ABOUT FINANCIAL CRISIS

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INTERNATIONAL BUSINESS ASSESMENT

INTRODUCTION:

The stock markets around the world fell and even large financial institutions collapsed. The world's largest and powerful economy is the economy of the United States. The main reason for the global financial crisis was due to the collapse of the United States sub-prime mortgage and adverse effect of housing boom in other industrialised economies around the world. As a result of this financial crisis it has led to housing market declined, banks ran out of capital reserves, business and individuals depending on credit fell down.

SUBPRIME CRISIS:

Instead of banks originating mortgages and holding on to them, the brokers and some banks started originating them and selling them to be securitized. The brokers and the banks were paid based upon the number of mortgages they approved. The next stage in this was securitization. Under securitization the home mortgages, insurance payoffs, loans and other assets was turned into tradable bonds, this attracted any investors and buyers into the market. Securitization was not transparent and complex. Securitization was taken from many countries in order to reduce the risk and to spread the risk differentially. The subprime crisis was caused because of securitization. Banks gave away their various loans into sellable assets. These assets were turned in to securities. The security buyer gets payments from all these mortgages. Securitization was the greatest financial innovation in the 20th century. Many banks took this huge risk which increased the exposure to this problem.

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At the initial stages of the crisis, the confidence level of many investment bankers went down. Lending money slowed down and even ceased at later stages. Assets were going down in value, so lenders wanted to get the money back. Some investment bankers were having some riskiest loans which the investors were not ready to buy or invest in. Some investment banks had little deposits and no secure funding so they collapsed quickly.

LATER STAGES:

The problem increased rapidly that even the banks with large capital reserves ran out. So they turned towards the government for support. So new capital was invested in banks so that they can lose money without going bust, but still that was not enough and confidence was not restored e.g. Bank of England deposited £5bn in the money market.  Shrinking banks took their money out to build their capital and didn't want loaning risks. On the other hand business and individuals who relied on credit from banks found it harder to get it.

MAIN CAUSES OF FINANCIAL CRISIS:

Many buyers moved in to the securitization market which was very risky. Arrival of the post-industrial society in the United States was another major cause for the financial crisis. Most of the labour force moved from manufacturing sector into the service sectors. Due to this millions of jobs were lost in the manufacturing field. This led to the major instability in the economy of the United States.

There was a lack of economic forecasting and also the financial structures were opaque as the investors did not clearly know the working of them. The economist should have forecasted properly and warned about the failure of the economy before it has occurred. The regulations in the United States were so liberal that allowed many public sectors to govern their own rules and regulations over the investment banking system. Also the intervention by the United States government was very low.

Many financial institutions and banks in the United States obtained excessive of cheap credit form European, Asian and Middle East countries, which made easier borrowing of money. Also the credit rating for the safer returns was high which boosted this business. Due to this many investors were attracted towards it. These borrowed funds were passed on for further lending's who were in need. The house owners pay their mortgages to the financial institutions from where they obtained it, but it indirectly went to the bond holders around the world. The process was opaque that no one knew what exactly was happening and where the money was flowing. 

The trading system was made so complex by the profit oriented financial institution, apart from that the Credit rating agency was not regulated properly, at the same time repeal of the real estate inflation shattered the trading system in United States. Real estate's were more profitable before the global financial crisis but as the liquidity started to dry out these sectors caused a drastic change in the economy. This eventually led to the lack of capital reserves in the financial institutions to handle at the times of financial crisis.  Due to the increase in the bad assets and reduction in the asset value there was no cash liquidity. Usually the value of the asset has to accelerate, but due to improper financial forecasting, the value of the asset started decelerating.

EFFECTS OF FINANCIAL CRISIS:

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The first signs of financial crisis started in the US. But it indirectly affected the other nations which were dependent on the US economy. Many lost their jobs in places all around the globe. Jobs in financial services around the globe have been strongly affected. It also affected independent mortgage brokers and other independent contractors who provide services to financial institutions. Also according to the press report as of mid 2008, major British banks began to sell their number and type of mortgages only to customers who approached directly, avoiding the brokers. Even the same trend existed in the United States, where brokers were concerned as the banks blocked them from offering loans. The global economy sank further into recession and financial institution's assets experienced even greater job losses to rise even faster. IT was also hit hard as firms scale down for lower business volumes. Bankruptcies and consolidation resulting from the financial crisis were expected to lead to significant financial job losses, that even stronger firms shed staffs. The employment impact on the British finance sector is expected to be equally real as in the US. Ireland is the only European country whose banking sector has been most affected by the financial crisis. The economies in many countries in Asia and Europe were drastically affected even though their banks had very little exposure to US securitization and remained strong.

UNITED KINDGOM HIT BY FINANCIAL CRISIS:

Main reason for the financial crisis in the UK is that there is a bubble in real estates. Suddenly the bubble burst and this caused the huge problems in the securitized mortgage market and in the real economy. This is the reason for the why the effect of real economy was so large. The crisis led to significant job losses in the financial sector. The job loss leads to permanent decline in the overall activity, stagnant and deceleration in the income growth and many financial institutions had gone out of business or changed their operating model.

Britain sank deeper in to recession in the later stages of 2008. BAA's underlying profits had fallen sharply due to the poor economy and the number of people taking flights reduced.

RECOMMENDATIONS:

Here are some of the recommendations to the U.K. Government to prevent any further financial crisis as this one. The government should maximise the efficiency by being clear about the short-run and long-run objectives. The Government regulations must be strong enough to withstand even during another financial crisis. Government must rely on market prices wherever available. Institutions that perform well must be rewarded more. Government should take advantage of leverage offered by the bailout to review incentive system within institutions that might have led to the crisis. 

Banks must set some levels of benchmarks for providing mortgages and to be safer. Economic forecast should be proper and any such crisis can be overcome or easily avoided. Any signs of such crisis should me forecasted properly and well in advance to overcome such drastic situations and appropriate measures can be taken in time. Also the manufacturing sector should be given equal priority as the service sector is. This gradually improves the job opportunities and increases the economy of the nation.

CONCLUSION:

Global financial crisis made the countries to understand the drawbacks in the regulatory measures. The effects of crisis were very immense, so the government should give importance in forming a proper framework to regulate all the businesses. By following strict rules and regulations, there will a steady growth in the economy. Even if there is any signs of any such crisis the framework can be altered so that the government can withstand any unfavourable condition that arises.

BIBLIOGRAPHY

Archarya, V.V. Philippon, T. Richardson, M. and Roubini, N. 2009. Journal of the financial crisis of 2007-2009: Causes and Remedies, pp. 2-32.

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Available at: http://www.ft.com/cms/s/0/972a27bc-06f5-11df-b058-00144feabdc0.html

[Accessed 25 February 2010].

Kollewe, J. 2009. Global financial crisis: UK recession deeper than thought [online]

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Available at: http://www.guardian.co.uk/business/2009/feb/25/uk-recession-gdp-data-revised

[ Accessed 25 February 2010].

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[Accessed 25 February 2010].

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Available at: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4298934/Britains-banking-crisis-may-last-for-almost-a-decade.html[Accessed 26 February 2010].