Global Financial Crisis in 2008 - Essay Example

? Global Financial Crisis in 2008 Global Financial Crisis in 2008 According to Herkenrath and Christian, Global Financial Crisis entails several aspects.1 Thus, it can be described as constituting crisis such as international credit, trade, banking as well as currency crisis that hit the world in the late 2000s. This Global Financial Crisis indeed had a dreadful effect on the international economy. So, in many countries, key players within economies such as stock markets as well as large financial institutions did succumb to the effects of global financial crisis. Precisely, some of the great organizations that succumbed to this crisis include Lehman Brothers, Bear Stearns, AIG, Fannie Mae, Freddie Mac as well as Meryl Lynch. All these were recognized as brand organizations and as such, they had been nationalized effectively. In addition to this, these organizations had risk management systems entailing technical excellence. Irrespective of this, they still succumbed to the effect of the Global Financial Crisis. The question is: if they indeed had implemented a superior risk management strategy, then why did they go under? Therefore, this article aims at establishing what could be the corporate weakness that contributed to their failure.2 Despite the fact that these institutions had established the right risk management strategies, there must have been flaws within those systems. To establish and better understand these flaws, it is essential that one understand some various concepts: Interconnectivity between operational risk, credit risk and systemic risk Risk management strategies are usually established and implemented in an effort toward readying an organization for any eventual risk that may occur. There are three categories of risks that an organization faces depending on the nature of its operations. These are: Operational risks: These are usually described as breakdowns that occur internally within the control systems as well as the corporate governance and as such, it results in financial losses attributable to errors, fraud or even inability to perform timely. In addition to this, these risks cause the interest rates set by the financial institutions to become compromised in some way.3 Systematic risks: These are risks that occur within a certain market segment or within the entire market. According to financial analysts, the aftermath of systemic risks is that the value of the portfolio of an organization declines. Such risks arise due to political or even economical problems like the global financial crisis in 2008. Other factors that facilitate the occurrence of systemic risks include changes of interest rates, wars as well as calamities. Credit Risks: These are risks that arise out of uncertainty in credit worthiness of a borrower, that is, uncertainty on the ability of the borrower to meet his obligations. They usually take a variety of forms since the borrowers could be a range of parties including the sovereign governments. According to most financial analysts, all these risks are interrelated or interconnected and as such, they are the major risks that warrant an organization to establish risk management strategies. According to most financial analysts, both the systemic as well as the credit risks are commonly underpinned by the need for individuals within an organization to follow some stipulated work procedures as well as the need to engage in particular work related activities, which can be said to be strong human elements. This underpinning is what can be referred to as operational risks, and this is where the interconnectivity is underlain.4 These three types of risks can therefore be said to have caused the extinction of the aforementioned organizations that were major players within the economy. The most obvious reason for this is due to failed transactions. Whenever financial credit occurs, the approval of credit worthiness of any organization by the financial institutions is usually delayed. This is because during such times, credit approval must be done after trade. This situation is usually facilitated by the operation risks experienced by the organizations and the credit risks being experienced by the financial institutions. Since every business organization is usually market oriented, market risks also take effect. During the financial crisis, credits as well as the market risks are deemed to surface and when they does, organizations fail to test stress associated with these risks. They fail to do this as most of them are mostly relying on compensation schemes aimed at executing the punishment of excessive risk taking.5 In addition to this event, poor data integrity during financial crisis in any organization definitely leads to drastic effect. Poor data integrity includes such things as failure to check and authorize manual data entry. When all these risks integrate, the effectual thing is that an organization will experience failed transactions, and this is the worst thing whenever the economy is faced with a financial crisis. Even if an organization implements any quality of decisions to curb the situation, in most cases, closedown is usually inevitable.6 The role of governance and non-regulatory compliance in risk models The corporate governance as well non regulatory authorities are important to risk management and they play a major role in managing risks within an organization. Some financial analysts attributed the collapse of major layers within the international economy to the corporate governance.7 However, this should not be the case. Instead, it is the perfect storm that hit the international banking industry. The financial institution’s boards could not be expected to foretell such an event.8 In addition to this, these boards could also not be expected to react as swiftly as possible to this storm in an effort towards making a sizable difference. To understand this rebuffing idea in regard to governance as the major cause of the closure of organizations during the global financial crisis, it is necessary that one put his efforts and thereby try to understand the role of governance and non-regulatory compliance in risk models.9 Governance after global financial crisis After global financial crisis, massive shortcomings were revealed that were within institutional systems as well as regulatory governance. The global governance was changed. There were two changes made on the global governance. Foremost, in March 2008, the World Bank as well as the International Monetary Fund meetings were held. From these meetings, a decision was established so that in most underrepresented countries, an ad hoc increase with regard to quotas was inevitable. During these meetings, a new quota formula was established.10 As such, it was the formula that would determine the economic size of any particular country as well as openness. This determination would then be essential as it would be used to establish the voting power as well as the IMF’s resource access by these particular countries.11 Moreover, during this meeting, another ad hoc quota that was come up with was the trebling of the basic voters. The second round of reforms with regard to the corporate governance came in April 2008 when the board of governors of the International Monetary Fund announced the global package, which entailed reforms that can be said to be far reaching.12 In the wake of the great financial crisis that hit the world economy in 2008, some G20 members responded by reinvigorating international corporation. These G20 members thrust a tremendous amount of resources to the International Monetary Fund. According to the financial analysts during this time, the amount of resources thrust reached approximately one trillion US dollars. The global financial crisis imparted decisions among the world’s leading economies so that new economic reforms were established.13 Role of ISO31000:2009 if adopted as the new global standard for risk management In most cases, implementation of a framework for risk is difficult when it comes to their achievement. However, if ISO 31000 is adopted, this becomes the contrary. As such, it can be said to be a winning practice that can be universally applied, that is, its guidelines as well as frameworks can be adopted by organizations irrespective of the geographical locations in which these organizations are situated. According to financial analysts, ISO is built on different risk communities with regard to several businesses as its basis. It proves efficient as if such aspects are taken into account; the resultant risk model is said to deliver a balance approach in which the bedding of a risk as well as a framework for risk control within an organization are implemented.14 ISO 31000, if adopted by any particular organization, would not only prove to be essential to it but to the global economy at large. It is important as it is capable of providing a single internationalized reference for various parties to an organization, especially the stakeholders. This is with regard to those organizations that entail high risk programs.15 If this kind of risk management model is adopted, it would follow that there is a provision of indispensable opportunities to institution that are business oriented and as such, they would review the risk management practices that have been put in place.16 The ISO31000 was established and it was intended to be a set of related standards with regard to risk management. These standards relate to risk management that has been codified by a body commonly known as ISO, that is, International Standardization Organization. Further, ISO is intended to establish and present principles as well as guidelines on risk management. These guidelines presented by the ISO31000:2009 are generic in nature. The main reason as to why ISO31000:2009 was established was to help come up with paradigms for companies as well as practitioners that are universally recognized. They were established to aid the organizations which have risk management strategies put in place in an effort towards replacing the already existing methodologies, standards and paradigms, and these must have differed tremendously between regions, industries as well as subject matters.17 If adopted, the risk management model will prove effective towards creation of a resilient global economy, and this effectiveness will arise out of the ISO 31000’s role. One role that makes the model efficient is its ability to transfer gaps that are largely associated to the accountability within the enterprise risk management. If adopted, it would establish the gaps that the current risk management strategy, thereby filling them up. Consequently, if any financial crisis happens, there would be no adverse effect on an organization which has adopted ISO 31000.18 Another role that would make ISO 31000 effective in ensuring a resilient global economy is that it has the capabilities of aligning whatever levels of corporate governance frameworks. If a company adopts the model, it would follow that the realizable objectives are given priorities while the irrelevant ones are done away with.19 In addition to these roles, ISO 31000 would also prove effective as it would lead to the adoption of reporting systems of the management systems and as such, it would be a stronghold for any organization. If hit with a financial crisis, it would not be adversely affected and it would continue with its operations as anticipated.20 Further, ISO 31000 would play a major role as it would result in creation of a uniform risk criterion within the global economy. In addition to this, it would also prove essential as out of the model’s role, evaluation metrics would be established21. From this analysis, it is evident that indeed, many high profiled organizations went under due to the effects of global financial crisis that hit the world in late 2008. It is also clear that operational risks provide the interconnectivity between both the credit risks as well as the systemic risks. When combined, they result in drastic fates to organizations. As discussed, economy giants can be said to have succumbed to the effects of these risks. The end result of lack of an effective risk management strategy, especially taking these three risks into account, is the inability to secure a transaction, which is the basis of any operating business. With the ability to transact locked, it follows that the organization is deemed to fail and succumb to the effects of any financial crisis regardless of how small it is.22 Governance as well as non regulatory compliance is important in risk models as they support and facilitate the effectiveness of these models.23 According to this discussion, ISO 31000 is an effective risk management model and if adopted, it will prove essential and would finely fight business risks, and hence resilient international trade.24 Bibliography Boesak, Allan and Len Hansen. Globalisation II - Global Crisis, Global Challenge, Global Faith. Pearson: Prentice Hall, 2010. Brunnermeir, Matt. “Deciphering the Liquidity and Credit Crunch 2007–2008.” Journal of Economic Perspectives 23, no1 (2009): 77–100. Central Statistical Organization (CSO). National Account Statistics. New Delhi: CSO, 2009. Economic Advisory Council. “Economic Outlook for 2008-09.” Economic Advisory Council to Prime Minister. 20 June 2009. http://www.pib.nic.in/archieve/others/2009/jan/eco_20092301.pdf Gamberoni, Einstein, and Richard Newfarmer. Trade Protection: Incipient but Worrisome Trends. Washington, DC: The World Bank, 2009 House of Commons Treasury Committee. The Run on the Rock. London: John Wiley and Sons, 2008. IMF. “Wild or Tamed? India's Potential Growth. Postwar U.S. Business Cycles: An Empirical Investigation.” International Monetary Fund Working Paper 07/224. Washington, DC: IMF, 2007. Institute of International Finance. Interim Report of the IIF Committee on Market Best Practices. London: John Wiley and Sons, 2008. International Labour Organization. Global Employment Trends Report. Geneva: International Labour Organization, 2009. Kumar, Richard. The Outlook of Indian Economy. New Delhi: ICRIER, 2009. Matt, Wolf. Fixing Global Finance. Baltimore: The Johns Hopkins University Press, 2008. Surjit, Bhalla. “Inflation Control Chokes Growth.” Business Standard 23, no 5 (2008): 23-58. Suter, Christian, and Mark Herkenrath. World Society in the Global Economic Crisis. Oklahoma: Cengage Learning, 2012. World Bank. Global Development Finance. Washington DC: The World Bank. 2001. Xu, Ratha. Migration and Remittances Fact Book. Washington: World Bank. 2007. Read More