Global financial crisis, Turner
During the 2007/2008 period, the world experienced a financial crisis that rivaled the great depression experienced in the late 1920's. According to Turner, the total cost of the crisis undoubtedly exceeds trillions using any of the major currencies . The crisis resulted in the collapses of businesses, major bank bailouts, very poor performance of stock markets worldwide and collapse of housing markets. The crisis also played an important part in the decrease of consumer wealth and poor economic activity ultimately leading to the global economic recession experienced between 2008 and 2012.
Various causes of the 2008 economic crisis have been identified. These causes have been assigned weights by various economists in order to offer a comprehensive understanding of the event. According to a report presented to the U.S. senate on the financial crisis, the main causes were identified as poor regulatory systems, failure of rating agencies and high risk products among other cumulative effects . By considering the financial crisis, we find that various questions need to be answered. First, what reasons resulted in the vulnerability of banks to problems in the credit market? What roles does the effectiveness of current international and national regulatory frameworks play on this vulnerability and finally, what changes are needed in the regulatory framework to prevented any future occurrence of a global financial crisis.
[...] housing bubble that begun in the late 1990s and peaked in 2007[3]. According to Bullard (2009), the rapid demand for housing and the resulting increase in prices can be attributed to rare low interest rates, fast income growth, improvements in the mortgage market and large capital influx. During the housing bubble, there was a rapid increase in the offering of nonprime mortgage loans especially those with unusual terms. According to research, there was a 40% increase of nonprime mortgage loans between the year 2001 and 2006[4]. [...]
[...] Wheelock, ‘Systemic Risk and the Financial Crisis: A Primer' (2009) 5 Federal Reserve Bank of St. Louis Review 403 James Bullard, Christopher J. Neely, and David C. Wheelock, ‘Systemic Risk and the Financial Crisis: A Primer' (2009) 5 Federal Reserve Bank of St. Louis Review 403 Michael Trebilcock and Robert Howse, The Regulation of International Trade (4th Edn Routledge, 2013) Morgan Ricks, ‘Shadow Banking and Financial Regulation' (2010) Columbia Law and Economics Working Paper No Accessed 5 November 2013. William Poole, ‘Reputation and the Non-Prime Mortgage Market' (2009) 5 St. [...]
[...] However, there are changes that can be made, to ensure that a better framework is laid to prevent future financial crisis to occur. Bibliography Bullard Neely and Wheelock ‘Systemic Risk and the Financial Crisis: A Primer' (2009) 5 Federal Reserve Bank of St. Louis Review 403 DiMartino D and Duca Rise and Fall of Subprime Mortgages' (2007) 2(11) Federal Reserve Bank of Dallas Economic Letter accessed 6 November 2013 Elosegui ‘Aggregate Risk, Credit Rationing, and Capital Accumulation' (2003) 43 Quarterly Journal of Economics and Finance 668 Fried Who Really Drove the Economy into the Ditch (Algora Publishing 2012) FSH, Regulatory Response to the Global Banking Crisis' (2009) FSA Hanson Anil and Stein Macroprudential Approach to Financial Regulation' (2011) 25 Journal of Economic Perspectives 3 Herdegen Principles of International Economic Law (OUP, 2013) Huang Hao Z and Haibin Framework for Assessing the Systemic Risk of Major Financial Institutions' (2009) 33 Journal of Banking and Finance 2036 Jorion ‘Risk Management Lessons from the Credit Crisis' (2009) 15 European Financial Management 923 Lastra ‘Systemic Risk, SIFIs and Financial Stability' (2011) Capital Markets Law Journal 43 Malz ‘Risk Neutral Systemic Risk Indicators', (2013) FRB 51 Poole ‘Reputation and the Non-Prime Mortgage Market' (2009) 5 St. [...]
[...] Wheelock, ‘Systemic Risk and the Financial Crisis: A Primer' (2009) 5 Federal Reserve Bank of St. Louis Review 403 Joseph Fried, Who Really Drove the Economy into the Ditch (Algora Publishing 2012) Danielle DiMartino and John Duca, Rise and Fall of Subprime Mortgages' (2007) 2(11) Federal Reserve Bank of Dallas Economic Letter accessed 6 November 2013 Jorion ‘Risk Management Lessons from the Credit Crisis' (2009) 15 European Financial Management 923 Rajdeep Sengupta and William Emmons, ‘What is Subprime Lending', (2007)13 FBRSL James Bullard, Christopher J. [...]
[...] Over-reliance to economic capital models exposes many financial institutions to the inability to identify and rank risk especially systematic risks. This may be due to using less conservative choices for given variables or from changing levels of correlation across asset portfolios. The institution of a high capital minimum value provides various advantages such as; providing an acceptable degree of protection for creditors, reduces the risk of extensive risk taking, cushioning banks during times of financial difficulties[18]. Another weakness noted is that their existed certain activities that resulted in the reduction of regulation standards. [...]
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