The Impact of Global Financial Crisis on Corporate Management

This report delves into the ramifications of the Global Financial Crisis (GFC) of 2008-09, exploring its origins in financial deregulation and the subsequent economic downturn. The report examines the causes of the crisis, including global savings imbalances, housing price declines, subprime lending practices, and credit booms. It analyzes the GFC's impact on various sectors, including the financial sector, remittance flows, foreign exchange reserves, and macroeconomic balances, with specific attention given to the indirect effects felt by Nepal. Furthermore, the report investigates the crisis's influence on the housing industry, investment, and the stock market, highlighting increased volatility. Finally, it proposes potential reforms such as capital planning, stress testing, and heightened capital regulation to mitigate the risk of future financial crises. The report concludes by emphasizing the need for proactive measures to safeguard financial stability.

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
Name of the Student
Name of the University
Author Note

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Introduction
The worst economic disaster after the economic depression that took place in 1929 was
known as the Global Financial Crisis (GFC, 2008-09). The deregulation that happened in the
financial industry was the major reason that led to the creation of this crisis. The rise in
unemployment and the decline in the price of the real estate were some of the major causes that
led to the evolution of GFC. It happened in the year 2007, as there was a decline in the assurance
level of the investors present in the US regarding the mortgages of the subprime products. The
increase in the volatility rate and the fall in the stock market were some of the major factors that
contributed towards this crisis in 2008 of September. The collapse in the price of the houses led
to a fall in the flow of remittance on a global manner by 6 percent in 2008-09. The institution
known as IMF reviewed a statement saying that the output level shranked to 2.2 percent as the
developing and the developed countries went in to a state of financial crisis (Attig et al. 2016).
Nepal is considered to be not impacted on a direct manner by the effects of GFC but has felt it in
an indirect manner.
Discussion
Possible causes
Global saving- The core grounds regarding the rise in the asset prices was basically the
factor of deficit that was seen in the current accounts, which prevailed in the US market. The
countries with a deficit in their trade and current accounts were due to the increase in the savings
of the people, which curtailed the borrowing capacity and becoming a lender to the US. The
increase in the capacity to save was seen mostly in the developing countries, as there was

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reduction in the investment within the capital market that created an increase in saving on a
global manner. The markets with respect to capital in the developed places were searching for
funds, which would help in increasing the market demand along with the asset prices in the US
stock and housing market.
Price of houses- The decline in the price of the houses in a substantial manner was one of
the shocks that led to the formation of global financial crisis. The period of 1996-2006 saw a rise
in the value due to the lower interest rates and stress of forming a fresh economy. From middle
of 2006 till 2009 mid-February, it was seen that the price of the houses had declined the most
since 1987 (Balakrishnan et al. 2016). The mortgage lending mainly attracted the wealthy people
so that it can be help in saddling the burdens regarding the mortgages that were large in nature.
Figure 1: Housing prices
(Source: imf.,org 2018)
Rise in subprime lending and rate of interest- There was a further increase in the price of
the houses because of sloppy standards of interest rate for the purpose of lending, which is
associated with the global economy as well. The borrowers who had the loans were mainly
subprime lenders and the standards also suffered because of the lack in the worthiness of credit

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of them. The rise in fed rates resulted in costly borrowing (Dungey and Gajurel 2014).
Furthermore, the cost of the buildings also created an impact, as the mortgage rate moved from
descending to ascending rates in the market place.
Credit booms- The trigger for the crisis was the major participation that the expansion
rate had on credit, which kept on increasing in the market. The access for the credit increased at a
greater rate as there was a boom in the market regarding the houses in places like Ireland, Spain,
European countries and the UK. The recurring flux that was happening in the economy was
because of the rapid credit growth. The indebtedness in the housing properties also increased in
the US market after 2000 due to the slow credit growth within the economy (Bauer and Thant
2015). The fiscal innovations and the mortgage finances were the major contributors that led to
the problem in housing sector indebtedness.
Probability of repeating the financial crisis
Regarding the job cycle theory, it can be seen that the financial crisis can be repeated in
the future. There is a possibility for this occurrence because of the stage of development, which
would escort the market to another phase of depression.

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Figure 2: Possibility of GFC
(Source: Created by Author)
Financial crisis of different countries and Nepal
The effect on financial sector- The presentation on the level of macro economy
revelation to the foreign market and the health of the financial sector changes from one economy
to another. The impact of foreign direct investment along with the flow of the capital had an
adverse impact and influenced the economy of countries like India. The deficit in the fiscal and
the current account has also affected countries like Sri Lanka as the inflow of capital was low
through the external manner and the spread of the bond of the bond in the nation increased. The
shock on the global fiscal crisis was also seen in Nepal because the nation was growing through
the state of lower growth. The decline regarding the prices of the fuel and food led to the
increase of inflation, which was indicated by the loans that were not performing in the market.
These factors contributed heavily towards a weaker financial sector within the country
(Albertazzi and Bottero 2014).

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Impact of remittance- The turning down of the remittance flow in 2008-2009 was 6
percent because of the effect of financial crisis on a global manner and the least striking
countries were the regions in Asia Pacific when compared to a fall of two percent in countries
like Central Asia, Latin America, Middle East and North Asia
Figure 3: Flow of remittance
(Source: Vazquez and Federico 2015)
Figure 4: Growth of remittance in Nepal
(Source: lib.icimod.org 2018)

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In the case of Nepal it can be seen that the flow of remittance did not create any impact
and the flow did not decries from 1998 to 2010. The country was the 5th largest in the world with
respect to the recipient of remittances and the share of Gross Domestic Product.
Reserve for foreign exchange- The business industry of the countries that were
developing had an effect because of the crisis, as it increased the funding problems that were the
cause of the foreign exchange loss. The funding needs of the vendor needed to be decreased,
which resulted in providing the funds that were necessary in funding the foreign exchange. The
pool that was present in foreign exchange in the Nepalese banks for decreasing the interest
income and the remittance inflow was delayed. The reserves in the foreign exchange decreased
from 21.9 percent to 17.3 percent from the financial year 2007-08 to 2008-09.
Macroeconomic balances impact- The trade stock decreased the macroeconomic balances
in the South Asian countries. Few months back during the financial crisis time, it can be seen
that the commodity prices were declining, as there was a delay in the earnings from the exports
and the remittance flow (Vazquez and Federico 2015). The decrease in the price level may result
in the decline of the earnings from the income as well.
Import- The products were imported, as it saw a increase in the features of the fuel and
food. The decrease in the prices of the commodity on a further level was because of the recession
that happened in the OECD countries and the South Asian countries, which also had an
optimistic impact.
Impact of financial crisis on housing industry
Investment- The increase in the price of the assets within the banks along with process of
funding process that caused a delay were some of the major attributors towards the risk in the

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growth of investment. This resulted in keeping the profits low for the organizations that deal with
the products for exporting purposes. The finances that are available in a domestic manner for
investment purposes decreased for delaying the investment rate within the local economy. The
growth of investment in the South Asian countries decreased because of the delay in earning of
exports and foreign capital (Boychuk et al. 2012).
Impact of GFC in share market
The financial crisis led to a higher volatility degree within the stock market, as it varies
from one market to another and the crisis in 2009 was because of the mortgage in the subprime
market and the liquidity crisis that led the crash in the stock market. Most of the countries were
under the grip of the crash that happened in the stock market and the crisis that took place in the
US market increased the volatility rate in the markets of Australia and New Zealand. The stock
markets that were present in Germany, US and Japan had a pattern of volatility as well. The
volatility level increased that led to the rise in the borrowing costs, which resulted in low
confidence within the investors (Benetrix et al. 2015).
The monetary industry in Nepal has no relation with the financial system in a global
manner closely for which the economy did not endure from the impacts of the financial crisis in
the beginning. The share and the investment market within the nation have no link with the
investment on a global manner in a direct manner. The availability of the funds in the Nepalese
banks led to an indirect impact for the crisis as the demand declined in an aggregate manner
along with a weak spending capacity of the consumers (Cayon et al. 2017).

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Reforms for reduction in financial crisis
Capital planning and stress testing- The federal reserve of the banks have to analyze their
capital, which help in the review of the capacity of lending at the time of economic downturn.
The testing of the level of stress can be another method that will help in designing a framework
based on risk capital (Obstfeld 2015).
Heightened regulation of capital- The requirement of capital relying on has to be
increased, which will help in the asset relation with the risks and the common equity (Haas and
Lelyveld 2014). The capital standards of the banks have to be higher along with regulations
needs to be done on the basis of risks so that the banks can allot more capital on the assets that
are risky.
Conclusion
Therefore, the global financial crisis created different effects on various countries and
Nepal in particular. The crisis happened during the second and third encompassing of the flow of
remittance within the country along with the reserves in the foreign exchange and the price of the
commodities. Furthermore, the crash in the stock market of the different countries had limited
the growth in the market.

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