Analysis within the Present Personal Crisis additionally, the Banking Industry

Analysis within the Present Personal Crisis additionally, the Banking Industry

The up-to-date finance disaster began as component in the worldwide liquidity crunch that occurred among 2007 and 2008. It will be believed that the crisis had been precipitated because of the extensive stress produced because of personal asset selling coupled that has a enormous deleveraging with the personal establishments of the big economies (Merrouche & Nier’, 2010). The collapse and exit within the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by principal banking establishments in Europe as well as the United States has been associated with the global monetary disaster. This paper will seeks to analyze how the worldwide economic crisis came to be and its relation with the banking sector.

Causes for the economic Crisis

The occurrence within the world-wide finance disaster is said to have had multiple causes with the main contributors being the personal institutions and therefore the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced within the years prior to the finance disaster increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most trusted investors and economical establishments from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to economic engineers within the big monetary establishments who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was which the property rates in America would rise in future. However, the nationwide slump inside 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 with the banking institutions experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices with the property market and as such most borrowers who experienced 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 by the central banks in terms of regulating the level of risk taking around the economical markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest the low policy rates experienced globally prior to the crisis stimulated the build-up of economical imbalances which led to an economic recession. In addition to this, the failure through 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 finance disaster.


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