Analysis within the Existing Financial Crisis along with the Banking Industry

The current monetary disaster started as piece of your worldwide liquidity crunch that occurred concerning 2007 and 2008. It will be believed that the crisis had been precipitated via the intensive worry created via finance asset selling coupled using a gigantic deleveraging on the financial institutions belonging to the primary economies (Merrouche & Nier’, 2010). The collapse and exit belonging to the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by main banking institutions in Europe as well as the United States has been associated with the global personal disaster. This paper will seeks to analyze how the global monetary disaster came to be and its relation with the banking community.

Causes on the monetary Crisis

The occurrence belonging to the global financial disaster is said to have had multiple causes with the foremost contributors being the economical institutions and also central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced while in the years prior to the money crisis increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and economical institutions from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to economical engineers on the big personal institutions who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was the property rates in America would rise in future. However, the nationwide slump within the American property market in late 2006 meant that most of these collateralized debt obligations were worthless in terms of sourcing short-term funding and as such most banks were in danger of going bankrupt. The net effect was that most from the banking establishments had to reduce their lending into the property markets. The decline in lending caused a decline of prices inside the property market and as such most borrowers who had speculated on future rise in prices had to sell off their assets to repay the loans an aspect that resulted into a bubble burst. The banking institutions panicked when this happened which necessitated further reduction in their lending thus causing a downward spiral that resulted to the global economic recession. The complacency via the central banks in terms of regulating the level of risk taking inside of the economical markets contributed significantly to the crisis. Research by Merrouche and Nier (2010) suggest that the low policy rates experienced globally prior to the crisis stimulated the build-up of money imbalances which led to an economic recession. In addition to this, the failure with the central banks to caution against the declining interest rates by lowering the maximum loan to value ratios for the mortgages banking institution’s offered contributed to the monetary crisis.


The far reaching effects which the finance crisis caused to the worldwide economy especially within the banking business after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul from the international finance markets in terms of its mortgage and securities orientation need to be instituted to avert any future monetary disaster. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending during the banking field which would cushion against economic recessions caused by rising interest rates.