bank financial crisis

bank financial crisis

Question 1The banking industry is a system of financial organizations authorized by the state to offer bank services. These services provided by the bank industry include transferring, storing, extending credit and managing risks that are related to holding different kinds of wealth. Functions of the bank include; transferring funds from the people who save to those that want to use these funds. The bank sets the terms of the prescribed arrangements as the funds are under transfer procedure in a way that supports and endorses financial activities. The bank observes borrower performance; by increasing across investment plans and reduces some risks and enhances the provision of funds to those activities with the best economic capability. The bank manages liquidity in the financial scheme hence steadying prices and production. The bank is also interested in the housing market because of the house price, and the number of sales indicates the amount of money people spend. The housing market helps in assessing the overall demand for goods and services.

Question 2 A bank financial crisis involves bank run when stockholders sell off their properties, and others withdraw their money from the bank due to fear that the value of their money and assets will drop if they remain in a financial organization. The two thousand and eight financial crises were the greatest and almost led to the world’s banking system on the verge of failing. It started when the Wall Street investment bank filed for bankruptcy. The crisis was more sudden than the other mess. The financial crisis began with the economic system of the United States and later to Europe. The crisis led to a decline in the economy where prices of housing decreased at a rate higher than the price drop during the depression. The year two thousand and eight financial crises had its effect, and they include; fall in the house price. It is not suitable for the homeowners because there has been a north-south separation in the last period in terms of the amount of the assets.

Saving was a disaster after the financial crisis, particularly those that had relished decent yields in the past years. The saving rates have reduced at a high price because, due to unemployment, people did not have money to save. All the money they get is all used on food and accommodation. The household average has climbed from less than three thousand euros to four thousand euros. The reasons for the rise include available credit through the plastic cards. The credit cards have been competing for a long by offering favourable terms like long terms and terms that are long term to gain more customers. In year two thousand and eight, fifteen months were the longest months for the balance transfer, but now, they take up to thirty-six months. One reason which explains the rise in personal debt is that it easy to get the money but proves difficulty is paying it back. The financial crisis created challenger banks. Supermarkets Tesco and Sainsbury’s used to be the challenger banks but now banks that do not have branches have merged and the biggest challenge.

Question 3Dereguration is where the government eliminates limits in an industry to create competition within the industry. In financial deregulation is a root cause of the financial crisis. The repeal of the Glass-Steagall Act of nineteen thirty-three permitted the banks to invest in derivations. They did this so that they could compete with foreign firms and assured them to invest in low-risk securities to protect their customers. The next year, the Commodity Futures Modernization Act excused credit exchanges and other derivatives from protocols. The federal legislation excused trading in energy derivatives after it domineered the rules of the state, which had forbidden this from gambling. Securitization involves taking all illiquid assets, transforming them into security through financial engineering.

An example is a mortgage-backed security, which is protected by several mortgages. It contributed to a mortgagee crisis because they fascinated investors because of the high interest rate offered and the assets supported by more jumbo mortgages. Many loans with mortgages that had an adjustable-rate were made and later contributed to the mortgage crisis.

Question 4The banks were not behaving ethically, and this led to the financial crisis. Banks were untrustworthy and could not give reliable information to their customers. In the eyes of their customers, they had respect. They behaved appropriately, ensuring everyone that they followed the law and respected their customers and employees and that they were honest in their public disclosure. They showed the public that they were always honouring their commitment by being good citizens of where they carried out their activities. But in reality, they are different. At times they would disclose how they are doing financially, and other times, they are giving false information on the same. They would sell the subprime paper to the public, and then they would be giving the same papers behind everyone’s back. The same banks would offer mortgages to their customers, and then later, they say that they do not have mortgages. All this led to a lack of trust. Their customers could not trust them, and it contributed to the financial crisis.

Question 5The government contributed to the financial crisis in different ways. Enterprises that were sponsored by the government were encouraged to enlarge and purchase mortgage-backed securities, including those mortgages that had risky subprime. They undervalued the securities’ jeopardies because of poor answerability, the challenge in evaluating risk or due to lack of competition. The government played a role in prolonging the crisis. The financial crisis happened when the money-market interest rates. There was a need for diagnosing the problem that led to an increase in interests to determine the kind of policy to use. The policymakers did not diagnose the question correctly, which led them to prescribe the wrong treatment. They diagnosed the crisis as liquidity and required a long process, which included making borrowing easier at the Federal Reserve discount window. Thus were responsible for prolonging the financial crisis. The Economic Stimulus Act of two thousand and eight, which was passed in February and was involved in sending money amounting to a hundred million dollars to families and individuals to spend. People did not spend this money as expected, and therefore consumption was not boosted. Reducing federal funds was also a role played by the government. This rate cut led to the depreciation of the dollar and the increase in the prices of oil. When the crisis started, this price was twice the price.

Question 6Housing market is the application of economic techniques to real estate markets. The housing markets may lower the price of their houses and consumers default on their home loans when house prices fall, therefore making the banks to lose their money and sometimes are forced to shut down. They may go extents of withdrawing their savings to purchase the houses. In return, they are also left with less money to spend, save, pay debts or invest. The decrease in housing prices contributed to the financial crisis that happened in the year two thousand and eight. Regulations were passed in the United States, emphasizing the bank industry to allow the consumers to own homes. When the housing markets are high, then the banks are stable and cannot lead to bankruptcy.

Question 7After the crisis, some regulations were put in place to avoid the financial crisis from happening again. The repeal of the Glass-Steagall Act allowed the bank to invest in derivation and hedge funds that were not regulated. It means that they could use a customer’s funds for their advantage but under the state that they assured to invest in low-risk securities and the customers’ risk would be abridged. The Emergency Economic Stabilization Act created the Troubled Asset Relief Program, which was involved in helping individuals and families in saving homes. Volcker Rule was formed to limit speculative investment. The banks and also non-banks had the right to add burdens that were regulatory to the stable institutions. They did this under the systematically important financial institution that was designated for them. The schedule of this law was to increase the transparency of the market through authorizing specific origins. The Federal Reserve, in return, had a chance to create the Consumer Financial Protection Bureau. This bureau limited the activities that were carried out to take advantage of the consumers. Increasing the capital required for shadow banks and depository institutions and making them countercyclical is another law that was introduced. The creation of chapter 11 where banks help in declaring a condition of insolvency legally and that there will be a good relationship between a debtor and creditor in the ex-ante sense when the debtor is in credit and ex-post when the debtor is already bankrupt. The exact risk Centre was set up to study the risks that may cause the next financial crisis and to come up with strategies that will help policymakers and financial institutions become better prepared.

Question 8The government did an excellent job of coming up with regulations because these regulations prevent market failures; that happens when the markets that were functioning fail in delivering efficient resources. Protecting the investors by ensuring that they get back their money if the bank becomes bankrupt or there is fraud involved. Improved the transparency of investors, whereby they get the information about the financial statement so that if they invest, they will have a clear idea of what is dealing with and will not blame it on the bank later in case of any problem. Promoted macroeconomic stability framework for monetary and fiscal policies are formed to reduce volatility and change the effects of financial failures on the economy. The financial crisis affected my business. I have started a business and borrowed funds to stock my business though the risks were high my hopes were I would manage to pay back the loan, and the market would expand, but this did not happen. My business collapsed. It left me without any company, a loan to pay, nothing to save and no money for my upkeep. I later lost my home. Everything went to me in a bad state.

In conclusion, the shortcomings of the international regulatory framework played a role in the eruption of the crisis and consequences. The financial crisis leads to a significant problem that, if not solved, can lead to even more significant issues like unemployment, which will result in unsatisfactory living standards where some cannot afford to pay their rent and are left homeless. If trust is created, maybe some things would be avoided, like banks losing their customers and being forced to shut down. If the government had come up with regulations, the financial crisis, it would not have happened. The public should be educated on this regulation and made understand so that they can avoid risks of losing everything they have and left homeless. Consumers should be advised against leverage because although the consumers can borrow money to increase the ability to earn more, there is a high risk if everything fails. The year two thousand and eight financial crisis led to eight million homes foreclosure due to failure in payment; there was a loss in a stock wealth of roughly sixty-six thousand and two hundred euros per home. Unemployment rose to ten percent, and the savings of individuals declined by twenty-seven percent in the year two thousand and eight. All this would have been avoided if the right measures were taken into action to prevent the crisis.