Global Financial Crisis: Impacts and Responses

This assignment delves into the Global Financial Crisis of 2007-2008. It examines the crisis's origins, its multifaceted impacts on various sectors (economies, regions, cities, banks), and the subsequent regulatory reforms implemented in response. The analysis draws upon a range of scholarly articles and reports to provide a comprehensive understanding of this pivotal event in recent history.

Running Head: Corporate Financial Management
Corporate Financial Management

Corporate Financial Management 1
Contents
Introduction.................................................................................................................................................1
Significance of the Global Financial Crisis....................................................................................................1
Examples of financial crisis events...............................................................................................................2
 Chinese stock market turbulence....................................................................................................2
 Russian Financial crisis.....................................................................................................................2
Causes of GFC..............................................................................................................................................3
Possibilities of GFC to occur in future..........................................................................................................4
Scale and impact of GFC in different countries............................................................................................5
Australia..................................................................................................................................................5
India.........................................................................................................................................................5
Actual and proposed reforms for GFC.........................................................................................................5
Conclusion...................................................................................................................................................6
References...................................................................................................................................................6

Corporate Financial Management 2
Introduction
The objective of this task is to understand and evaluate the significance and causes of the global
financial crisis which occurred in the year 200-2008. The crisis badly impacted the economies of
many countries worldwide. So, the below mentioned task explains about the GFC and its reforms
and impacts worldwide.
Significance of the Global Financial Crisis
The financial crisis which occurred in the year 2007-2008 laid an adverse impact on the state of
many nations worldwide. The crisis happened in the year 2007 in the subprime mortgage market
of market of US. The market busted because many banks went in liquidation and collapsed.
Economist says that it is regarded as one of the biggest issue of all times after the Great
Depression of 1930s (Davis 2018).Intake of excessive risks in the market led the outburst of the
financial markets due to which all the other market were impacted worldwide. Some of the banks
Lehman Brothers etc. tried to take advantage of the market by providing maximum loans to the
people for purchase of property due to which the subprime mortgage bubble busted affecting the
property market as well. High degree of taking risk, high degree of complexity in the market, lax
supervision of governments, aggressive strategies of the banking system etc. activities combined
together to magnify the impact of global financial crisis (Dijkstra, Garcilazo, and McCann 2015).
Further the main reason of this financial crisis was the combination of debt mortgage –backed
assets with debts. Along with which the housing prices in the property market was rising
continuously. The traders in the market were looking forward to expand the bond market due to
which they discovered the process of restructuring of US mortgages into bonds and sell them to
the investors so as increase the flow of income. Further through such investments the investor
aimed to purchase the houses. The investment banks were then buying different mortgages from
the issuers, pooling them together and restructuring them (Rey 2015). Then the banks were
selling these securities as a new product in the market naming collateralized debt obligation or
CDOs. It is assumed that pooling of such different mortgages in the market reduces the risk on
securities due to which the assets become safe and secure from the risk. But this theory worked
in the opposite manner in this case as the major mortgages which were being securitized were of

Corporate Financial Management 3
very low quality and credit rating agencies did injustice to the quality of these debts resulting to
which these mortgages were overly estimated (Nobi, et. al., 2014). Due to which the real estate
market reached its peak and there was increase in borrowing at low interest rates as well. All
these activities collective promote the initiation of financial crisis in the market. The Community
Reinvestment Act initiated a law which boosted the mortgage loan for the low and middle
income people. Thus, all these activities collectively were poorly handle d in the market and
gave rise of the financial crisis (Levine, Lin, and Xie 2016).
Examples of financial crisis events
 Chinese stock market turbulence: The Chinese stock market crashed with the
popping of the market bubble in the year 2015 which ended in the year 2016. The A-
shares which were listed on the Shanghai stock exchanges were sold by the traders within
a short span of time because of insecurities and aggressive fluctuation in the market. The
stock market always shows its way when it is being aggressive used by the companies to
obtain profits from it. Under this crash, initially the stock market rose to its peak of all
time which helped many people present in the market make profits. But soon after that
within 3 weeks the market crashed by 30 per cent which was not expected by any person
present in the market (Hong 2016). More than 1400 companies listed on the exchange
faced a trading halt because of the negative growth. This action was taken so as to secure
position in the market and diminish the effect of crashing of the market. Further in the
annual meeting of International Monetary Fund, the organization stated that this issue is a
serious issue for the countries worldwide as it can trigger another financial crisis. The
Chinese stock market was considered as a highly achieving stock market in the world but
it suddenly fell down because the shares which were listed on the exchange with a high
value than original. Also the high performing stock did not showed up according to the
expectations due to which the peak in the market gradually fell down with a rapid speed
due to which the country faced difficulties as major GDP of China was growing because
of stock market only.
 Russian Financial crisis: The financial crisis in Russia occurred in the years 2014-
2017. This crisis was result of the collapse of Russian ruble beginning in the second half
of the 2014. Due to decrease in the interest of the investors in the economy of Russia due

Corporate Financial Management 4
to which the people started selling their assets. This activity of people resulted in the
increment of the Russian Financial Crisis. The economy of the country started falling
when the prices of the crude oil fell in the year 2014. Russia being the major exporter of
oil and petroleum product worldwide faced decline in price of these product by nearly 50
per cent due to which most of the income which the economy earned from this source
started depleting. Also the country faced crisis because the international economic
sanctions imposed various on Russia (Mearsheimer 2014).
The US Federal Reserve’s low rates of interest showed a deep impact on the market of
countries worldwide. The companies forecasted the denomination deb including the debts
of Russia as well which was increased from 7.4 percent in 2008 to 117 percent by 2017.
Reduction in interest rates of US people again started taking interest in the economy of
US due to which the capital of Russia started flowing outward. These activities initially
slowed the growth rate of the country and it also devalued many national markets like
ruble. Further the sanctions imposed on Russia due to annexation of Crimea and Russian
assistance to separatists fighting Ukraine in the War in Donbass adversely depleted the
state of the country.
Causes of GFC
The global financial crisis disturbed the whole working of the economies. Many countries faced
difficulty in sustaining the global market. Further some of the causes due to which the financial
crisis occurred are discussed below:
 High level of keeping private debts in the banking sector: The banks initiated the
strategy of manipulating the market by repacking the mortgaged securities and selling
them in the market. Due to this activity the crisis occurred as the mortgage was
overvalued. In order to gain the markets and remove the lock on the securities the banks
increased the level of debts for the people ad backed up it with assets. In response to
which the people in the market obtained household properties, this subsequently
misbalanced the stock market along with the property market as well (Chang, Stuckler,
Yip, and Gunnell 2013).

Corporate Financial Management 5
 Lax supervision by government: This factor shall be regarded as one of the biggest
causes of the financial crisis. The regulatory bodies of the country ignored the activities
which were being implemented in the environment by different sectors of the economy.
Thus, due to negligence of the government on the activities initiated by different
companies, the financial crisis occurred. The government never investigated the causes
and reasons due to which the interest rates of the country depleted and subprime
mortgage increased (Bech, Gambacorta, and Kharroubi 2014).
 Growth of subprime mortgage: In the year 1989, the financial Institutions Reform
Recovery and Enforcement Act increased the enforcement of Community Reinvestment
Act. This act abolished the banks ‘redlining’ of poor neighborhoods, after which the
regulators started giving ranks to the banks on the basis of their performance in
‘greenlining neighborhoods’(Baker, Bloom, and Davis 2016). Further the loans were
secured with mortgage but subsequently after some years the federal banks again started
raising the rates of interest. And the people were unable to afford them. Due to which
people starting selling off their house and the house rates started decreasing. Further due
to fluctuation in the property market, the bubble busted resulting in crisis for the country
(Ollivaud, and Turner 2015).
Possibilities of GFC to occur in future
The economist says that now the chance of occurrence of global financial crisis has increased
overtime. As the world economy has now become more interconnected than ever due to which
one threat can poorly affect the state of all the nations. The financial markets are heavily
regulated and the capital markets are expanding their scope in all parts of the world including
Africa, Asia and Latin America. The banking sector worldwide is facing reduction in the number
of players as banks have started eliminating themselves from the market. The MNIT countries
(Mexico, Nigeria, Indonesia, and Turkey) are gaining the attention now after the Russia, Brazil
(Harvie, C. and Van Hoa 2016). China, India and South Africa have shown disappointing results.
Europe and Germany have started maintaining the pace in the market by recovering the markets.
Further US is still regarded as one of the most competitive economy. This is the current situation
which seems to be smooth, but again the causes due to which the world suffered the crisis are
arising again. The government policies are encouraging more and more mortgage and the interest

Corporate Financial Management 6
rates have now reduced as well. Also lack of transparency and wrongful intention of different
companies to harass the market can lead to initiation of this crisis again in the near future. Thus,
the regulatory bodies need to implement strict measures monitor the activities of different
companies worldwide (Claessens, and Van Horen 2015).
Scale and impact of GFC in different countries
The impact of GFC on different countries is discussed below:
Australia: The economy of the country faced a surprise after the global financial crisis because
the markets started busting in unexpected manner. The banks of the country had adequate profits
with them but with the occurrence of this event the reserves depleted within a short span of time.
Just like many other countries fall in the prices of property rose, banking sector became unstable
and the share market busted abruptly. All the reserves of the country were transferred back to US
resulting to which the country faced cash crunch. This activity subsequently increased the deficit
balance of the country and unemployment increased in the country (Moradi-Motlagh, and
Babacan 2015).
India: Though initially the government officials denied that the crisis has not affected the
economy of nation but soon the impact was clearly seen. The stock of the country started falling
soon after the crisis as rupees 250,000 were wiped off from the share market in a single day. The
Sensex started losing its points and showed negative results. The trade also portrayed deficit
balance due to which sources of income reduced and the reserves started getting depleted. The
manufacturing sector faced difficulty in managing because the demand of the product drooped in
the international markets. Lastly it shall be noted that the value of rupee in the market
depreciated by 20 percent against the US dollar due to the crisis (Reddy, Nangia, and Agrawal
2014).
Actual and proposed reforms for GFC
 Banking reform BASEL III: As some of the countries were not holding enough capital
in order to meet the risk which they were taking due to which mismatch in the interest
rates and the bond resulted in loss for the country. So, the Basel reform initiated with an

Corporate Financial Management 7
aim to strengthen the regulation, manage the risk on practices initiated in the banking
sector and supervise the activities accordingly. The framework maintained standards to
withstand with the losses and maintain capital ratio as well. Further reform also
maintained liquid cash with the banks in order to meet up the unseen liabilities (Ahmed,
Coulibaly, and Zlate 2017).
 Crisis management and resolution: The key focus of the too big to fail work agenda
was to address the international risks. These crisis management activities were initiated
for the SIFIs (Systemically important financial institutions). The framework suggests the
building banking market sector in such a way that these institution act according to the
rules and always remain under the surveillance of the government. Recovery plan was
developed to help in financial market infrastructure (Gourevitch et. al., 2016).
 Bail-in: Under this strategy the unsecured and uninsured liabilities of failing institutions
were converted in equity so as to recapitalize them. Under this strategy three classes were
differentiated like, contractual bail in, bail in via explicit statutory powers and bail in by
business transfers (Simou, and Koutsogeorgou 2014).
Conclusion
Thus, in the limelight of above mentioned events the fact that shall be noted is that global
financial crisis is the biggest crisis which disturbed the markets of all nations worldwide. The
inflation rate, interest rate, property rates etc. other segments were busted due to the occurrence
of this event.

Corporate Financial Management 8
References
Ahmed, S., Coulibaly, B. and Zlate, A., 2017. International financial spillovers to emerging
market economies: How important are economic fundamentals?. Journal of International Money
and Finance.
Baker, S.R., Bloom, N. and Davis, S.J., 2016. Measuring economic policy uncertainty. The
Quarterly Journal of Economics, 131(4), pp.1593-1636.
Bech, M.L., Gambacorta, L. and Kharroubi, E., 2014. Monetary policy in a downturn: are
financial crises special?. International Finance, 17(1), pp.99-119.
Chang, S. S., Stuckler, D., Yip, P., and Gunnell, D., 2013. Impact of 2008 global economic crisis
on suicide: time trend study in 54 countries. Bmj, 347, f5239.
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.
Davis, K., 2018. Regulatory Reform Post the Global Financial Crisis. Viewed on January 13,
2018 from < http://www.apec.org.au/docs/11_con_gfc/regulatory%20reform%20post%20gfc-
%20overview%20paper.pdf>
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.
Gourevitch, P., Markovits, A., Ross, G., Bornstein, S. and Allen, C., 2016. Unions and Economic
Crisis: Britain, West Germany and Sweden. Routledge.
Harvie, C. and Van Hoa, T., 2016. The causes and impact of the Asian financial crisis. Springer.
Hong, S., 2016. China’s Crash Course: How a Turbulent Year Derailed Reform. Viewed on
January 13, 2018 from < https://www.wsj.com/articles/crash-course-how-chinas-turbulent-year-
derailed-reform-1451714582>
Levine, R., Lin, C. and Xie, W., 2016. Spare tire? Stock markets, banking crises, and economic
recoveries. Journal of Financial Economics, 120(1), pp.81-101.

Corporate Financial Management 9
Mearsheimer, J.J., 2014. Why the Ukraine crisis is the West's fault: the liberal delusions that
provoked Putin. Foreign Aff., 93, p.77.
Moradi-Motlagh, A. and Babacan, A., 2015. The impact of the global financial crisis on the
efficiency of Australian banks. Economic Modelling, 46, pp.397-406.
Nobi, A., Maeng, S.E., Ha, G.G. and Lee, J.W., 2014. Effects of global financial crisis on
network structure in a local stock market. Physica A: Statistical Mechanics and its
Applications, 407, pp.135-143.
Ollivaud, P. and Turner, D., 2015. The effect of the global financial crisis on OECD potential
output. OECD Journal: Economic Studies, 2014(1), pp.41-60.
Reddy, K.S., Nangia, V.K. and Agrawal, R., 2014. The 2007–2008 global financial crisis, and
cross-border mergers and acquisitions: A 26-nation exploratory study. Global Journal of
Emerging Market Economies, 6(3), pp.257-281.
Rey, H., 2015. Dilemma not trilemma: the global financial cycle and monetary policy
independence (No. w21162). National Bureau of Economic Research.
Simou, E. and Koutsogeorgou, E., 2014. Effects of the economic crisis on health and healthcare
in Greece in the literature from 2009 to 2013: a systematic review. Health policy, 115(2),
pp.111-119.