The paper "Financial Institutions and Markets " is an outstanding example of a finance and accounting assignment. The global financial crisis of 2008 culminated in one of the sharpest declines in global economic activities of this century. Most of the developed economies experienced economic turmoil and leading to a sharp decline in global trade, weakened consumer confidence and rapid crashes in the stock markets around the globe. Banks faced a liquidity crisis referred to as a credit crunch while the United States housing market experienced a harsh decline with consumers unable to service their mortgages (Zhu 2012 43).
The events marking the financial crisis included the collapse of the Lehman Brothers, the collapse of the United States housing market, the collapse of sub-prime mortgages and ultimately the erosion of confidence in the stock markets. The global financial crisis took place based on a series of events, some dating as far back as a decade before. The Asian Financial crisis in 1997-98, led to the general of large current account surpluses invested offshore to keep the nominal exchange rates in these economies low.
With the rising of the NASDAQ, most of these monies were channelled towards the dotcom stocks. The dot-com bubble burst in 2001 and the United States Fed fearing deflation eased monetary policy between 2001 and 2004. The net effect was the boom in the housing sector and the rise of leveraged and loans. At the same time, demand for commodities in China led to the growth of the commodities market. These events created the baseline for the global financial crisis(Zhu 2012 50). The triggers for the financial crisis resulted from supervision and regulatory factors.
The regulatory authorities such as the United States Federal Reserve Bank failed to exercise authority and offer guidance to financial institutions leading to excessive risk-taking. The Fed practised loose monetary policy but lacked strict supervisory and regulation towards these policies (Mckibbin & Stoeckel 2010 67). The monetary policies led to serious financial imbalances leading to risks fuelled by macroeconomic factors such as capital flows. In most of the markets, banks began seeking leverage from wholesale financial markets instead of the deposit markets thereby increasing their rollover risk (Mckibbin & Stoeckel 2010 67). Global imbalances were also responsible for the financial crisis.
The pre-crisis period experiences a rise in global imbalances characterized by disparities of current account positions between various countries. Global imbalances reduced interest rates. The existence of the two led to a shortage of safe financial assets and instruments for investors. This, in turn, led to financial institutions increasing their leverage and expanding their balance sheets. Such risky trends in fact affected the banking sector when the crisis hit as was the case with Lehman Brothers.
The collapse of Lehmann brothers spread fear and panic within the financial markets that more institutions would follow leading to Governments taking drastic measures to intervene. The governments bailed out various financial institutions, especially in the United States. In Australia, the government took precautionary measures by stating it would guarantee bank deposits and releasing a 10.4 billion dollars economic stimulus package (Walker 2013 56). The United States housing market is connected in many ways to the financial markets. It is used as a measure of growth and wealth, with the United States releasing housing numbers on a monthly basis.
The housing market acted as a huge baseline for the financial crisis in a large way. With the accommodative monetary policy exercised by the Federal Reserve Bank, there was a surge in cheap credit. The banks began issuing mortgages and loans to owners cheaply. These loans were referred to as NINJA loans. With the financial system at the brink of falling, most of the homeowners found they were unable to service their loans. Subsequently, a measure of wealth and assets in the United States eroded many people and this led to panic among banks, who found themselves holding onto land and houses (Walker 2013 67).
This crisis manifested itself, sent shocks in banks and financial system around the world, and became the first indicator of the impending collapse. These factors were both the triggers and the structural causes for the global financial crisis. Since the crisis, measures including policies and structural frameworks guard the financial markets against another turmoil.
Zhu, X 2012, 'The Global Financial Crisis: How China Responded to It through Legislation', Chinese Economy, 45, 3, pp. 42-55.
McKibbin, W, & Stoeckel, A 2010, 'The Global Financial Crisis: Causes and Consequences', Asian Economic Papers, 9, 1, pp. 54-86.
Walker, G.A. 2013, "Financial Crisis and Financial Resolution", Banking & Finance Law Review, vol. 29, no. 1, pp. 55-84.
Akdogu, S.K. & Umutlu, M. 2014, "The Link between Financial System and Economics: Functions of the Financial System, Financial Crises, and Policy Implications", International Journal of Financial Research, vol. 5, no. 4, pp. 52.
Antzoulatos, A, Panopoulou, E, & Tsoumas, C 2011, 'Do Financial Systems Converge?', Review Of International Economics, 19, 1, pp. 122-136