FIN200 T3 2018 Assignment: A Comprehensive Look at the GFC

This essay provides a detailed analysis of the Global Financial Crisis (GFC), starting with examples of financial crisis events and examining the role of the sub-prime mortgage crisis. It discusses the potential causes of the crisis, including global trade imbalances, financial market deregulation, and the US consumption pattern. The essay also explores whether a similar crisis could occur again, considering factors like global debt levels. Furthermore, it assesses the scale and impact of the GFC on various economies, including the effects on unemployment rates and GDP. Finally, the essay identifies actual and proposed reforms implemented in response to the crisis, such as monetary policies and financial rescue plans, and suggests further recommendations for preventing future crises. Desklib offers a variety of study tools, including solved assignments and past papers, to aid students in their academic pursuits.

Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student
Name of the University
Authors Note
Course ID

1CORPORATE FINANCE
Table of Contents
Introduction:...............................................................................................................................2
Examples of Financial Crisis events:.........................................................................................2
Effect of Lehman failure Balance of Payment:..........................................................................4
Possible causes of financial crisis:.............................................................................................4
Can GFC repeat again?..............................................................................................................5
Impact of GFC in different economies:.....................................................................................6
Actual or proposed reformation that have eventuated:..............................................................7
Conclusion:................................................................................................................................8
References:.................................................................................................................................9

2CORPORATE FINANCE
Introduction:
Currently, the world is facing severe financial downturn with the increasing
joblessness and lesser manufacturing production because of the failure in business and
reduced consumer spending. The main reason for this depression is the worldwide financial
crisis had initiated in the US and prolonged across the world in 2008 (Lane and Milesi-
Ferretti 2018). The economic crisis led to bankruptcy in several banks and monetary
organisations in US and across world. The study here would examine the how the financial
crisis has took place and the reasons which resulted in the failure of monetary system.
The fiscal market deregulation and the lack of management has contributed to the
mortgage crisis in several banks of US and across the world. Disproportion across the world
trade, US pattern of consumption and global reliance on the US exchange with multifaceted
financial derivatives market were amongst the principal reasons that contributed towards
crisis (Bénétrix, Lane and Shambaugh 2015). To evade the upcoming crisis, the financial
markets should be efficiently controlled and administered. The international trade should be
balanced and an improved financial system should be applied by the IMF.
Examples of Financial Crisis events:
The crisis of credit directly led to the failure of US mortgage market. The difficulty
began in 2001, when the federal reserve bank of America undertook the decision of reduced
interest rates to 1% so that it can overcome the ill effects of growth in the economy. The
actions of FED escorted the inflow of money from rising China and Middle East nations that
led to higher credit in US (Balakrishnan, Watts and Zuo 2016). Financial investors
represented by Wall Street were seeking higher return on investment of greater than 1% FDI
rates. They seized on the occasion that was offered by the mounting amount of mortgage in
the country. Abundant availability of credit stimulated several Americans to purchase home

3CORPORATE FINANCE
by getting loans from the Mortgage Lenders. The higher lending increased the demand for the
new houses where majority of Americans entered into mortgage market. This led to
flourishing real estate market from 2002-06 where the price of house tripled during this
phase.
The mortgage businesses packed these loans and sold the same to Investment banks
that characterised the loan as per their risks and sold the same as financial derivatives under
diverse names and returned to investors across the world (Ang et al. 2018). This shifted the
risks from mortgage lenders to Investment banks and then later to monetary stockholders.
The scheme was considered risky but till the time the home owners paid their monthly
instalments, all appeared regular and satisfactory. In order to smooth up the procedure
financiers began running out of credit worthy applications and stared to make risky
applications with the poor credit history.
The investors used this scheme as they did not required paying any down payment, no
proof of earnings and lure new risk applicants. A justification sub-prime loans was formed
where any investors default their houses will be sold to someone else at higher than
anticipated to be sold to somebody at greater price (Claessens and Van Horen 2015).
Nevertheless, the rate of default was higher with sub-prime credits were issued than the
estimated. The higher supply of houses over the demand has burst the bubble and the price of
house began falling. The decline in price resulted the prime home holders to non-payment
because it is useless to make payments to low-priced houses.
All through the country there was a default in payments where investment and
investors finished up with the higher credits and useless houses. The mortgage lenders were
unable to discovery new contenders and could not sell their loans to investors (Sui and Sun
2016). The entire financial system was frozen in the nutshell. This resulted in collapse of

4CORPORATE FINANCE
financial system and many banks went bankrupts with foreclosure of financial organizations
in US and across the world.
Effect of Lehman failure Balance of Payment:
The failure of Lehman brother does not created any direct effect on the local financial
segment with the view of restricted acquaintance of the Indian banks. Nevertheless, the
catastrophe of Lehman brothers bought an unexpected transformation in the external
environment. As it is in the case of chief EME, there was the sell-off of domestic equity
markets by the portfolio investors that reflects deleveraging (Obstfeld 2015). Subsequently,
there was also the large amount of outflow of capital by the portfolio investors in September
2008 with increasing pressure from the overseas exchange market. Even though the FDI
flows represented flexibility, access to the external marketable borrowings and trade credits
became to some extent difficult. As a whole, the net amount of capital inflows in 2008-09
was significantly lower than 2007-08 with depletion of reserves as well. Nevertheless, there
was a large amount of loss of reserve in 2008 that amounted US $58 billion.
Possible causes of financial crisis:
According to Rey (2015) it is difficult to ascertain the root cause of financial crisis.
Nevertheless, the economist and analyst have indicated a collective impact of numerous
reasons which led to the outburst of credit market in US and later across the world. An
important factor that resulted in financial crisis was the imbalance of world trade. China
obtained greater advantage by joining the new worldwide system of trade and engulfed the
world with cheaper exports. By keeping the Chinese Yuan very low, the exports of Chinese
products in the international market were very competitive (Lane and Milesi-Ferretti 2017).
This enabled china to amass higher trade surplus whereas the rest of exporting nations mainly
US enlarged their shortfall in trade. The trade deficit of US tripled from 69 billion USD in

5CORPORATE FINANCE
1999 to 256 USD billion in 2007. The manufacturing of industrialised and end user goods fell
abruptly in the US and the American economy moved to service economy.
One more reason that contributed to financial emergency was the unnecessary
deregulation of monetary markets. Ever since 1980 US led the world in monetary market
liberalization. To attain this, the financial market was deregulated significantly with the
government, FED administration and observation was relaxed (Lennartz, Arundel and Ronald
2016). During the last two decades the idea of liberalizing the market swept the world with
the push from GATS settlement. With increasing global trade several financial products and
derivatives were presented leading to increased international trade and liberalization. The
involvement of numerous financial and investment banks in the mortgage market became the
example of deregulation and liberalization. Therefore, such growth resulted in fizz that
erupted and halted the credit market.
To encounter the international demand for USD, US kept on printing the dollar
without any real regulation and criteria. This procedure permitted the arrival of international
goods and capital to US in exchange of USD (Dijkstra, Garcilazo and McCann 2015). This
kept US to consume beyond its capabilities resulting in continuous shortfall of trade balance.
During the last two decades, higher importation consumption reduced the manufacturing
productivity and shifted the traditional economy in the direction of service. The inflow of
money to USA resulted in the concept of "Cheap Money" and resulted in higher credit
which was used in fruitless activities, giving rise to financial crisis.
Can GFC repeat again?
The rising story is that central across the world have the speedy series of reduction in
the borrowing costs and recorded the lower of $10 trillion negative yielding sovereign debt.
This stimulates monetary supplies as the provisional measure of buying time and allowing the

6CORPORATE FINANCE
economies to recuperate from the financial crisis (Bremus and Fratzscher 2015). However,
the political system in many countries have not implemented the structural fiscal reformations
required by the sustainable financial growth and have only used liquidity injection from the
central banks to lend supplementary amount of cash in order to fund the deficit instead of
benefits or restructuring it meaningfully.
The private sector corporation have usually retreated from the capital venture which
may normally be encouraging to financial growth. The net impact of this that there is a
system wide leverage but international debt has been rising to negatively stand at -240 of
GDP by the end of 2020 (Kenourgios and Dimitriou 2015). The debt of non-corporate is
outperforming the GDP growth and has presently eclipsed the debt-to-GDP ratio which is
observed in the last three recession. Therefore, this make it imminent to say that another
financial crisis is imminent since the lead time between the rise in the corporate debt with
respect to the GDP and previous depressions has varied.
Impact of GFC in different economies:
The global nature of the crisis is regarded as the most distinctive traits. The sub-prime
credits mainly existed in US and was moderate in Great Britain. In US the current account
swung in different direction with US GDP declining 3 to 4% than the German GDP. In
Germany the rate of unemployment increased to 7.2% to while in US the unemployment
ranged as high as 10.2% while in Spain the unemployment ranged from 11.9% to 19.3%
(Kemp 2015). The international economy suffered severe downturn during 2008 and 2009
which also impacted the GDP and macroeconomic policy. OECD estimates that the GDP fell
by 2.5% while after the recession it declined by 4.0% following the severe recession.
The impact of financial crisis in Australia has been considerably less than several
other nations. The most obvious effect of financial crisis on majority of the household was

7CORPORATE FINANCE
large with fall in price of equity (Kono 2016). The Australian household declined nearly by
10%. Furthermore the Australian dollar also depreciated significantly by 30 percent from July
2009. The Lehman bankruptcy deteriorated the foreign exchange market of Australia which
particularly became illiquid, resulting the Reserve Bank of Australia to interfere in the market
to improve liquidity. The Australian credit and money market has been more resilient in
many other nations necessitating considerably lesser intervention by the reserve bank of
Australia than occurred in several other nations.
Actual or proposed reformation that have eventuated:
Responding to the GFC, governments and central banks undertook different measures
to correct the difficulties and bring back the monetary markets as well as economies in the
correct track. The most significant measures included the introduction of monetary policies in
central bank (Gendron and Smith-Lacroix 2015). The central bank across the world have
resorted to several financial strategies to hold the economic crisis. The most vital policies
included the lowering of interest rates significantly. The purpose is to reduce the price of
lending for the private business and consumers so that commercial activities can be
stimulated.
A financial rescue plan was began since the crisis began in US. The US government
arranged 800 billion USD as the rescue plan for saving the monetary market. The purpose
was to save the vital investment bank and insurance companies from bankruptcies as well to
preventing further financial deterioration.
Apart from the above stated corrective measures, few recommendations can be made
and solutions which may help in amending the errors of financial crisis. The reformation of
WTO and global trade is necessary. Nations such as China must not be permitted to control
the world trade by undertaking unfair activities (Kenourgios and Dimitriou 2015). Another

8CORPORATE FINANCE
recommendations can be made is the G8 and G20 summits where the exchange of views and
perspectives as well as concerns of several developing nations must be considered and
integrated under joint programmes of serving the entire world. Furthermore, the government
and the central banks across the world should be actively supervising and monitoring the
activities related to the financial firms both internationally and domestically. Efforts in the
direction of short run should be made to clean the balance sheet of financial organization
containing toxic assets.
Conclusion:
The existence of international depression is the result of financial crisis that has
resulted in US from the mortgage market and stretched to the whole world. The global
economic crisis has resulted bankruptcy in several banks and monetary institutions in the US
and across the world. Government across the world have undertaken different policies
namely the financial savings plans and aggressive monetary policies to hold the crisis. The
spiral effect of the financial crisis would take time until the new equilibrium is attained.

9CORPORATE FINANCE
References:
Ang, A.E., Masulis, R.W., Pham, P.K. and Zein, J., 2018. Internal capital markets in family
business groups during the global financial crisis. UNSW Business School Research Paper
Forthcoming.
Balakrishnan, K., Watts, R. and Zuo, L., 2016. The effect of accounting conservatism on
corporate investment during the global financial crisis. Journal of Business Finance &
Accounting, 43(5-6), pp.513-542.
Bénétrix, A.S., Lane, P.R. and Shambaugh, J.C., 2015. International currency exposures,
valuation effects and the global financial crisis. Journal of International Economics, 96,
pp.S98-S109.
Bremus, F. and Fratzscher, M., 2015. Drivers of structural change in cross-border banking
since the global financial crisis. Journal of International Money and Finance, 52, pp.32-59.
Claessens, S. and Van Horen, N., 2015. The impact of the global financial crisis on banking
globalization. IMF Economic Review, 63(4), pp.868-918.
Dijkstra, L., Garcilazo, E. and McCann, P., 2015. The effects of the global financial crisis on
European regions and cities. Journal of Economic Geography, 15(5), pp.935-949.
Gendron, Y. and Smith-Lacroix, J.H., 2015. The global financial crisis: Essay on the
possibility of substantive change in the discipline of finance. Critical Perspectives on
Accounting, 30, pp.83-101.
Kemp, P.A., 2015. Private renting after the global financial crisis. Housing Studies, 30(4),
pp.601-620.
Kenourgios, D. and Dimitriou, D., 2015. Contagion of the Global Financial Crisis and the
real economy: A regional analysis. Economic Modelling, 44, pp.283-293.

10CORPORATE FINANCE
Kono, M., 2016. The Evolution of Bank Regulation and Supervision After the Recent Global
Financial Crisis (Doctoral dissertation, Columbia Business School).
Lane, M.P.R. and Milesi-Ferretti, M.G.M., 2017. International financial integration in the
aftermath of the global financial crisis. International Monetary Fund.
Lane, P.R. and Milesi-Ferretti, G.M., 2018. The external wealth of nations revisited:
international financial integration in the aftermath of the global financial crisis. IMF
Economic Review, 66(1), pp.189-222.
Lennartz, C., Arundel, R. and Ronald, R., 2016. Younger adults and homeownership in
Europe through the global financial crisis. Population, Space and Place, 22(8), pp.823-835.
Obstfeld, M., 2015. after the Global Financial Crisis. POLICY CHALLENGES IN A
DIVERGING GLOBAL ECONOMY, p.383.
Rey, H., 2015. Dilemma not trilemma: the global financial cycle and monetary policy
independence (No. w21162). National Bureau of Economic Research.
Sui, L. and Sun, L., 2016. Spillover effects between exchange rates and stock prices:
Evidence from BRICS around the recent global financial crisis. Research in International
Business and Finance, 36, pp.459-471.