Effect of the financial crisis of 2007-2008 on the stability of the banks in the United States
Introduction
In the recent past, the economies of the countries have been interlinked and have become interdependent with each other. Consequently, all the countries across the world operate within the same realm of the financial market. In business environment the financial institutions are normally the backbone of any financial market and therefore it is destroyed by the global financial crisis. Of factor which if they are number of , This financial market ought to be controlled and managed in order to avoid the collapse of the market which results in large recess. This paper discusses the effects the huge financial crisis that hit the globe in the years 2007-2008 and evaluates the impact that it had on the American banks.
The financial crisis of 2007-2008
A financial crisis started off as a subprime crisis in the mortgage market of the United States of America, and it turned out to be a major crisis in the American banking sector and also culminated into a global crisis (Svilenova, 2011). The period before the crisis had been characterized by a rise in the credit extension especially in the real estate, reduced volatility of the financial market and also high levels of risk-taking. This crisis was a major surprise to the investors, the policy and even the academics since it was not anticipated. Even though it seemed to surprise many, there had been many warning signs which were never put into consideration until it was too late. Due to this crisis, several countries and their banks lost out a lot on their dominance of the global financial market. The general map of the leading banks in the global financial market was opened largely open. Don't use plagiarised sources.Get your custom essay just from $11/page
Effects of the financial crisis on the Banks in the United States of America
The period of the financial crisis of the between 2007-2008, had a major impact on the banking sector of the United States of America. It was interesting to find the crisis mainly affected the financial institutions such as American financial institution. Established counties .The banks’ interest rates deemed too low that there they were running at a loss during this period. This caused a huge imbalance in the financial market thus affecting the business transaction of the American banks in the global financial market.
Furthermore, since the crisis emanated from the United States of America, the banks in the U.S experienced problems with mortgages market. This is whereby other banks from other countries which were the primary beneficiaries avoided engaging in a business transaction with mortgages from America. Those banks that like taking risks of mortgages this time they retreated and immediately they started reconsidering their position and refused the taking in of the mortgages. Such countries that benefitted this include Australia and Canada which turned away the mortgages.
Another thing that was adversely affected by the financial crisis was the cross-border banking transaction. Liquidity was also affected which had resulted in the central bank claiming against the financial sector. The banks faced a lot of instability throughout this period of the great recession. There was also the loss of confidence for the bank’s holders of liability (Laeven & Valencia, 2010). As a result, there was a wide use the guarantees on the liabilities of the bank throughout the crisis in a bid to try and restore confidence in the liability holders. The banks again had to raise the insurance limits and extended the guarantees of the banks in order to try and manage the huge crisis that was facing these banks.
Again, there were witnessed bank failures which as a result of the involving of those institutions that had been assisted by the government. These banks had received some government assistance in the year 2007. These banks failure generated losses that were very similar to those that had been experienced in the past coming to a similar loss rate. A lot had to be done to restore the banks from the losses. During this crisis, the bank failure turned out dramatic, especially for the American banks(Laeven & Valencia, 2010). American banks were among the leading banks across the world in the period before the financial crisis. However, after this wave of crisis, the top tier banks including American banks found themselves nocked out of the top the world due to the crisis. The map of the global banking had been totally changed . in general, the American banks significantly lost it out from the top of the banking world. There was also another general loss in the market capitalization.
Conclusion
In conclusion, the 2007-2008 financial crisis that hit the world came as a surprise to many people including the financial advisors and even the investors. This is after many of them ignored the warning signs that had indicated that things were headed for the worst. American banks were highly affected by the crisis that resulted in the failure of the banks that had received the government assistance. The banks had also generated numerous losses during this period of the crisis. The financial institutions need to heed the warning signs of the collapsing financial market to avoid a huge recess period that leaves banks in an awkward position that force to bear with the low-interest rates.
References
Islam, I., & Verick, S. (2011). The Great Recession of 2008–09: Causes, Consequences and Policy Responses. In From the Great Recession to Labour Market Recovery (pp. 19-52). Palgrave Macmillan, London.
Laeven, M. L., & Valencia, F. (2010). Resolution of banking crises: The good, the bad, and the ugly (No. 10-146). International Monetary Fund.
Svilenova, J. (2011). Regulatory response to the financial crisis of 2007-2008: will Basel III help prevent future crises in the banking sector? (Master’s thesis).
Islam, I., & Verick, S. (2011). The Great Recession of 2008–09: Causes, Consequences and Policy Responses. In From the Great Recession to Labour Market Recovery (pp. 19-52). Palgrave Macmillan, London.