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How the World Crises Happened and What are the Causes - Essay Example

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The author of the following essay "How the World Crises Happened and What are the Causes" underlines that the latter part of the year 2008 witnessed rapid weakening of the global economy. The turbulence in the financial market was felt from all over the world…
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How the World Crises Happened and What are the Causes
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Download file to see previous pages The resultant was a steep fall in both personal and corporate credit. This multiplied with the fast recession that occurred in the housing and the construction markets. The financial institutions especially the investment banks have been lending to each other at lower rates. The reason is that the banks have been well aware of the solvency of other institution and don’t want to take the high risk rather they want to keep the cash reserve for themselves. As lending by the bank lowered due to the economic instability, the bank increased the borrowing cost to increase the operational revenue. This strategy was taken by the banks in order to maintain a sustainable business operation in the financial market. The company undertaken for discussion is Barclays PLC. The company is a multinational bank of Britain. It operates in the financial sector and is headquartered in London. The operations of the organization spread over 50 countries and territories. The company emerged as the fourth largest in terms of total assets in the year 2010. The organization has got two business clusters namely retail and Business Banking as well as Corporate and Investment Banking. The company is listed in the London Stock Exchange. How the crises happened and what are the causes The collapse of the U.S. housing market regarded as the housing bubble is characterized as one of the prime reason for the situation to occur. The collapse resulted in a surge of default of mortgage loans (World Health Organization, 2009). The collapse of the real estate market and the subprime mortgage market of the U.S. can be held responsible to spread the severe effects of the crisis. Uncertainties accrued in the financial system. The creditors became inclined to pull out their funds and cashed out the securities issued by the financial institutions. The situation thus caused led to shutting down of many institutions while others just managed to survive. The loan and credit facilities available from the banks dried up. The investors began to dump their holdings and the obvious situation was a downturn in the share market. In order to create securitization, the banks started to borrow more money. The dependency of the banks on the savers can only be felt when the banks are not able to pull out by selling loans on the basis of securities. Some of the banks launched to buy securities which increased the exposure of the banks towards risk. When the problem got realized, the process of lending got slowed. Some of the banks were on the verge of the riskiest loans which was beyond the intention of the investors. The lenders fell upon to take back their loans. The investment banks fell drastically as they had no or little deposits. The problem got intensified and even the banks with large capital reserves began to feel the pressure. They turned to the government for support. The banks began to feel nervous to loan out the injected money and the shrinking banks sucked money out of the economy. In spite of the fact that the global financial crisis has shown its effects a year ago, yet the prime banks of UK were able to accrue a profit in the second quarter of the financial year 2009 in the area of non-recurring items. The retail business of Barclay got affected along with the top three banks of UK. In the middle periods of the year 2009, Barclays reported that profit has decreased far more than what it was in mid-2008.  ...Download file to see next pagesRead More
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