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Global Financial Market Essay Financial Crisis

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Added on  2019-12-03

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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. 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).

Global Financial Market Essay Financial Crisis

   Added on 2019-12-03

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Institutions in GlobalFinancial Market
Global Financial Market Essay Financial Crisis_1
ESSAYFinancial crisis is determined as a situation of economic downturn in which the value offinancial institutions or assets reduces rapidly. A financial crisis is also associated with improperfunctioning of banks that influences investors to sell off assets or withdraw money from savingsaccounts. The financial crisis of 2008 was considered the most dangerous crisis after GreatDepression of 1930 (Ivashina and Scharfstein, 2010). This economic down turn began in US inthe year 2007 after the bursting of US housing bubble which have recorded significant peak offin 2004. This influences negative growth in prices of houses that spread in entire US financialmarket along with overseas financial market. The economic crisis collapsed entire bankingindustry of US, insurance companies, largest mortgage lenders, two government charteredmortgage 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, thebursting of housing market bubble is identified as the most important reason of economicdownturn. In addition to that, this financial downturn was triggered by a complex interplay ofpolicies 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 hasinfluenced overvaluation of bundled subprime mortgages on the basis of such assumption thathousing prices would continue to escalate etc. Furthermore, it has been evaluated that a flood ofirresponsible mortgage lending in America is addressed before several years of crisis. Loanswere provided to “subprime” borrowers who are having poor credit histories and are strugglingto repay them. These risky mortgages were transferred to major financial engineers of the bigbanks who considered these loans as low-risk securities by putting large numbers of loantogether 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 ineconomic downturn.The housing slump has played important role to influence chain of reaction in alleconomies. Individuals and investors are not able to flip their homes for a quick profit. Thereforemortgages are no longer affordable for homeowners that increased the number of mortgagesdefaulted. This situation has caused massive losses in mortgage backed securities and many
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banks and investment companies were facing shortage of money and cash. It also depressedhousing prices and slowed the growth in housing market such as new home building projects andput the thousands of home builders in loss (Allen and Moessner, 2010). The reduction in housingprices has encouraged various further complications as it made many homes much less than themortgage value. These entire factor played important role to encourage economic downturn. After the financial crisis of 2008, there has been several legislation and regulatoryresponses taken by public authorities and various other agencies of the world in order to controllending practices, bankruptcy protection, tax policies, affordable housing, credit counseling, andeducation along with the qualifications and ability of lenders. In this regard, Housing andEconomic Recovery Act of 2008 was introduced in which a new regulator, the Federal HousingFinance 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 termrestriction on short-selling of financial stock. In this context, G20 has taken appropriate actionsin which Financial Stability Board (2010c) examines an overview of the scope along with scaleof 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 requirementsby raising standards for risk management such as Basel III (Goodhart, 2008). These responsesalso influenced toward strengthening accounting standards and strengthening the internationalsupervisory 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 facedsubject to substantial criticism due to improper valuation. Therefore, Code of ConductFundamentals for Credit Rating Agencies was updated in the year 2008. These principles alsoinfluenced operations of rating agencies with reference to Central Bank operations and prudentialsupervision. This thing influenced CRA rating changes and collateral requirements associatedwith 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 announcedenhanced capital requirements for banks with reference to Basel III norms. Therefore, thetimetable of application of norms is relatively protracted during 2013 and will be completed till2018. 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
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