The large financial institutions due to the large amount

The topic for our group presentation and artefact paper is: ‘Global Financial Crisis’. The topic was
divided up into four related questions, in which we divided fairly amongst our
group members. The four questions were based on the spread of the housing
crisis, global imbalances, impact of the crisis amongst different countries,
and regulation of financial institutions. The associated research was conducted
by Silvia, Dawit and Gianluca, Francesco and Jordan, respectively.  

 

To analyse how the housing crisis spread to other advanced economies, it
is important to understand the state of the US economy prior to the financial
crisis and the related causes. On the fourth slide, there is a brief timeline
of the US economy prior to 2007, which was detailed verbally during the in-class
presentation.  The module lecture slides
provided an overview of the financial crisis before further research into more
detailed academic resources was conducted. Although there were many causes of
the financial crisis, the following were mentioned in relation to the first
question; Lax regulation, securitisation/CDO’s,
global imbalances, financial contagion, and the effectiveness of rating agencies.

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The housing crisis spread through the adoption of CDOs, and the sequential collapse of
large financial institutions due to the large amount of exposure to subprime
mortgages. Due to the failure of these institutions to prudently manage their risk,
many banks around the world experienced a loss of confidence and a fall in
interbank lending.  

 

Global
Imbalances refer to the differences in the current account balance amongst many
countries around the world. Rising global imbalances are associated with a
greater dispersion between their current accounts. The causes of this issue involve
a wide range of different variables, including economic growth, trade
surpluses, and the movement of capital abroad. The consequences of such can
result in a rise of the amount of credit available in certain countries, and
cause an exaggerated rise in asset prices and uncertainty in some markets. It
appears that global imbalances are not sustainable in the long term, and the ‘global savings glut theory’ (Ben Bernanke) is further validation that
effective steps to lessen the global imbalance gap is necessary.

 

The
answer to third question required an in-depth analysis of the impact of the
crisis among different countries. In order to make the research more
interesting and accurate, we decided to compare the different impacts on
developed and developing countries and we also included a post-crisis
comparison between the Greek and German economies. The results showed that the
German economy was first to be hit hard by the crisis before bouncing back due
to revitalised export
industries, low borrowing costs, an inflow of investors’ cash? as well as a large external surplus and a balanced budget. On the other hand,
economies like Greece have not recovered yet because of weak macroeconomic
fundamentals and vulnerable capital accounts.

 

Authorities regulate
financial markets in an attempt to have a degree of control and maintain
stability and confidence in the financial system. Financial institutions have adopted
the responsibility of maintaining a strong payment system upon which the
mechanics of our modern economy operate.  Government intervention in order to regulate
the financial market has the objective of ensuring financial stability and
addressing the issues of moral hazard, asymmetric information, externalities,
and the principal-agent problem. There are three types of regulation that the
government use; Structural regulation, prudential regulation, and investor-protection
regulation. The official policies
prior to the financial crisis had severe implications following the crisis. They
include, but are not limited to; ‘Big Bang, 1986’, ‘The Banking Act of
1987, and 2009’, ‘The Basel 1 Accord
1988’, and ‘The Basel 2 Accord 2004’. This legislation resulted in an increase in the financial
resources committed to trading deals, the abolishment of fixed commissions, a reduction
in large trade transaction costs, a limited amount of supervision of financial
institutions by authorities, regulatory arbitrage, and an official capital
adequacy of 8%. Key regulatory reforms were apparent, and government authorities
took prudent steps to ensure higher stability of our financial system, they included,
but are not limited to; higher capital requirements, allowing small banks to
fail to reduce the burden on taxpayers, maintenance of liquidity, dispersion of
regulatory power, and the limitation of interdependence amongst financial
institutions. 

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