.
Examples of financial crisis events
Subprime mortgage crisis- The crises in subprime mortgage was basically triggered by decrease
in residence prices after this housing bubble. As a result, it led to securities devaluation and
mortgage delinquencies. The two basic reasons for this crisis were increase in residence
speculation and subprime lending. Easier conditions of credit contributed to rise in total amount
of subprime lending during this period (Dell’Ariccia, Igan and Laeven 2012). The housing
bubble that led to this crisis was mainly financed with collateralized debt obligations (CDO) and
mortgage backed securities (MBS) that offered higher rate of interest than the government
securities. Moreover, there were several other causes of these crisis- bad residence policies, risky

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mortgage product, trade imbalance, adoption of improper government regulation and inability of
the house owners to make their payments (Shiller 2012).
Collapse of the Lehman Brothers- One of the investment bank Lehman Brothers was filed for
bankruptcy during this period. With a total of $619 billion debt and $639 billion total assets, this
bank collapsed since their assets exceeded with regards to bankrupt giants. This event also
contributed to attrition of total of $10 trillion in market capitalization from the equity market.
However, the stock procedure of this bank declined sharply owing to this credit crisis and hedge
funds failure. During this GFC period, this bank also removed 2500 jobs relating to mortgage
and also closed some of their units. In 2007, their total stock again rebounded since the equity
market reached to new height as well as their fixed assets prices took rebound. Hence, this huge
leverage and credit crisis led to collapse in the market.
Impact of GFC in Pakistan and several other nations
The Pakistan economy was adversely influenced by the GFC and the direct victims were
the financial institutions especially the commercial banks. These banks withstood worst affect of
GFC due to their credit policies as well as reforms in banking for the last two decades. But the
State Bank of Pakistan remained resilient as well as strong despite huge pressures that emanated
from bad macroeconomic environment during this period 2007-2008 (Ali and Ghauri 2013). In
the long run, this economy was greatly affected owing to decline in foreign direct investment
(FDI), remittances, exports and development aid. In addition, budgetary and trade, shortage of
energy, increasing food inflation, twin deficit and increase in stock markets. Furthermore, size
of these remittances that this nation receives from West mot only affected their businesses but
also the people’s job prospects. According to the World Bank data, this GFC also led to political
instability and also added to downward pressures on their financial markets. As a result, the

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Pakistan government lowered their target for the inflation rate as well as GDP growth rate
(Chaudhary and Abbas 2017). It is also seen from the historical evidences that the exports of this
country hit severely owing to this recession. However, in order to avert this GFC, this nation
formed nation’s group known as “Friends of Pakistan” for attaining financial help. Some
countries did not came out to help this country and so they asked IMF ( International Monetary
Fund) to provide them funds for overcoming this crisis. However, the GDP growth rate of this
economy declined during this period.
2008 2009
167
167.5
168
168.5
169
169.5
170
170.5
GDP OF PAKISTAN DURING GFC
GDP
YEAR
Figure 1: GDP of Pakistan during GFC
Source: ( Author’s creation)
The effect of GFC on Australia was considerably low in comparison with the other
developed countries. This country recorded better GDP growth rate and low inflation as well as
unemployment rate. The financial system of this country became highly resilient and the
commercial banks had continued to gain huge profit and also did not need any injection of
capital from the Australian government (Bryant 2012). The obvious effect of GFC that it had on

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their Australian households was huge decline in prices of equity, which in turn declined their
wealth by 10% in 2009. Additionally, this country’s dollar depreciated rapidly owing to
intensification of GFC. Around the Lehman bankruptcy period, the foreign exchange market
conditions were basically illiquid, which promoted that the RBA (Reserve bank of Australia) to
intervene in this market.
2008 2009
850
900
950
1000
1050
1100
GDP OF AUSTRALIA DURING GFC
GDP
YEAR
Figure 2: GDP of Australia during GFC
Source/; (Author’s creation)
The effect of GFC on the UK economy was larger than other nations owing to some
particular factors. The productivity in UK declined sharply during this recessionary phase owing
to credit crunch in financial market. Moreover, there was sharp decline in lending between the
commercial banks (Junankar 2013). The unemployment rate in UK increased as the people
employed in its financial industry were fired from the job. In addition, this crisis also led to
decline in retail sales and this in turn led to decline in productivity of the nation (Martin and

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Gollan 2012). Overall, the GDP growth rate of this country fell by around 1.5% during the last
quarter of the year 2008.
2008 2009
0
500
1000
1500
2000
2500
3000
3500
GDP OF UK DURING GFC
GDP
YEAR
Figure 3: GDP of UK during GFC
Source: (Author’s creation)
Identifying few proposed reforms that occurred during GFC
Few proposed reforms that had occurred during this recessionary period includes-
 Implementation of Basel III capital requirement, which involves countercyclical capital
protect and surcharge for the financial institution.
 Improvement in the framework of securitization
 Adoption of principles regarding compensation practices in order to avoid risk taking
incentives
 This nation also reached to an agreement for implementing the liquidity standards, which
includes – LCR ( the liquidity coverage).

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 Agreement in some of the principles on different types of financial transactions in US ,
which includes- GAAP ( Generally accepted principles), IFRS( International Financial
reporting standards) etc.
 The policymakers also proposed to close data gaps such as starting of consolidated data
gathering especially on the bilateral counterpart, banks credit risk etc.
Possibility of GFC occurrence in future
There might be possibility of occurrence of this financial crisis in future according to the
concept of “business cycle”. Business cycle signifies the economic cycle in which there has been
upward as well as downward movement in GDP growth rate for longer term. These variations
mainly involves shift between the phase of economic growth (expansion) and relative stagnation
(recession) over certain period of time. There are basically five stages of the business cycle
including- expansion, peak, contraction, trough and recovery (Gabisch and Lorenz 2013). In the
expansionary stage, the economic growth of the country increase at higher rate and this situation
continues till it reaches peak. In peak stage, the business cycle growth rate reaches its highest
level, which the economic factors do not increase further. After this stage, there has been gradual
decline in economic factors, which leads to recession stage. At this recession stage, all the
economic factors including prices, investment starts to decline. This then enters to trough stage
in which the activities of the economy decline below the target level. After the economy reaches
the minimum level, the economic growth starts to increase at higher rate. This completes the
business cycle (Iacoviello and Pavan 2013). However, at present the US economy is in
expansionary phase and hence this can be assumed after few years the economy will reach peak
stage and then it will again move to recessionary stage.

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Figure 4: stages of business cycle
Source: ()
Conclusion
The financial crisis affected most of the developed countries positively as well as
negatively. The negative impact of the GFC reflected collapse in financial industry, decrease in
GDP growth rate, decline in productivity etc. On the other hand, positive impact of GFC were
redrafting of financial rules and regulations including IMF (International Monetary Fund), WTO
(World Trade organization), absence of the bigger financial organization in several nations.
However, the government of several countries implemented proper fiscal as well as monetary
policies in order to improve their economic health.

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References
Ali, A. and Ghauri, S.P., 2013. Global crisis and credit risk management by banks: comparative
study of banks in Pakistan. International Journal of Business and Economics Research.
Barakova, I., Calem, P.S. and Wachter, S.M., 2014. Borrowing constraints during the housing
bubble. Journal of Housing Economics, 24, pp.4-20.
Berkmen, S.P., Gelos, G., Rennhack, R. and Walsh, J.P., 2012. The global financial crisis:
Explaining cross-country differences in the output impact. Journal of International Money and
Finance, 31(1), pp.42-59.
Brusov, P., Filatova, T., Eskindarov, M. and Orekhova, N., 2012. Hidden global causes of the
global financial crisis. Journal of Reviews on Global Economics, 1, pp.106-111.
Bryant, L., 2012. An assessment of development funding for new housing post GFC in
Queensland, Australia. International Journal of Housing Markets and Analysis, 5(2), pp.118-
133.
Chaudhary, G.M. and Abbas, Z., 2017. Global financial crisis and its impact on efficiency and
performance of commercial banks in Pakistan. Journal of Business Studies Quarterly, 8(4), p.15.
Dell’Ariccia, G., Igan, D. and Laeven, L.U., 2012. Credit booms and lending standards:
Evidence from the subprime mortgage market. Journal of Money, Credit and Banking, 44(2‐3),
pp.367-384.

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Frankel, J. and Saravelos, G., 2012. Can leading indicators assess country vulnerability?
Evidence from the 2008–09 global financial crisis. Journal of International Economics, 87(2),
pp.216-231.
Gabisch, G. and Lorenz, H.W., 2013. Business cycle theory: a survey of methods and concepts.
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cycle. Journal of Monetary Economics, 60(2), pp.221-238.
Jarsulic, M., 2012. Anatomy of a financial crisis: A real estate bubble, runaway credit markets,
and regulatory failure. Palgrave Macmillan.
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Download This Paper.
Martin, G. and Gollan, P.J., 2012. Corporate governance and strategic human resources
management in the UK financial services sector: the case of the RBS. The International Journal
of Human Resource Management, 23(16), pp.3295-3314.
Moulton, S., 2014. Did affordable housing mandates cause the subprime mortgage
crisis?. Journal of Housing Economics, 24, pp.21-38.
Shiller, R.J., 2012. The subprime solution: how today's global financial crisis happened, and
what to do about it. Princeton University Press.
Yoshino, N. and Taghizadeh–Hesary, F., 2014. Monetary policy and oil price fluctuations
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