Thus we can say that even a stable banking system with all proper regulations in place failed to stop such a financial crisis from occurring. The paper intends to trace out the reasons behind such a failure with the help of findings and analysis and the relevant steps undertaken for this. Reasons behind failure of banking regulations Economists and policy makers of various countries have tried to find the conditions which led to the crisis. They tried to find out those faulty policies and the incorrect measures taken by the bank that led to its failure of crisis prevention. It was found that at the time of the crisis the interest rate was really low. Financial investors in such a scenario became optimistic regarding the prices of assets along with the underlying risks. The banking regulations directed towards changes in financial landscape led to extension of leverage and this made accurate risk prediction more difficult. Investors transformed into risk lovers and excessive risk taking began in the markets (Caruana). Neither banking regulations nor effective supervision could stop such a phenomenon. The fragmented banking regulation again proved to be wrong. No connection could be traced out in the activities of regulated and non regulated markets. All over the markets and institution there was prevalence of asymmetric information. Some loopholes existing in the legal procedures were also equally responsible (Caruana). The macroeconomic policies implemented during this time were inadequate. The easy liquidity banking policy made structures of debts, especially the heterogeneous ones more incomprehensive. Criticisms have been against the supervisory regulations of bank. Easy loans were given to individuals without careful examination of the underlying default risks (Neuman). Monetary policies were framed in such a way that cash flow becomes easy across the economy. Such an instance is proved by statistical evidence. Table1: Data showing low interest rate policy adopted by the banks Source: Neuman The interest rate considered is for the Euro zone. The data is for short term real interest rate which continued till 2005. Such data shows that banks have adopted a low interest rate policy during the given years. This paved the way for easy liquidity. The banking regulations of 2004 led to significant credit expansion and credits involving high risks became the main reasons for initiating such crisis. It first led to subprime losses in March 2008 with Bear Sterns incurring huge subprime related losses. Ultimately Federal Reserve had to take over the firm. Detoriation of subprime loan holdings eventually culminated into the crisis. Banking sectors have earlier avoided such high risk alerts generated by the economists in 1999 (Nichols, Hendrickson and Griffith). Easy financing act of 2005 became the strategy for banking operations. During this time some big American and European banks even violated banking regulations by setting up companies for such short term financing purpose. Such companies were not disclosed in balance sheets. Banking sectors however did not pay attention to the fact that such a low interest rate policy regime adopted by banks in 2003 after European Central Bank followed suit was slowly increasing
Banking Regulations and the current financial crisis Introduction Banking sector is termed as a heavily regulated industry and it has a huge impact on both the local and global economy. So every country feels the need for a stable banking system. Instability prevailing within the banking system can lower down the growth of a country by causing higher uncertainty (Jokipii and Monnin)…
The leverage ratio for minimum risk based capital requirement was initially 2% and the increased to 4.5% meant to help the situation. However in measuring total risk based capital the committee has retained the framework that was adapted initially in determining risk based capital.
CDS – Credit Default Swaps 6 5. Why economic models failed? 8 6. Case Reference – Perspective of HSBC Bank 8 7. Conclusion 9 8. References 11 1. Introduction Financial institutions cater to the needs of different types of customers by providing relevant financial services.
Although other countries were not directly affected by the crisis, they were still significantly affected by the crisis as their economies also crashed, the prices of oil and other commodities skyrocketed, and the banking crisis overwhelmed their economy.
They have made the society to be increasingly integrated into a single community. The sharing of information and products has greatly affected the standards of living of individuals. Populations that did not have access to quality products previously have had a chance to benefit from the same through the free flows of products across the globe.
According to OECD, most countries pursue attractive policies that seek to ensure increased home ownership, which is considered as a way of helping to improve livelihood. This is also reaffirmed by Bloom and Schirm who assert that there was a large credit and housing bubble in US and Europe (37).
Many have assigned the year 2004 as the year of the great credit crisis that first had a toll on the United States’ financial sector before other parts of the globe had its impact. However, there are indications that the credit crisis of the year 2004 was just a climax of a historically influenced turbulence in the world’s financial market that began with the end of “the golden age of capitalism in 1970’s” (Kapadia and Jayadev 33).
This essay mainly focuses on determining the roles of major American financial institution in aggravating financial crisis and exposing the inefficiency of existing regulatory framework. Any further bailouts or interference on the part of the government is deemed inefficient, as the financial burden ultimately will lie on citizen taxpayers.
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.
There is wide spread loss of jobs and unemployment. The global financial market is heading towards a collapse if necessary measures to resolve financial crisis is not taken by the authorities, not only in US but also in other countries facing the same situation.
al banking policies as things that are not closely linked with cultural attitudes, but which have been allowed to roam free in search of growth and profit. In addition, the focus will incline more on the financial crisis worldwide and more so, on the financial markets and
12 pages (3000 words)Essay
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