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Bank recession of 2011 - Essay Example

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In 2008, the world witnessed one of the worst financial meltdowns in history, only surpassed by the Great Depression. The wide scale fiscal turmoil brought about speculations concerning the feasibility and sustainability of totally unregulated markets and institutions with government involvement confined to just adjusting monetary and fiscal policies…
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Bank recession of 2011
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Bank recession of 2011

Download file to see previous pages... Particularly marked by decreased bank lending, which creates the recurring loop of a recessive economy. Three main players are involved in this triangular arrangement of the financial system: The government, the banks/financial institutions and the credit consumers. The government with its increased involvement to regulate financial markets formulates policies for the consumers which are mediated through the banks and financial institutions. Thus, the banks are stuck in a paradox of adhering to government policies and maintaining their own liquidity and capital ratios, which in turn effect the end consumers. During the pre-recession period, credit access was particularly easy worldwide, especially among the G 10 countries which were attributed as pioneers of the ongoing economic boom. (Michael, B., Leonardo, G., & Goetz, P. 2011) Increased mortgaging and borrowing backed by higher expectations from the market were rampant, but to the dismay of economic analysts, this bubble was artificial. And eventually the growth backed by ill securities, bad mortgages and irregular credit ratings suddenly came to a halt with the financial market in doldrums.( Badertscher, B., Burks, J., & Easton, P. 2012) Banks and financial institutions had major investments in the real estate sector, the most effected of these by the financial crisis were those who had had readily converged to commercial construction and land development loans during the boom. (Hays, F., & Ward, S. 2010) Earlier financial crises have demonstrated that a concentration of loans within a single sector is very risky, since the developing sector may turn out to be a fad. It is considered a rule of thumb to diversify the investment portfolio to lower the risk to a minimum. But such was not the case and eventually, with the excess of subprime lending in the real estate economy without much securitization to back it, the banks involved had to bear the brunt of this mammoth of a crisis. Since then bank credit requirements have increased twofold making it harder to borrow and creating a bottleneck in economic injections. And on the other hand dipping credit ratings are naturally creating skepticism in the average consumer’s mind about the credibility of bank loans, creating a demand lag which is evident in the 2011 loan demand figures. Worldwide government efforts have been aimed towards saving major banks and financial institutions by providing much needed capitalization as a measure to increase liquidity. But smaller community banks have had a tough time surviving without much government assistance, and a plethora of risky real estate mortgage loans with an unfavorable market to profit from. Since larger banking corporations are more inclined towards heavier accounts and portfolios, the role of an intermediary played by relatively smaller banks for consumer loans remains vacant. This becomes evident in the form of the supply lag for loans that has been a feature of the banking crisis. The major clients for bank loans are corporate clients which require substantial amounts of capital. This is an area where international banking is prevalent, with loan syndication seen as a common practice among international financial institutions. (Ralph, H., & Neeltje, H. 2011) This may perhaps also be the reason why the recession in the ...Download file to see next pagesRead More
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