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'Five Years after Lehman's Collapse: Have the problems of the financial system been solved' - Essay Example

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‘Five Years after Lehman’s Collapse: Have the problems of the financial system been solved?’ Introduction On 15th September 2008, when Lehman Brothers collapsed and got bankrupt, the whole financial sector worldwide was left in trauma. It was at this point of time that the financial market in the global economy became highly fragile…
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Five Years after Lehmans Collapse: Have the problems of the financial system been solved
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Download file to see previous pages The essay will throw light on three such measures undertaken by the public regulatory authorities in these nations to recover the economies from the state of crisis. In brief, the essay will implicitly analyze the impact of these measures in the economy of U.S., U.K. and Continental Europe, five years from the implementation of the plans (Ragan, 2011). The Causes behind Financial Crisis Faulty Monetary Policies: It was analyzed by many economists and analysts that the loose monetary policies adopted by the financial institutions were a factor responsible for the financial crunch at 2007-2008. The rate of interest at which the banks offered the short term loans in the market along with the lessoned cost of lending money to the whole sale intermediaries were responsible to augment the gross risk exposure of the commercial banks. This resulted in an increment in the number of defaulters in the market. Global Imbalances in General: It was also found that the rising global imbalances in the current account balances and the unequal transfers of capital had generated financial crisis in the global economy. A high capital inflows in the developed economies as the rationale of development had helped to reduce the gross cost of the financial institutions for lending domestic loans (Agatha, 2011). ...
Regulatory and Supervisory Factors: In the regime of the free market principles in nations, the fiscal authorities undertaken in the economy should be largely different from the monetary authorities. However, the success of the regulatory and supervisory bodies of these authorities must always be effective and efficient. It is stated by the analysts that the poor regulatory and supervisory systems of these organizations were largely responsible in these developed for the financial crash in the global economy. Reforms Undertaken for Recovery The Gearing Ratios of the Commercial Banks Analysis by the commercial banks in this crisis and volatile market conditions shows that the most crucial tasks of the banks should be the verification of credibility of the borrowers (Thomas and Mastropieri, 2006). Before the crisis, the commercial banks in the U.S. and Euro Zone economies engaged in high credit lending operations to hike their revenue. However, after the collapse, the banks started to adopt the policy of optimizing the revenue instead of maximizing it. This is because the banks adopted several credit appraisal tools to prevent the probability of losses in the market (Joshua, Jurek and Stafford, 2009). One such important step undertaken by the banks was gearing up of the ratios. It was believed that the low leverage of the commercial banks was a primary factor leading to the financial crisis in 2008 associated with the collapse of Lehman Brothers. The international community had retaliated to the crisis by introducing credit appraisal techniques and increasing the leverage ratios of the commercial banks. The leverage ratio indicates that the commercial banks gets to avail the risk based capital. Figure 1: The banks Performances over time. The above ...Download file to see next pagesRead More
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