Reasons for the Global Financial Crisis and its Aftermath

Reasons for the global financial crisis
and its Aftermath: Role of regulatory
reforms, financial markets, institutions,
and governance as a way forward

Reasons behind the global financial crises
The global financial crisis (GFC) can be referred to as the period of extreme stress faced by
global financial markets and banking systems between mid-2007 and early 2009. The United
Kingdom is one of the major economies among the European countries, which are significantly
impacted by the Global Financial crises (Balakrishnan, Watts, and Zuo, 2016). Several financial
institutions and bank in whole over the world suffered from significant losses and relied on the
support of the government to avoid bankruptcy. Several people lost their occupation, due to
Global Financial Crisis. There is a range of factors, which lead to global financial crisis. Some of
the key elements of the reason behind the global financial crises are Extensive borrowing by
investors and banks, Extreme risk-taking in a positive macroeconomic era, Rules and regulations
of government, distorted information, and many others related elements.
At initial phase of global financial crisis, investors and banks of the United Kingdom has
increased the amount of borrowing for the purpose of extension of their lending business.
Further, the borrowing money to buy an asset not only assists in anticipated gain, but it also
enlarges the probable loss. As an outcome, when the value of the house starts to decrease, the
investor and banks suffered from large losses as they borrowed a significant amount of money
(Bénétrix, Lane, and Shambaugh, 2015). Along with this, few investors and banks gradually
borrowed fund for a very short period of time, consisting of abrupt, to buy an asset that can be
sold immediately. However, the asset cannot be sold by investors and banks immediately, by
which they became more dependent on the lender, which comprised of other banks, for covering
new loans as the prevailing short term loans were paid back. Therefore, the extensive borrowing
by banks and investor is one of the elements behind the global financial crisis.

At the beginning period of global financial crisis, the financial conditions of the United Kingdom
were positive. Financial progress was consistent and robust, and the interest rate, inflation rate,
and the unemployment rate were comparatively low (Claessens, and Van Horen, 2015). It is
expected that the price of the house will continue to rise. Therefore investors and banks
borrowed extensively. Several mortgage loans are around or above the purchase price of the
house. The lender and banks provide the significant and large volume of the loan, which is
extremely risky because, there was severe competition in the market of lenders, as the economy
of the country was stable and it is expected that they can earn more profit from the loans.
Further, Several financiers at the time of offering the loan did not assess the creditability of
borrowers for the repayment of the loan. It reflects that financiers assume the positive condition
would continue in future. Along with this, financiers had few inducements to consider the
lending decision, as they did not anticipate about any losses (Lennartz, Arundel, and Ronald,
2016).
Moreover, with regards to rules of the government, there are no proper norms, rules, and
regulation regarding lending activity. Loans are provided to the individual without assessing
their capability to repay the loan; further fraud was significantly common. The policies of the
government were not adequate so that the complex mortgage-based loans are created to investors
(Rey, 2015).
Due to the problem of distorted information, the financial marked failed. With regards to the
financial transactions, parties who are involved in the transaction do not evaluate the quality,
volume, effectiveness of the information. For assessing the probable risk and return, considerable
information is required. The innovation of the comprehensive derivative products and enhanced
securitization leads to the ineffectiveness of several financial transactions because the seller does