Global Financial Crisis of 2008: Impact on International Financial Institutions

International Political Economy
Global Financial Crisis of 2008
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Introduction
The global financial crisis was begun in early to mid-2007 with major credit crunch.
In which there was a heavy loss of the US stakeholders in the value of sum major mortgages
begun due to the liquidity crisis (Cohn, 2016). In 2008 the crunch had worsen as stock market
around the sphere crashed down and became highly unstable. It majorly affected the
customers confidence and as many investors tighten their belts due to facing the fear for
future. The 2008 financial crisis is known as the worst economic disaster. It was occurred
despite the efforts are made by federal reserves and treasury department. This all leads to the
great depression (Amadeo, 2018).
The financial crisis was caused due to the deregulation in the monetary industry.
Banks at that time acceptable to get involve in hedge funds trading with derivatives. Banks
then claimed more mortgages to support the profitable sales of these derivatives. They
created interest only loans, which became affordable to subprime debtors. Moreover, the
housing values started falling as supply-outplaced demand and due to this, trapped house
owners was unable to afford the payments. This highlights that when the values of derivatives
crumbled, ban ks clogged lending and hence this generated the financial crisis, which leads to
the great recession (Chor, & Manova, 2012).
Limitation exposed by IMF and World Bank
The limitation of the international financial institution majorly highlights about the
World Bank and IMF. In which the advances made up mortgage backed securities has
organizational flaws including a lack of proper vetting of leaders and the teaser rates that
essentially guarantees default in many cases. In addition, when they started to blow holes in
the stability sheet of financial institutions, they apprehended that no one had correctly pricing
in the threats on these derivatives. Therefore, the inter-lending between the companies
stopped and the credit- crunch united with the mortgage meltdown to generate the credit
crisis which frozen the financial method when they needed liquid capital at its peak. In order
to handle the situation Federal Reserve has to drive in billions into the system in order to save
it but it still ended up with great recession (Obstfeld, 2012).
Islamic development bank
An Islamic development bank, IMF compares the performances of Islamic banks
and conventional banks throughout the recent financial crisis, and they found that Islamic

banks displayed stronger resilience during the worldwide financial crisis. However, other
than this, it was also found that Islamic banks also faced greater losses when the crisis hits the
real economy. Many economists highlighted the effects of the financial crisis on banks
profitability, credit and asset growth in the countries where both the banks having a
significant market share. There was a major impact on the change in profitability, bank
lending, banks assets and external bank rating (Hasan, & Dridi, 2011). The below given
graph highlights about the effects faced by the Islamic development banks:
(Source: Ahmed, 2010)
From the above graph, it was analysed that Islamic banks differently faced the global
financial crisis from the conventional banks likewise, smaller investments portfolio, lower
leverage. Before the crisis, banks were in more gainful state than their conventional upper
class peers were running up to the crisis. Then at initial stage, Islamic banks faced a very
little impact on profitability at the early staged whereas credits and assets were still remained
at the stronger position. During the global crisis period, Islamic banks were having