Managing Financial Crisis: A Review of Post-Crisis Reforms and Recommendations

The global financial crisis of 2008 was a significant event that led to widespread economic instability and financial losses. In response, various regulatory bodies and international organizations took steps to strengthen financial market supervision and control lending flows. The Financial Stability Board (FSB) played a key role in this effort, introducing the Basel III norms to enhance bank capital and liquidity requirements. Additionally, accounting standards were strengthened, and central banks implemented policies to stabilize financial markets. Furthermore, credit rating agencies were subject to increased scrutiny and regulation following criticism of their role in the crisis. These efforts have helped to improve the resilience of financial institutions and reduce the risk of future crises.

Institutions in Global
Financial Market

ESSAY
Financial crisis is determined as a situation of economic downturn in which the value of
financial institutions or assets reduces rapidly. A financial crisis is also associated with improper
functioning of banks that influences investors to sell off assets or withdraw money from savings
accounts. The financial crisis of 2008 was considered the most dangerous crisis after Great
Depression of 1930 (Ivashina and Scharfstein, 2010). This economic down turn began in US in
the year 2007 after the bursting of US housing bubble which have recorded significant peak off
in 2004. This influences negative growth in prices of houses that spread in entire US financial
market along with overseas financial market. The economic crisis collapsed entire banking
industry of US, insurance companies, largest mortgage lenders, two government chartered
mortgage lending companies, largest commercial banks of the world (Naudé, 2009). Initially,
this economic downturn was identified in the US market and then it spread all over the world.
However, several causes were witnessed which influenced the financial crisis. But, the
bursting of housing market bubble is identified as the most important reason of economic
downturn. In addition to that, this financial downturn was triggered by a complex interplay of
policies which encouraged home ownership with the help of easy access to loans for
(lending)borrowers (The origins of the financial crisis, 2013). The hike in prices of assets has
influenced overvaluation of bundled subprime mortgages on the basis of such assumption that
housing prices would continue to escalate etc. Furthermore, it has been evaluated that a flood of
irresponsible mortgage lending in America is addressed before several years of crisis. Loans
were provided to “subprime” borrowers who are having poor credit histories and are struggling
to repay them. These risky mortgages were transferred to major financial engineers of the big
banks who considered these loans as low-risk securities by putting large numbers of loan
together in pools. This pooling works when the value of risks of each loan is uncorrelated
(Erkens, Hung and Matos, 2012). But this approach has proved wrong which resulted in
economic downturn.
The housing slump has played important role to influence chain of reaction in all
economies. Individuals and investors are not able to flip their homes for a quick profit. Therefore
mortgages are no longer affordable for homeowners that increased the number of mortgages
defaulted. This situation has caused massive losses in mortgage backed securities and many

banks and investment companies were facing shortage of money and cash. It also depressed
housing prices and slowed the growth in housing market such as new home building projects and
put the thousands of home builders in loss (Allen and Moessner, 2010). The reduction in housing
prices has encouraged various further complications as it made many homes much less than the
mortgage value. These entire factor played important role to encourage economic downturn.
After the financial crisis of 2008, there has been several legislation and regulatory
responses taken by public authorities and various other agencies of the world in order to control
lending practices, bankruptcy protection, tax policies, affordable housing, credit counseling, and
education along with the qualifications and ability of lenders. In this regard, Housing and
Economic Recovery Act of 2008 was introduced in which a new regulator, the Federal Housing
Finance Agency is developed with the power to control lending flow with country (Blundell-
Wignall, Atkinson and Lee, 2008). In similar way, UK regulators announced a short term
restriction on short-selling of financial stock. In this context, G20 has taken appropriate actions
in which Financial Stability Board (2010c) examines an overview of the scope along with scale
of activities in financial reform at the international (and national) levels since the GFC of 2008.
The agency has provided extra attention on strengthening bank capital and liquidity requirements
by raising standards for risk management such as Basel III (Goodhart, 2008). These responses
also influenced toward strengthening accounting standards and strengthening the international
supervisory as well as regulatory standards in order to increase control on financial markets.
In addition to that, both auditors and Credit Ratings Agencies (CRAs) have been faced
subject to substantial criticism due to improper valuation. Therefore, Code of Conduct
Fundamentals for Credit Rating Agencies was updated in the year 2008. These principles also
influenced operations of rating agencies with reference to Central Bank operations and prudential
supervision. This thing influenced CRA rating changes and collateral requirements associated
with information disclosures which is carried out by issuers of securities (Colander and et.al.,
2009). In order to control the lending and mortgage, the Basel Committee has announced
enhanced capital requirements for banks with reference to Basel III norms. Therefore, the
timetable of application of norms is relatively protracted during 2013 and will be completed till
2018. As per Basel III norms, Minimum Capital Requirement is 8 % of Risk Weighted Assets
(RWA) which remained unchanged. In addition to that, Capital Conservation Buffer is also

determined in these norms which determines the additional common equity requirement of at
least 2.5 % of RWA with constraints on distributions (dividends, bonuses) if overall capital ratio
falls below 10.5 % of RWA (Davis, 2015). These norms have been found very effective to
control liquidity among banks and it also makes financial institutions stronger.
On the basis of above assessment, some recommendations are provided to manage
financial crisis. The public authorities should develop appropriate strategies and formulate an
appropriate monitoring agency which has proper authorities in order to check lending and
mortgage procedures of banks and other financial institution especially in the housing market.
This monitoring agency is found to be very effective for controlling poor mortgage during the
peak season of housing market (Goodhart, 2008). Apart from that, United Nations and
international monetary controlling authorities should develop proper regulations for different
financial markets and lending practices which would lower the chances of financial downturn
which is similar to financial crisis of 2008. By strengthening banking and other regulations
related to sub-prime lending and mortgage loans etc., central banking authorities of different
countries in the world will be able to avoid situation of financial crisis and credit shortage. This
approach will help in managing flow of capital in different financial markets.

REFERENCE
Books and Journals
Allen, W. A. and Moessner, R., 2010. Central bank co-operation and international liquidity in
the financial crisis of 2008-9. Bank for International Settlements, Monetary and Economic
Department.
Blundell-Wignall, A., Atkinson, P. E. and Lee, S. H., 2008. The current financial crisis: Causes
and policy issues. OECD.
Colander, D. and et.al., 2009. The financial crisis and the systemic failure of the economics
profession. Critical Review. 21(2-3). pp.249-267.
Erkens, D. H., Hung, M. and Matos, P., 2012. Corporate governance in the 2007–2008 financial
crisis: Evidence from financial institutions worldwide.Journal of Corporate Finance.
18(2). pp.389-411.
Goodhart, C. A., 2008. The regulatory response to the financial crisis.Journal of Financial
Stability. 4(4). pp.351-358.
Ivashina, V. and Scharfstein, D., 2010. Bank lending during the financial crisis of 2008. Journal
of Financial economics. 97(3). pp.319-338.
Naudé, W., 2009. The financial crisis of 2008 and the developing countries. WIDER Discussion
Papers, World Institute for Development Economics (UNU-WIDER).
Online
Davis. K., 2015. Regulatory Reform Post the Global Financial Crisis: An Overview. [Pdf].
Available through <http://www.apec.org.au/docs/11_CON_GFC/Regulatory%20Reform
%20Post%20GFC-%20Overview%20Paper.pdf>. [Accessed on 1st December 2015].
The origins of the financial crisis. 2013. [Pdf]. Available through
<http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-
being-felt-five-years-article>. [Accessed on 1st December 2015].

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