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Thu October 13th, 2016 - Analysis on the Active Finance Disaster and therefore the Banking Industry

Analysis on the Active Finance Disaster and therefore the Banking Industry

The present fiscal crisis started as element with the global liquidity crunch that happened in between 2007 and 2008. It’s always thought that the crisis had been precipitated with the thorough worry created by means of monetary asset advertising coupled accompanied by a substantial deleveraging from the money establishments on the leading economies (Merrouche & Nier’, 2010). The collapse and exit from the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by big banking institutions in Europe as well as United States has been associated with the worldwide economic crisis. This paper will seeks to analyze how the worldwide monetary disaster came to be and its relation with the banking field.

Causes with the economical Crisis

The occurrence in the intercontinental personal disaster is said to have had multiple causes with the key contributors being the economical establishments and then the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced from the years prior to the economic crisis 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 fiscal engineers on the big monetary institutions who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was the property rates in America would rise in future. However, the nationwide slump during 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 of the banking establishments experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices inside of 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 establishments panicked when this occurred which necessitated further reduction in their lending thus causing a downward spiral that resulted to the worldwide economic recession. The complacency via the central banks in terms of regulating the level of risk taking on the economic markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest the low policy rates experienced globally prior to the disaster stimulated the build-up of personal imbalances which led to an economic recession. In addition to this, the failure with 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 economic crisis.


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