a) The financial crisis of 2007-2010; was it simply the result of lax regulation, or were a range of factors at play? (50 marks). Lack of strict regulation was the core of 2007-2010 financial crises. However, there are a host of other factors that equally played a key role in the crises, though all the factors are somewhat intertwined and result in one issue to hold responsible – lax regulation…
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The first phase, as explained below, is Novel Offering. Finally, I will discuss the link between the crises and the factors such as Crises of Financialisation and contradiction. The crises will also be explained from an economic theory pint of view (Peretz and Schroedel 2009). Novel Offerings Novel offerings are sources of revenue used by banks and other financial institutions by trading in different financial products. For the last few decades, the context of deregulation has greatly contributed towards development of these financial products. For example, since 1970s, different regulations controlling the actions of financial institutions in the UK and USA have been loosening up. This includes Glass Steagall, which had been instituted to disjoin the people’s savings from the riskier operations of investment banks. The banks resulted in creation of shadow baking system, which allowed them to circumvent the rule that required them to balance the risk on their books with some level of capital. Securitisation, Boom and collapse of shadow banking The shadow banking system is believed to have traded the worst performing and the riskiest mortgages. These systems put extensive pressure upon the traditional institutions hence forcing them to soften their underwriting standards and start dealing with riskier loans. These banks were later criticised for underpinning the financial system, though they were not accountable to the same regulatory controls. What’s more, these banks were susceptible because of maturity mismatch, implying that they borrowed short-term loans from liquid markets and bought illiquid, long-term, but risky assets. The uncontrolled practices of such banks are the core of the 2007 financial crises – the situation could have been better if regulation was imposed on all activities related with banking. In the spring of 2007, the securitization markets were helped by shadow banking systems, leading to a more or less shut-down in the fall of 2008. What ensued was disappearance from market of more than a third of the private credit market (Thompson 2005). Figure 1 shows how securitization market came near shut-down during the crises. Figure 1: Decline of securitization market Securitisation is the process by which a certain assets’ cash-flows are separated from the balance sheet of the primary entity and transformed into marketable securities (Thompson 1995). The purpose of securitisation is to convert illiquid assets into marketable securities. It is used by insures as a form of risk management, which is achieved through transferring, commoditising and reallocating of different types of risks such as interest rate risk, credit risk, and pricing risk. Securitisation of the US subprime mortgage, according to Ingham (2008), fuelled the global crises during the summer of 2007 by increasing the extent of lending to subprime borrowers, which was happening at a very high default rate. Between 2004 and 2006, the market for subprime loans expanded significantly as shown in figure 2. As a result, the European and the US banks were writing off a massive amount of financial assets as the securitised mortgages became illiquid. The public money was used by many governments to bail out the financial institutions that were entangled into crises. Although it is usually a regulatory requirement to undertake credit rating on ...
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All the countries felt the affect of this global crisis but with different intensity. The impact of the financial crisis affected all the economies and hence challenged the incorporations and businesses to strive for their mere survival. The businesses with weak business models in this time were forced to shut down.
Both legal and ethical regulations exist in the sector to ensure stability and protection of stakeholders’ interests. Securitization, another concept in the financial sector, defines the pooling together of debts and selling them to investors who then earn interest from the debt’s proceeds and is an important concept towards provision of financial services.
The news that were most shocking was the filing of the bankruptcy protection by some of the major house mortgage lenders like New Century Financial Corporation that was regarded to be the largest in USA and Northern Rock that was largest in UK, filing of bankruptcy petition by Bear Stearns to bail out two of its hedge fund and at the same time JP Morgan Chase acquiring Bear Stearns, liquidation of Lehman Brothers with pre bankruptcy petition assets of value $700 billion, acquisition of Merrill Lynch by Bank of America, Federal Reserve Bank taking the control of American International Group (AIG) and Morgan Stanley and Goldman Sachs becoming the holding company of the bank (Mazumdar and Ahmad
Institutions like Lehman Brothers, Citibank, HSBC and many other global financial houses simply crumbled to the unwinding financial crisis. Though the exact causes of the crisis may not be easier to explore and understand however, lax regulations are considered as the major cause of the crisis.
The immediate cause of the crisis was rise in interest rates in the mortgage market so that people with home loans, paying adjustable interest rates, found themselves with spiraling interest payments. This in turn was the result of the liquidity crunch that banks faced as a result of growth in lending to borrowers of the sub-prime category, that is, those who had less than adequate credit worth.
specially commercial banks and saving institutions) aggressively attempted to expand their mortgage in order to capitalize on the strong housing market’ (Madura 2012, p17 ‘see this details of that book below’)
This essay examines important elements and components of
en the Lehman Brothers bankruptcy happened in the year 2008, the financial crisis became a more general crisis of banking that in turn rapidly impacted on the actual economy of the world leading to the onset of a global recession. In attempts of understanding the financial
ry Institutions Deregulation and Monetary Control Act of 1980 enabled financial institutions to influence the nature of monetary policies thus making the economy susceptible to non-factual policies, as was the case in 2006.
Thesis Statement: There are several fundamental
The 2007-2009 Global financial crisis threatened the collapse of some of the greatest financial institutions. The reason the effect was felt by many financial institutions is that they had invested mortgages which lead to deterioration in the balance sheet of the banks as a result of housing bubbles.
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