Causes of Global Financial Crises of 2008-2009 and Role of Financial Regulations in Creating Stability

International Financial Markets
and Institutions

TABLE OF CONTENT
QUESTION 1..................................................................................................................................3
Causes of global financial crises of 2008 – 2009. Contribution of the financial regulations in
creating stability of the financial markets and institutions. Role of Basel III regulation in
making the banks safer................................................................................................................3
QUESTION 2..................................................................................................................................5
Evaluation of the way Brexit has impacted on UK stock market and pound sterling.................5
Identification of several factors that have contributed in movements of both stock and
currency market...........................................................................................................................6
QUESTION 3..................................................................................................................................7
What determines short term and long term interest rates ? Role of interest rates in economy....7
REFERENCES..............................................................................................................................11

QUESTION 1
Causes of global financial crises of 2008 – 2009. Contribution of the financial regulations in
creating stability of the financial markets and institutions. Role of Basel III regulation in
making the banks safer.
Causes of global financial crises of 2008-2009
Global financial crises occurred in 2008-2009 refers to massive financial crises which
was faced by the world from year 2008 to year 2009. Financial crises took the toll over
institutions and individuals around globe, with the several numbers of Americans being highly
impacted. The financial institutions began sinking, many of them were absorbed by the larger
entities and US Government was forces for offering the bailout in order to keep the institutions
afloat.
Crisis is often referred as great recession and this did not happened overnight. Many of
the factors were there that lead to the crises and the effects even linger today. The crises began
with housing bubble that was created by overwhelming load of the mortgage backed securities
which are bundled with high risk loans. The reckless lending led to the unprecedented number of
loans making default that bundled together caused loss to many of the financial institutions
resulting in their failure and required government bailouts.
Foundation of global financial crises is built over back of housing market bubble which
began in 2007. The lending institutions and banks offered lower interest rates on the mortgage
and encouraged the homeowners for taking out the loans which they were not able to afford.
With large numbers of mortgages flooding in, the lenders created a financial instruments known
as mortgage backed securities that were the mortgages bundled so that could be sold as the
securities with the minimum risk load because of the fact that the securities were backed with
credit default swap. Lenders were allowed of passing the mortgages and risks to other (Fligstein
and Roehrkasse, 2016). The outdated regulations which were not enforced rigorously allowed the
lenders for getting sloppy with the underwriting which means actual value of securities could not
be guaranteed or established
Banks began lending recklessly to the individuals and families without having true means
for following over mortgages that were granted. The high risk loans were bundled together
inevitably and they passed down of line. As subprime mortgage bundle grew in the number to
over overwhelming degree with large number of mortgages turning down into defaults, lending

institutions started facing critical financial difficulties. This led to dismal the financial conditions
of the world during period 2008 to 2009 and continued for several years.
Deregulation in financial industry was primary cause of financial crash in 2008. It
allowed derivative speculations backed by the cheap, wantonly issued mortgages that were
available to even those havin questionable creditworthiness.
Financial regulation in contributing to stability of the financial markets and institutions
Financial stability could be termed as the situation where financial systems are not
unstable. It is a situation where financial institution, financial markets and the financial
infrastructure is stable. More broadly financial stability could be broadly defined as the condition
where financial system facilitating the real economic activities efficiently and also capable to
unravel the financial imbalances that arise from the shocks (Regulations in Financial industry,
2019). Financial stability is essential for price stability and policy goal of central bank and also
for the healthy development of economy. Financial instability causes heavy costs for the
economy as volatility of the price variables in financial market increases and the financial
corporations or institutions could go bankrupt.
Financial regulations play significant role in maintain financial stability of the economy.
Successful financial regulation prevents market failures, protect investors, promote
macroeconomic stability and mitigates the effect of financial failures over real economy.
Financial regulations are also essential for improving the market transparency and for protecting
investors (Sainz and et.al., 2020). Financial regulations encourage financial innovation that
helps in the growth of the economy. There are various financial products owed by the markets
for financial efforts and regulations to bypass the regulations.
Dynamic approach to the regulations is critical and especially when it comes over
defining regulatory perimeter. Financial industry is highly regulated as compared with the other
sectors in the economy. There are various institutions in the charge of regulating banking and
financial industry. Financial regulations ensure that a structured procedure is followed by the
financial industry and banks. Regulations keep the institutional within the restricted limits that is
beneficial for the economy. Regulatory bodies keep control and monitor the workings and
operation of the financial institutions ensuring that they are effectively complying with the
regulations. Regulations impose fines and penalties over the institutions not complying with the
required regulations or provisions (Taylor, 2017). Effective regulations create stable economy