Essay: Bankers' Bonuses, Financial Crisis of 2008, and UK Economy

This essay delves into the 2008 financial crisis, focusing on the UK's economic downturn and the role of bankers' bonuses. It identifies inappropriate incentives provided by banks as a major contributing factor, highlighting issues of corporate governance and short-term goals. The essay provides a brief history of the crisis, discussing how banks, driven by the pursuit of bonuses, prioritized short-term gains over long-term business prosperity. It explores key factors such as the rise of market prices, investment in stakeholders, and the impact of the global market trade. Furthermore, it examines the role of derivatives, mortgage demand, and accounting practices, and the impact on the UK economy. The essay concludes that the financial crisis occurred because banks gave loans for homes without proper procedures, increasing the amount of money in the market and causing the crisis. References from books, journals, and online resources are included to support the analysis.

BUSINESS SKILL – FINAL

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
Bankers bonuses were to blame for the 2008 financial crisis.....................................................1
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Business is a process through which an organisation can attain large amount of profit and
can sustain at market for long term. There are some resources require to operate each and every
sort of activity in an appropriate manner. These resources are limited in number and em0ployees
are consider as the best part of an organisation because with the help of them all goals and targets
can attain in an effective manner (Chodorow-Reich, 2013). Appropriate strategy is one in which
management not only frame scheme for profit margin but also for the losses which are taking
place. If a company do not lead to do so then they have to suffer from heavy crises. Under this
essay a major thing is identified which is consider as one of a major issue of UK which took
place in 2008 under which bankers are consider as the major problem behind the economical
crises of a country.
TASK
Bankers bonuses were to blame for the 2008 financial crisis
In united kingdom, one of a major thing which which took place in year 2008 is financial
crises. Chairman of financial authority measure that the major reason behind this thing is
inappropriate incentives provided by bank to bankers. This is a consider as a major thing and
financial inquiry commission stated that the main reason behind this thing is the
inappropriateness of corporate governance. Moreover the goals and targets which are framed by
them are short termed. Thus, it signifies as the major issues which affect UK economy very
badly. Before discussing on this topic, a major reason and history of this crises have to be
determine so that adequate information can be provided on topic.
A brief history about crisis 2008-
UK has one of a most appropriate economy in the world and it was consider as better
than others. But in the year 2008, one of a major issue arose in United Kingdom, is the bankers
bonus. That was treated as global crises of a country and the worst problem ever in the world. In
UK mostly banks are run with the help of performing partnership under which they can maintain
their operation in an effective manner (Erkens, Hung and Matos, 2012). They also measure their
balance sheet for taking any appropriate decision for a business. But a major problem arose
which is related with international market trade. The price of market get arise and thus it leads to
affecting the banks very badly. They also have to increase the prices of their shares and sale them
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it in stock market. Many of them thought, that they have to invite general public for such purpose
but some of them think that this is not appropriate at all. They invest more in stakeholders and
take care about their interest.
They provide reward in form of bonus to their employees with a will to attain more and
more surplus for a company. In such situation, all bankers were kept their focus more on attain
and generate more and more bonus on the place of prosperity of their business in long term.
Thus, this was a major reason behind the financial crises of 2008/2009.
after analysing this fact all business organisation lead to identify the major risk and
potential issues which are related with the reward or bonus system and thus they make their
system more complex than previous one. So for overcoming such sort of thing, government
formulate a law and regulation which have to follow by enterprise at the time of providing bonus
(Frankel and Saravelos, 2012). An appropriate reason behind such sort of thing is criticized of
Global bank due to increment ion their pay mode which leads to rises 35%. Thus, this signifies
as a major reason for depression. Basic facts about this thing is identify in 1998 under which
banks are free to gamble. According to Glass- Steagall legislation, all the financial and
investment bodies are completely separated from each other.
Federal Reserve decreased their investment rate with 1% and allow their investment
holders to keep it with them for more and more time. This thing took place in year 2000.
managers find new ways to generate more and more money for their business through which
whole task and project get done in an appropriate manner. Along with that office of comptroller
Currency federal states that there is no requirement to show mortgage credit and anti predatory in
books of an organisation at the time of 2004. Hence, this was a main reason behind increasing in
rates. In this period, many people get compensation for services which serve by them on short
term performance basis. Traditional banks start compensating their employees on the basis of
loan volume not on quantity and quality which offer and render by them. Hence, a major culprit
behind these thing is private institution who lead to support these happening. But their
negligence has to bear by whole country and thus this global crises of fund arose.
Main reasons of financial crisis 2008-
A major thing which is constituted with this thing is derivates and mortgage. Also, the
demand of mortgage also rises which is a major reason behind the increment in sales of many
new things at market (Goh and et. al., 2015). For sub-prime borrowers they created a interest
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only loan pay system which lead to maximise their number of lenders. In 2004, Federal reserve
increased their fed rates just like interest price on these new mortgages reset because of this
action, rates of houses started to fall and demand of home was less than supply. Derivates values
are crumbled because financial institution are not providing their services to each other which
created a worst situation which is not acceptable at all and global crises took place. Also, there
are several number of more issues are identified which are recognise out of them one problem is
Mark to market accounting (What Caused the 2008 Global Financial Crisis?, 2017). In the early
1990s, Securities and Exchange Commission and Financial Accounting Standards Board
signifies that every company have to mention their asset cost on market price not on historical
price. Hence, this system treating as abandoned during recession period and every bank become
insolvent announced at accounting standpoint.
Some major players who play an essential role in global crisis as they did not classify
scrutinies as an investment grade. Reason of this is incompetence and other portion was conflict.
research has revealed that issuers paid a high amount to these agencies for giving them high
ratings. In earlier times, when securitization of loans take place and banks take loans or create
finance from where they originate (Karanikolos and et. al., 2013). Institute underwrites more
loans by giving more incentive to brokers, which has less chance of defaulting. After the
introduction of proliferation of securitization this approach went other edge.
Blasting of house bubble is the fundamental driver of emergency in light of the fact that
in this era of 2007/07, lodging bubble had blasted. Soon after this episode, default rates of sub
prime and flexible rate contracts started to increment. At the point when advance is effectively
accessible from banks and remote assets inflow are expanded then it improved the lodging
development exercises and encouraged obligation financed buyers spending. At the point when
banks were giving credit effectively to home then it expanded the rates of house. As a major
aspect of lodging and credit blasts, there were expanding vast number of budgetary assent-ions
which can be called as home loan upheld securities and guarantee obligation commitments. From
this progression, for the most part individuals were putting resources into building house which
was result that lodging costs started to diminish which made money related emergency in the
market (Marazzi, 2011).
Prior to this issue, it was accepted that home costs will never be declined at the same time
on an across the country premise. In any case, it wasn't right on the grounds that for the most part
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individuals started to put their cash in to obtaining house since they were expecting that it is a
hazard free speculation. Enactment permitted to Lehman Brothers' which was the greatest slip-
up. They abused the cash and give pointlessly advance to the general population which made this
issues before whole world (Munir, 2011). Also, if a man required credit then he could take
advance effectively from banks. In keep running up to the budgetary emergency, monetary
establishment made new cash in the market by giving credit to the general population. In only 7
years, measure of cash and additionally obligation of economy expanded simply multiplied.
Effect of this crisis in UK-
Along these lines, offers of retailer go down particularly in the outfitting and DIY areas.
Understood brands need to close down their outlets which expanded the joblessness in the whole
world that is the reason government's income additionally tumble down (Rose and Spiegel,
2012). In the quarter of 2008 Gross Domestic Product of United Kingdom likewise tumbled
around 1.5% and nation entered in a time of retreat.
CONCLUSION
From the above exchange, it can be presumed that budgetary emergency 2008 happened
in light of the fact that banks began to give advance for home to each individuals with no
conventions which expanded the measure of cash in the market that delivered the emergency
before whole world. Since individuals started to put their sum in developing house as a result of
which costs of home tumble down. Aside from this, there are numerous different reasons of this
issue, for example, credit organizations did not give redress rating to the securities and so forth.
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REFERENCES
Books and Journals
Chodorow-Reich, G., 2013. The employment effects of credit market disruptions: Firm-level
evidence from the 2008–9 financial crisis. The Quarterly Journal of Economics. 129(1).
pp.1-59.
Erkens, D. H., Hung, M. and Matos, P., 2012. Corporate governance in the 2007–2008 financial
crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance.
18(2). pp.389-411.
Frankel, J. and Saravelos, G., 2012. Can leading indicators assess country vulnerability?
Evidence from the 2008–09 global financial crisis. Journal of International Economics.
87(2). pp.216-231.
Goh, B. W. and et.al., 2015. Market pricing of banks’ fair value assets reported under SFAS 157
since the 2008 financial crisis. Journal of Accounting and Public Policy. 34(2). pp.129-
145.
Karanikolos, M. and et.al., 2013. Financial crisis, austerity, and health in Europe. The Lancet.
381(9874). pp.1323-1331.
Marazzi, C., 2011. The violence of financial capitalism. MIT Press Books. 1.
Munir, K. A., 2011. Financial crisis 2008-2009: What does the silence of institutional theorists
tell us?. Journal of Management inquiry. 20(2). pp.114-117.
Rose, A. K. and Spiegel, M. M., 2012. Cross-country causes and consequences of the 2008
crisis: early warning. Japan and the World Economy. 24(1). pp.1-16.
Online
What Caused the 2008 Global Financial Crisis?. 2017. [Online]. Available through:
<https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176>.
[Accessed on 29th July 2017].
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