Financial Crisis and Banking Project: BUSI431, 2nd Term, 2019-2020

This project, created for the BUSI431 course, analyzes a financial crisis scenario involving a bank run and potential insolvency. It explores the reasons behind customer actions and outlines managerial options to address the crisis. The project further examines the role of the Central Bank of Bahrain in regulating financial institutions and implementing monetary policies to stabilize the economy during economic contraction. It also discusses the impacts of economic downturns and high interest rates on inflation, and it investigates the characteristics of a monopoly market structure, including barriers to entry and price-setting power. Additionally, the project assesses the causes and effects of the 2008 financial crisis on commercial banks and the fragility of the banking sector, referencing academic sources to support its analysis. This project is a comprehensive case study that covers several key aspects of banking and finance.

Running head: BUSINESS PROJECT
Business Project
Student’s Name:
Institutional Affiliation:
Date:

BUSINESS PROJECT
Qn. 1
The act of customers rushing to withdraw their finances is bound to leave the banks
without any funds necessary to support their operations and this will likely lead to them being
insolvent. The banks can therefore decide to call in on any outstanding loans in order to have
adequate funds for their operations. this would mean that all the customers who have either
personal, business and mortgages will be required to pay all the outstanding amounts in order for
the bank to avoid being insolvent. Another option for the banks is to liquidate the loans that are
there and sell the assets at rock bottom prices in order to cover the gasp that has been occasioned
by the mass withdrawals and thus prevent the aspect of being insolvent (Bouvatier, Lepetit,
Rehault & Strobel, 2018)
Qn. 2
The central bank of Bahrain is responsible for the regulation of all banking and financial
institution in the country.it provides a number of regulatory framework upon which the financial
institutions have to operate. This is important in ensuring that there is fair competition in the
financial sector and that illegal trading activities are wiped out. The CBB formulates regulatory
rules that are adopted by the financial institutions and used to carry out their activities. This
includes control of the interest rates in order to deal with rates of inflation and thus ensure that
the economy of the country is stable (Prasad, 2018).The current situation where the economy is
set to contract can be improved by the CBB through formulation of fiscal and monetary policies
that will be critical in revamping the economy. The effect brought about by crude oil prices and
the coronavirus can thus be contained by the policies that the CBB will formulate (Bartmann,
2017). .

BUSINESS PROJECT
Qn. 3
Businesses and financial institutions will try as much as possible to recover from the
effects of the virus. This will result in most of them charging high prices and high interest on
loans in order to recover on the losses that they suffered. This is an act that is bound to lead to
inflation in the country as the general prices of commodities will be higher (Gilchrist, Schoenle,
Sim & Zakrajšek, 2017). The demand that will be there for the good and services will also
increase as most of the people will have lacked the goods during the crisis period and thus would
want to have the commodities. This increases the prices of goods and services in the market and
thus leads to inflation. The high interest rates charged by the banks will also contribute to
inflation within the economy.
Qn. 4
Monopoly market structure has a number of characteristics that is used to define it. One
of the characteristic is high barriers to entry. There are a lot of barriers that are put in place by
those who control the market in order to make it difficult for competitors to venture into the
market. They are discouraged by the several barriers put on their way and this leaves the firm
that has monopoly to continue dominating in the industry. Another characteristic is that of a price
maker (Manna, 2017). The firm that is a monopoly in the market operates on its own and thus
sets out the price that it will charge for its good and services. There are no forces of demand and
supply that contribute to the price that will prevail in the market and thus the price that will be
set by the monopolistic firm will be the one that will be utilized. The third characteristic is single
seller. In a monopoly market structure, there is only one seller in the market who is responsible
for provision of the good and services and setting out of the price in the market (Roesler, &

BUSINESS PROJECT
Szentes, 2017).. There are a lot of barriers that are put in place by those who control the market
in order to make it difficult for competitors to venture into the market. They are discouraged by
the several barriers put on their way and this leaves the firm that has monopoly to continue
dominating in the industry. There is no competition in the market structure and thus the single
seller is able to achieve maximum profits.
Qn. 5
The financial crisis in 2008 caused a lot of loses to the banking sector due to the non-
performance of the loans that had been issued out. Most of the borrowers were not able to fulfill
their loan obligations as a result of the financial situation and this made the bank vulnerable in
terms of recovering losses. Thus, the financial crisis exposed the weaknesses and the fragile
nature of the banking institutions as they did not have a proper regulatory framework that could
cushion them in such times of a crisis (Yu, 2019). They were used to the normal situation in
which the borrowers would fulfil their obligations and thus did not anticipate the crisis of such
magnitude occurring. Most of the bank suffered significant loses and had to be bailed out in
order for them to come out of the crisis and continue with their operations. Thus commercial
banks were rather fragile and this put them at a higher risk of suffering more losses as the crisis
persisted (Anginer, & Demirguc-Kunt, 2018). . The banks can therefore decide to call in on any
outstanding loans in order to have adequate funds for their operations. this would mean that all
the customers who have either personal, business and mortgages will be required to pay all the
outstanding amounts in order for the bank to avoid being insolvent.

BUSINESS PROJECT
References
Anginer, D., & Demirguc-Kunt, A. (2018). Bank runs and moral hazard: A review of deposit
insurance. The World Bank.
Bartmann, R. (2017). Causes and effects of 2008 financial crisis. Hochschule Furtwangen.
Bouvatier, V., Lepetit, L., Rehault, P. N., & Strobel, F. (2018). Bank insolvency risk and Z-score
measures: caveats and best practice. Available at SSRN 2892672.
Gilchrist, S., Schoenle, R., Sim, J., & Zakrajšek, E. (2017). Inflation dynamics during the
financial crisis. American Economic Review, 107(3), 785-823.
Manna, E. (2017). Exercises on Perfect Competition, Monopoly, Market Structure and Market
Power.
Prasad, E. (2018). Central banking in a digital age: Stock-taking and preliminary
thoughts. Hutchins Center on Fiscal & Monetary Policy at Brookings.
Roesler, A. K., & Szentes, B. (2017). Buyer-optimal learning and monopoly pricing. American
Economic Review, 107(7), 2072-80.

BUSINESS PROJECT
Yu, H. (2019). A Brief Analysis of the Financial Crisis of 2008. Proceedings of Business and
Economic Studies, 2(4).