IMDAFM101: Global Financial Crisis, Reforms, and Institutions

This report provides a comprehensive analysis of the global financial crisis (GFC) from mid-2007 to early 2009, focusing on the significant impact it had on the United Kingdom and other major economies. It explores the key reasons behind the crisis, including extensive borrowing, excessive risk-taking, inadequate government regulations, distorted information within financial markets, and the role of financial institutions. The report then delves into the aftermath of the crisis, particularly the changes in economic norms within the UK. Furthermore, it examines the role of regulatory reforms, financial markets, institutions, and corporate governance as a way forward to mitigate the impacts of the GFC. It highlights measures such as enhanced government expenditure, robust supervision, nationalization of banks, and the implementation of quantitative easing, along with a discussion of the Financial Services Authority and the Financial Stability Board, and the importance of transparency and risk management. The report concludes by emphasizing the crucial role of these reforms in preventing future crises and ensuring the stability of the global financial system, referencing key academic sources.

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

not have proper and adequate information regarding the buyer. Along with this, many times third
party enters into a transaction, by which the actual seller and buyer may not be aware of the real
risk connected with the transactions. As a result of this, in the year 2007, the financial market
started to collapse in the United Kingdom (Dijkstra, Garcilazo, and McCann, 2015).
The impact of the global financial crisis on the United Kingdom was more as compared with any
other economy. This was because of some particular elements. There is no large production base
in the United Kingdom, and the earlier growth had been operated by the financial operations and
services, which encompassed a house purchasing and extreme retail sale, which has been totally
based on credit (Kenourgios, and Dimitriou, 2015). This type of growth was specific to the
United Kingdom. Overall, when the price of the house started to decrease, and credit sources
went arid, it leads to the negative impact on the economy of the country, which made the severe
long term impacts.
A period of 2007-2008 of the global financial crisis, created an immediate change in the
economic norms of the United Kingdom. Earlier to this crunch, the government addressed the
consistency in the price, financial caution, and low touch on the regulation of finance. In the stir
of this crunch, there is the requirement of reviewing the financial administration raised.
The role of recent regulatory reforms, financial markets, institutions, and corporate governance
as a way forward to overcome the impact of global financial crisis
The government of the country approved various rules and regulations for mitigating the impact
of the global crisis. At the time of making policy, there are three basic problems addressed by the
authority, namely, How to establish the greatest control and regulations over the bank, how to

obtain liquidity into the worldwide system, and how to arrange with the subsequent impacts of
the banking crunch (Cayon, Thorp, and Wu, 2018).
For addressing the issues of global crises, financial markets, regulators, institutions has taken
some steps, which are Enhanced government expenditure, Robust supervisions of financial
organizations, Nationalization, Regulations, Financial incentives – quantitative assistance and
others. Due to the global financial crisis, thousands of people became jobless. With regards to it,
the government enhanced its expenditure to balance the demand and assist the employment
opportunity all over the economy. Further, for increasing the confidence in the financial
organizations, government-issued guaranteed deposits and banks bonds. Along with this, some
firms or organizations also acquired by the government to safeguards from the insolvency, that
could have impaired the problems in the financial market (Bremus, and Fratzscher, 2015).
Moreover, because of the global financial crisis, the economy faced the deepest recessions.
However, the policy of regulators assists in the prevention of global depression.
In reaction to the crunch, regulators of the country strengthened their administration of financial
organizations and banks. Many new global policies made by the government, with this regards,
the bank has to evaluate more minutely the risk of loans they are offering and apply more robust
funding sources (Becchetti, & et al. 2015). For instance, a bank must carry out their operations
with lower leverage and cannot use the short term loans to deposit the loan, so that they cannot
make a loan to their customers. Further, regulators are also more attentive about the manner in
which risk can be supper all over the financial system, and needs activities to safeguard the
scattering of risk.

One of the steps taken by the government in response to the global financial crisis is the
nationalization of the significant banks, consisting Northern Rock, and partly nationalize others
consisting Lloyds Banking Group and the RBS (Royal Bank of Scotland). Further, through the
extensive re-capitalization, the government provided significant support to financial institutions
(Cukierman, 2019).
From the year 2001, financial service authority has responsibility for regulations of the financial
market in the United Kingdom. The main objective of financial service authority is to promote
effectiveness, orderly and partial market and to assist retail consumers in obtaining a reasonable
deal. It has been already described that asymmetric information is a major problem in the
financial market, the regulatory authority will contain the enhancement of a fairer and
transparent system, along with this, the financial institution required to provide advanced quality
information of risk related aspects. Some opponents of the regulatory system of the United
Kingdom claimed that the system is based on the rules, should be directed towards the principle-
based regulations of the European model (Anginer, Cerutti, and Peria, 2017). In the rule-based
system, the regulator interprets the rules as incorporated in the law, and there is no scope for
opportunities of judgment or analysis. On the other hand, under the principle-based system,
normal rules are incorporated in the law. It is argued that the regulator should be additional
power to assess the applicability of the principle to ascertain whether the general principles are
being complied to. After the global financial crisis, it has been recommended for the set-up of a
financial stability board. This board provides the initial warning over the problems in the global
financial system. Further, the activities of the hedge fund should also be closely examined.
Quantitative easing is a method, by which the central bank or bank of England under guidance
from the Treasury, purchase the current government bonds, with regards to enhance money

straight into the financial system. It is regarded as open market operations and considered as the
last option when a low rate of interest did not work. This is the most effective technique, by
which the liquidity can be increased.

REFERENCES
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Balakrishnan, K., Watts, R. and Zuo, L., 2016. The effect of accounting conservatism on
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Bénétrix, A.S., Lane, P.R. and Shambaugh, J.C., 2015. International currency exposures,
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Claessens, S. and Van Horen, N., 2015. The impact of the global financial crisis on banking
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Cukierman, A., 2019. The Impact of the Global Financial Crisis on Central Banking. The Oxford
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