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Name Institution Instructor Course Date Effect of global Financial Crisis on Lending and Hence Investment and the Economy In General The financial crisis 2008 caused the banks to reduce lending as a way of reducing future risks that might arise from securities write-downs…
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Download file to see previous pages... The housing market was not unaffected with foreclosures, evictions and the resultant massive unemployment. The crisis contributed to the failure of many businesses, it reduces the consumer earnings and a reduction of overall economic activity (Anon, 125). The current European debt crisis is attributed greatly to this crisis with countries affected taking austerity measures that have had far more adverse effects on the citizens of these countries. This paper analysis how the crisis led to decreased lending and how this affected the economy. During the summer in 2007, the lending market experienced drastic disruptions with the market for asset-backed commercial disintegrating while the interbank market stagnated. The financial crisis created a fright that led financial institutions to seek to run through other financial institutions as a way of mitigating the escalating financial risks. These institutions suffered greatly when the lenders increased their lending requirements as a way of reducing lending. The banks hoarded liquid asset as a reaction to a number of factors. One, there was a rising concern solvency of these interbank operations. Moreover, the banks were experiencing an increase in the risk of their asset collection. Moreover, they could predict a risk related to draw-down of a long line of committed credit. Besides reducing lending, the banks used several other measures to management liquidity. These range from one bank to another depending on the pressure they felt for having liquid assets. During the crisis, the banks increased their liquid asset by selling assets such as government securities and treasuries. This enabled them to accumulate huge reserves in the central bank which was lucrative as they would earn huge balances from the large reserves. The banks also invested more in mortgage backed securities from Fredie Mac and similar banks whose security was guaranteed by the government (Anon, 1230. The liquidity hoarding was seen to be common across all banks irrespective of their sizes. The reduction in lending was seen to be different on the local and foreign banks. The foreign banks reduced lending compared to the local banks. This is because; the financial shock such as the one that was experienced has been seen to transmit negative effects to the foreign subsidiaries. A research conducted showed that there was no decrease in lending in both local and foreign banks in the fiscal year 2008 to 2009 (Anon, 69). This could be probably because the effects of the crisis had just started to be felt. However, in the following fiscal year, foreign lending was seen to have reduced by 5% more than the local banks. This is a reason why foreign investment across Europe reduces at a greater rate compared to local investments. The effects of the crisis are still being felt by banks around Europe and the globe in general. Banks have been restricted to in order to improve their immunity against the effect of such crisis. This is either through government conditions or the banks initiatives. The banks have also been forced to adapt to the changing economic climates. They now have to deal with a shrinking economy in the advanced economy and increasing economic opportunities in the emerging economies such as China. It is evident that the decrease in lending has a detrimental effect on investment. This is because with reduced lending or greater credit requirements, investors will shy away for making investments. The uncertainty of the market also discourages ...Download file to see next pagesRead More
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