Corporate Financial Accounting

This article discusses the global financial crisis and its impact on various economies. It analyzes the causes of the crisis and recommends changes to avoid such events in the future. The article also provides access to solved assignments, essays, and dissertations on Desklib.

Running head: CORPORATE FINANCIAL ACCOUNTING
Corporate Financial Accounting
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CORPORATE FINANCIAL ACCOUNTING
Table of Contents
Introduction......................................................................................................................................2
Instances of Financial Crisis............................................................................................................2
Downfall of the Financial Markets..............................................................................................2
Failure of Lehman Brothers and Balance of Payments...............................................................4
Causes of Financial Crisis...........................................................................................................5
Can Global Financial Crisis occur again?...................................................................................5
Impact of GFC in various economies..........................................................................................6
Recommended Changes...............................................................................................................7
Conclusion.......................................................................................................................................8
Reference List..................................................................................................................................9

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Introduction
The development of the economic crisis that was observed globally, which gave light to
the issue that Lehman brothers faced in the year 2008 created a severe condition of the economic
and monetary position all over the globe (Lewis-Beck and Stegmaier 2018). The creation of the
global crisis can be regarded to be transition in the central banks as well as in the monetary
regulatory policies. The economy of each and every country in Europe during the year 2008-09
faced a financial scare after the Great Depression in the year 1930. After the World War II, the
current financial crisis that occurred globally is regarded as one of the biggest financial blunders.
It is known financial crisis on a nationwide basis occurs at any point of time but any sort of
financial crisis occurring globally is a rare one ever since the Long Depression in the year 1893
to 1879.
The other issue that took place was the Great Trade Downfall which was a simultaneous
event with the Great Recession and it is during this time that the environment of trade
internationally started falling started falling and continued till the middle of 2009. This event was
a drastic downfall in the last 40 years (Balakrishnan, Watts and Zuo 2016). It is due to this fact
that this paper has been constructed so that an analysis can be made in accordance to the
financial crisis in certain economies all over the globe and thereafter suggestions would be given
with the help of which such events can be averted in the future time period as well.

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Instances of Financial Crisis
Downfall of the Financial Markets
The crisis that took place due to credit is known to be a direct impact on the failure in the
mortgage market in USA. There were decisions taken in the year 2001 when the decision was
taken by the Federal Reserve Bank was incorporated in order to decrease the interest rate to 1%,
with the help of which the impact that took place on 11th September can be reduced. The decision
that took place to reduce the rate of interest by Federal Reserve Bank led to the incoming of
money from the developing countries that created massive credit availability in the US credit
market (Chen et al. 2016). The banks that undertook investments started to look for better returns
over their investment and the return was more than 1%. This opportunity was caught by the
investors which led to the rise in the market of mortgage in USA.
The citizens of USA were attracted with increased credits available in the market and
therefore started to buy properties for their own by taking mortgage from the lenders. With the
rise in the increased amount of credits the people of USA showed keen interest towards
purchasing properties and therefore the demand for the same increased. This led to the
development in the real estate sector. The mortgage organizations sold the entire borrowings to
the investment banks and the borrowings were sorted on the basis of their risks and thereafter
sold the mortgages to the derivatives with the name of different names and thereafter came back
to the investors globally (Rey 2015). In this manner the risk got transferred to the financial
investors. The process looked a bit everything seemed to be normal since the monthly
instalments were paid properly by the borrowers.

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The method was maintained in an effective manner as the lenders tried to attract the risky
and the poor credit history customers rather than the customers who were credit worthy. There
were several options and offers that were implemented by the lenders in order to bring the
customers who were in a dilemma. This was the main reason that created problem in the
mortgage market. The companies stated that in case the borrowers became defaulters, they would
sell their houses at a higher price (Intriligator 2017). However, the amount of defaulters became
very high and the companies did not find customers to sell the houses that were acquired.
The rise in supply with respect to demand created a noise and thereby the price of the
properties started declining drastically. The decline in the price of the houses led to the actual
lenders to become default as they were not ready to pay back the loan on the houses that were
having low price (Bayne 2017). The companies were incompetent to bring in new purchasers and
thereby were not able to sell out the loans to the investment banks. The financial system had a
major hit which led to the collapse and thereafter various issues of bankruptcies took place
leading to many of the US based financial companies and companies from other countries
globally ceasing to operate (Kenourgios and Dimitriou 2015).
Failure of Lehman Brothers and Balance of Payments
The incompetency of the Lehman Brothers did not have a major impact on the financial
market of India as they were not exposed to the global financial market. A change was observed
in the external market after the fall of the Lehman Brothers. Deleveraging was observed as an
extensive amount of sell-off was undertaken by the portfolio investors took in the equity market.
This led to an extensive amount of outflow of cash by the depositors in the year 2008 in the
month of September that generated a pressure in the global exchange market. There was a
resilience created with the inflow of the foreign direct investment but a problem was observed in

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the trade loans and commercial lending (Gay 2016). The inflow of capital was lower, which led
to the decline in the reserves.
Causes of Financial Crisis
The main factor that led to financial crisis is very difficult to understand. However, there
are various factors that have been identified by the researchers that led to the downfall in the
lending market in US and thereby spreading all over the globe. One of the prime factors of
financial crisis was the global trade inequity (Dijkstra, Garcilazo and McCann 2015). In the year
2001, the advantage was attained by China as they joined hands with the World Trade
Organizations. China gained use of the benefit of global trades and increased their exports to
distribute their low ranged products. The rate of exchange maintained by China was very low
and thereby made profits out of their exports (Urbano and Aparicio 2016). In this manner China
was able to enhance their trade surplus whereas there was a shortfall of trade globally and
specially in US.
The amount of deregulation in the financial market is known to be another factor for such
financial crisis. From the year 1980, the leader of global financial market liberalization has been
USA. In order to maintain this, there was a deregulation in the financial market as there was a
relaxation in FED supervision and monitoring (Claessens and Van Horen 2015). In the last
twenty years the concept of liberalization of market had an impact internationally with the thrust
from the treaty of GATS. USA was able to capitalise their role to become a key player in
providing financial services. Various kinds of derivatives were introduced with the development
of global liberalization and trade.

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Can Global Financial Crisis occur again?
The impact of the financial crisis created an awareness globally and therefore strive was
made to minimise the lending expenses this led to $10 trillion of negative sovereign debt yield.
The fall in the cost of borrowing attracted increased monetary supply as the purchase measure
that was temporary enabled the nations to convalesce from the financial issues (Bénétrix, Lane
and Shambaugh 2015). The political framework in various countries are still to implement the
financial reformation framework that is needed by the financial development in a sustainable
manner and have only incorporated capitals from the central banks to take the additional cash in
order to cover for the shortfall undertaking restructuring.
The private sector organizations have opted out of the capital venture, which is a positive
aspect for financial development. The real effect of financial development has been that there is
an extensive level of leverage even though the global debt has been rising and stands at a
negative -240 out of the GDP within the year 2020. The extent of debt that is non-corporate in
nature has overpowered the development of GDP and thereby has presently covered the GDP to
debt ratio that has been observed in the previous recessions (Furtado 2018). Therefore, it
becomes pertinent that global financial crisis may occur again and may lead to increased
corporate debt in accordance to the GDP where there have been variations in the previous
depressions.
Impact of GFC in various economies
The current financial issues were noticeable as it had an impact on most of the countries
and therefore the term global financial crisis has been termed. It is seen that most of the
developing nations get away from the recession as they have a development that is seen to be
negative. On the other hand the developing nations face a fall in their GDP from the pre-

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recession level to approx six percent, which is in line with the developed countries (Baker,
Bloom and Davis 2016).
The present US account has moved to the contrary direction and the USA GDP has fallen
to 4%. The rate of unemployment in Germany has shown a downfall of 7.2% and the rate for
unemployment in USA was 10.2%. The range of the unemployment rate has been among 11.9%
to 19.3% in Spain. The economies all over the world has faced a drastic fall in the year 2008 and
2009 that even had an impact on the macroeconomic policies as well as on the GDP (Ocampo
2018). There was an impact on trade as well in the developing economies of Europe and dropped
drastically from the last year. In the year 2009, the exports in Russia have been half and imports
have been three-fifths.
The economic crisis impact in Australia has been very low. But the key impact on the
economic crisis has been on the household as there has been a fall in the price that led to a 10%
decline in the household market of Australia (Mucci et al. 2016). The Australian dollar even
faced a fall as the depreciation was over 30% in the year 2008 and 2009. Lehman Brothers
becoming bankrupt has an impact on the foreign exchange rate in Australia and therefore the
Reserve Bank of Australia made interference on the overseas exchange in order to enhance the
liquidity scenario.
Recommended Changes
In accordance to the financial crisis the central banks and the governments all over the
globe moved towards the monetary policies in order to control the financial crisis. The central
banks as well as the governments undertook steps to minimising the rates of interest in order to
decrease the cost of borrowing for the private companies in order to undertake fast commercial

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operations. Some of the suggestions can be undertaken that may be helpful in resolving the errors
leading to financial crisis.
The changes in the international trade and in WTO will not permit countries like China to
play a dominant role in international trade. This will be helpful in the eradication of any sort of
unfair trading practices and thereby would enhance economic developments. The other
suggestion can be to enhance the public expenses on infrastructure and other activities like
construction which may be helpful for economic development. The central banks as well as the
government should incorporate supervision and regulation in the market in order to create an
effective line of credit for the organizations and enhanced supervision over the tax reports of the
financial firms. Additionally, IMF has to undertake an active role in auditing and monitoring
global financial process. There has been a proposition that has been made by China to create a
new currency internationally that would replace USD. This proposal can be allowed in order to
eradicate the dependency on the US dollars by the global countries as this has been the key factor
for the crisis.
Conclusion
It can be said that the current GFC has highlighted that the market may be incompetent
and these in competencies generates increased costs. The monetary process is vulnerable to
overstress because of increased leverage of financial companies and banks. The idea that the
markets would protect the weaknesses has been found to be incorrect. In one sentence,
ineffective monitoring of the companies on the financial market and enhancing financial
derivatives over the level of acceptance generates an imbalance and thereby leads to
extraordinary economic issues.

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Reference List
Baker, S.R., Bloom, N. and Davis, S.J., 2016. Measuring economic policy uncertainty. The
Quarterly Journal of Economics, 131(4), pp.1593-1636.
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.
Bayne, N., 2017. Current Challenges to Economic Diplomacy. In The New Economic
Diplomacy: Decision Making and Negotiation in International Economic Relations (pp. 97-116).
Routledge.
Bénétrix, A.S., Lane, P.R. and Shambaugh, J.C., 2015. International currency exposures,
valuation effects and the global financial crisis. Journal of International Economics, 96, pp.S98-
S109.
Chen, Q., Filardo, A., He, D. and Zhu, F., 2016. Financial crisis, US unconventional monetary
policy and international spillovers. Journal of International Money and Finance, 67, pp.62-81.
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.
Dijkstra, L., Garcilazo, E. and McCann, P., 2015. The effects of the global financial crisis on
European regions and cities. Journal of Economic Geography, 15(5), pp.935-949.
Furtado, C., 2018. Economic Development of Latin America. In Promise Of Development (pp.
124-148). Routledge.

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Gay, R.D., 2016. Effect of macroeconomic variables on stock market returns for four emerging
economies: Brazil, Russia, India, and China. The International Business & Economics Research
Journal (Online), 15(3), p.119.
Intriligator, M., 2017. Globalisation of the World Economy: Potential Benefits and Costs and a
Net Assessment. In Economics of Globalisation (pp. 85-94). Routledge.
Kenourgios, D. and Dimitriou, D., 2015. Contagion of the Global Financial Crisis and the real
economy: A regional analysis. Economic Modelling, 44, pp.283-293.
Lewis-Beck, M.S. and Stegmaier, M., 2018. Economic voting. The Oxford Handbook of Public
Choice, 1, p.247.
Mucci, N., Giorgi, G., Roncaioli, M., Perez, J.F. and Arcangeli, G., 2016. The correlation
between stress and economic crisis: a systematic review. Neuropsychiatric disease and
treatment, 12, p.983.
Ocampo, J.A., 2018. International Asymmetries and the Design of the International Financial
System 1. In Critical Issues in International Financial Reform (pp. 45-74). Routledge.
Rey, H., 2015. Dilemma not trilemma: the global financial cycle and monetary policy
independence (No. w21162). National Bureau of Economic Research.
Urbano, D. and Aparicio, S., 2016. Entrepreneurship capital types and economic growth:
International evidence. Technological Forecasting and Social Change, 102, pp.34-44.