The paper "Financing the Business Sector " is a wonderful example of a Macro and Microeconomics Case Study. The international financial crisis that began with the sub-prime problem in the United States in 2007 spread around the world in the middle of the year, gathered force in 2008 as a number of global banks went bankrupt and inter-linked stock markets affected growth processes in the developed as well as the developing world. While most of the international financial crises of the 1990s erupted from the emerging economies in Asia and Latin America because of inadequate domestic monetary and fiscal regulations, the 2007-08 crisis had its roots in the developed world because of spiraling asset prices, especially house prices, on the back of loose monetary policies and lax lending standards (Mohan, 2008).
On the other hand, emerging economies in Asia were less affected by the financial crisis because of the decoupling of economic growth in this region from the developed world. As a result, to tide over the crisis following reduced business in the home countries, many companies in the United States and the United Kingdom have been aggressively expanding in Asia.
In particular, insurance companies in the west, which have been predominantly dependent on the booming home property sector from 2004 to 2007, found their revenues falling drastically since 2007, leading to significant consolidation of the sector and expansion in Asia rather than in the home countries. Besides, insurance companies based in the United Kingdom had been better protected from the financial crisis than the US ones since they had been maintaining substantial capital buffers since 2003. This paper will discuss the sources of growth of the global financial system during 2004 to 2007, on which the origins of the financial crisis of 2007 lay, the impact of the crisis on the global insurance sector, with particular reference to the UK, and the fallout in terms of restructuring of UK insurers, with examples of a large player (Prudential Insurance), a medium-sized insurance broker (Jardine Llyod Thomson) and a small insurance underwriting company (Novae Group). Credit boom The subprime crisis that erupted in August 2007 was feared to result in depression in the global markets in a manner similar to the 1929 crash followed by the Great Depression.
The crisis in a way was the result of a prolonged period of low-interest rates in the United States and Europe, which prompted demand for mortgages. Over the period 1997-2007, the pound lost value against most other currencies primarily because of the development of the financial services sector. London grew as a major financial center as the UK attracted huge doses of foreign investments. Investors from many of the countries that had trade surpluses with the UK began to acquire financial and real estate assets in the UK, which was supported by a low-interest rate regime that also induced consumer credit in the housing boom (Price Waterhouse Coopers, 2009).
This set in force speculative activities in the stock exchanges and in the real estate market which led to the crash of many financial institutions, like the Northern Rock, in the UK. By 2007, economic activity had grown on the basis of consumer spending and business services. Since 1999, UK households had been deficit spending, implying that they were borrowing in the mortgage market and selling assets to the non-residential sector, mostly corporate entities.
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