Answered Same DayMay 12, 2021

Answer To: No

Harshit answered on May 16 2021
129 Votes
GLOBAL FINANCIAL CRISIS
    Serial Number
    Contents
    Page Number
    1.
    Introduction
    1
    2.
    Causes of the Global Financial Crisis
    2-4
    3.
    Can the Global Financial Crisis be repeated?
    5
    4.
    Impact of Global Financial Crisis in major economies
    6
    5.
    Reforms that eventuated
    7
    6.
    Yield Curves
    8-9
    7.
    Conclusion
    10
    8.
    Referencing
    11-12
INTRODUCTION
The global financial crisis that occurred in the year 2008 was the b
iggest hit to the financial system in the last 100 years after the great depression in the year 1929. Between the mid-2007 and beginning of 2009, the banking system and the global financial market was into a crash during which most of the banks incurred huge losses and were on the brink of going bankrupt. This crisis originated in the United States of America wherein the real-estate-housing market became the catalyst for the crisis to spread from the US to across the globe.
It started when the price of housing projects started to fall and the experts thought that this was just a correction in the already inflated real-estate-housing project. But with time the truth was unfolded wherein the banks were issuing housing loans with any reasonable credit of repayment of such loan by the borrower (Doidge, C., Karolyi, G.A., and Stulz, R.M., 2020). The banks used to approve 100% of the loans and sometimes the amount of loan was even more than the value of the property purchased. This is what triggered the global financial crisis that lead to a worldwide recession causing millions of people to lose their jobs and even after the crisis was over; the unemployment rate was more than 9%.
CAUSES OF GLOBAL FINANCIAL CRISIS
As discussed earlier, the crash of the real-estate-housing market in the United States led to the losses in the banking system which ultimately acted as the beginning of the crisis which then hit the European market and eventually across the globe. The major causes of the global financial crisis were as follows:
1. DEREGULATION: Deregulation means the removal of restrictions from an industry for the smooth running of the businesses in the industry. The Gramm-Leach-Bliley Act, 1999 was introduced replacing the Glass-Steagall Act, 1933 and thereby allowing banks to invest in derivatives to compete with foreign banks. It was allowed only to invest in low-risk securities for the protection of the customers of the bank. The next year, the credit default swaps were exempted. These two laws, allowed banks to invest in housing based derivatives which were riskier for the customer’s interest.
2. SECURITIZATION: The hedge funds and pension funds invested in this risky derivative known as Mortgage-backed Securities which was backed by the value of mortgages and was also insured by the credit default swaps which covered the risk of default because of non-payment of monthly installments. The insurance companies like AIG Insurance, sold these swaps and this was considered to be very profitable as it was supported by both the real-estate and insurance (Kanjilal, K. and Ghosh, S., 2017). Therefore demand for MBS increased and housing loans were provided to sub-urban areas without the creditability of the borrower to repay the loan which eventually and they lost its value, the cash flow was not enough to honor the swaps. In 2007, the bank absorbed all the carried forward losses and stopped inter-bank lending, which therefore led to the rise of LIBOR.
3. RISE IN SUBPRIME MORTGAGES: In case of default in the repayments of the mortgage-based loans, the banks used sell off the mortgage and reissue a fresh loan with the amount received. This lead to an increase in the amount of borrowing in the United States and other foreign countries. The loans were lent to borrowers whose creditability was not appropriate. The Financial Institutions Reform, Recovery, and Enforcement Act, 1989 focused on the removal of the redlining of certain poor areas in the banking sector under the Community Reinvestment Act. This led the banks to issue the housing loans at subprime interest rates with a backing by Fannie Mae and Freddie Mac to the banks that these loans will be securitized.
4. INCREASE IN RATES OF SUBPRIME LOANS: In 2001, the Federal Reserve lowered the fed funds rates to 1.25%becasue of which the adjustable-rate mortgage rates were also lowered. This decreased the income of the banks eventually due to which the subprime interest rates increased from 6% to 14% from 2001 to 2007. During the same period there was a huge rise in the demand of...
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