Analysis with the Existing Money Disaster also, the Banking Industry

Analysis with the Existing Money Disaster also, the Banking Industry

The active economic disaster commenced as portion from the world-wide liquidity crunch that occurred in between 2007 and 2008. It is believed that the crisis experienced been precipitated because of the detailed panic produced through personal asset advertising coupled which includes a immense deleveraging while in the money institutions of your primary economies (Merrouche & Nier’, 2010). The collapse and exit for the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by principal banking institutions in Europe and also United States has been associated with the global finance crisis. This paper will seeks to analyze how the worldwide finance disaster came to be and its relation with the banking trade.

Causes of the economical Crisis

The occurrence in the worldwide money disaster is said to have experienced multiple causes with the main contributors being the money establishments and also the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that experienced been experienced from the years prior to the finance disaster increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and money establishments from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to financial engineers inside big money establishments who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was that the property rates in America would rise in future. However, the nationwide slump while in the American property market in late 2006 meant that most of these collateralized debt obligations were worthless in terms of sourcing short-term funding and as such most banks were in danger of going bankrupt. The net effect was that most for the banking establishments experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices with the property market and as such most borrowers who had speculated on future rise in prices experienced to sell off their assets to repay the loans an aspect that resulted into a bubble burst. The banking institutions panicked when this transpired which necessitated further reduction in their lending thus causing a downward spiral that resulted to the global economic recession. The complacency by the central banks in terms of regulating the level of risk taking inside the economical markets contributed significantly to the crisis. Research by Merrouche and Nier (2010) suggest which the low policy rates experienced globally prior to the crisis stimulated the build-up of economical imbalances which led to an economic recession. In addition to this, the failure by the central banks to caution against the declining interest rates by lowering the maximum loan to value ratios for the mortgages banking institution’s offered contributed to the financial disaster.


The far reaching effects that the economic crisis caused to the worldwide economy especially while in the banking market place after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul for the international personal markets in terms of its mortgage and securities orientation need to be instituted to avert any future finance disaster. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending in the banking community which would cushion against economic recessions caused by rising interest rates.