Finance Markets and Risk - Essay Example

Extract of sample
Finance Markets and Risk

The intention of this study is systemic risk that is ushered by unforeseen incidents that amplify uncertainty unimaginably and damage the liquidity of the market at a rapid phase. Illiquidity results in “prices gaps” in respective markets and in the pricing of a particular asset. The related pressure later extends to the liquidity of funding of financial institutions around the world that are assisting those independent markets. Illiquidity in markets sequentially can result in potentially momentous real economic impacts, thus warrant policy action, particularly by central banks. As per IMF (International Monetary Fund), BIS (Bank for International Settlements) and FSB (Financial Standard Board), systemic financial risk is one, which is associated with the peril of risk of disruption to financial services that (a) is happened by a destruction of whole or parts of the financial system and has the probable to have the worst negative outcome for real economy. During September 2008, AIG borrowed from the Federal Reserve System an $85 billion two-year loan that too at a penalty rate, which has been termed as ever known the rescue of one of the globe’s major insurers. In return for the rescue operation, Fed received a 79.9% of shares in the AIG. At the time, the investment banking arm of AIG witnessed a systemic risk emanating from its credit default swap (CDS) business. The failure of one firm may not impact its rivals as is happening in the most sectors of the economy nor does it result in market failures. ...Show more

Summary

The paper operates mainly based on research questions which can be stated as follows: What is meant by ‘systemic risk’ and ‘systemically important financial institutions’ (SIFIs)? Is separation of banking between retail / commercial banking business and investment banking need of the hour?…
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