Financial markets or institutions

Financial markets or institutions

Financial markets or institutions refer to a marketplace whereby individuals’ trade financial securities. The exchange also involves stock, bond, derivatives, money and forex markets. The market is crucial to the smooth running of most capitalist economies. Informational transparency is a requirement that ensures the appropriate and efficient setting of the prices in a particular market. Financial markets lower the transaction and search costs of goods and services provided in the economy. They do this by offering a variety of financial products. The exchange also acts as a link between investors and savers. Additionally, it plays a crucial role in the mobilization of savings, saving time and money to the parties and providing liquidity to tradable assets.

Financial markets have negatively affected economic activities in the 21^st century. Factors such as stock markets have continued to play a huge role in different economies. The trading of stocks allows most businesses to raise capital. The low prices of the shares in the market influenced the business activities since it consequently led to wealth for individual investors. Stocks are a reflection on how a company or organization is performing. When the prices of the shares are low for an extended period, the businesses lack funds to grow. Their investments on the stocks will affect their abilities to sustain and retain their employees. The continuous depression in stock market prices dramatically affects the economy’s gross domestic product of a nation.

Another factor that significantly influenced the economy is the interest rates set by banks. The high borrowing costs set for company’s organizations and individuals have reduced the will and desire to acquire loans. The reduction was due to the lower rate of returns from investments made using given loans since the amount paid to the lenders did not yield reasonable profits. The slowdown in turns results to lower economic growth in the nation. Higher interest rates mean lower spending habits for consumer’s individuals and businesses that highly depend on loans for survival and keep their investments running. The increased interest payout rates also meant a decrease in the number of loans offered by the banking institutions. The increase of interests is a way to cover up for the high probability of unpaid loans by borrowers. The hike is also a high-risk factor that has contributed to a depressed economy and reduced growth in business activities. The future economic crisis should be prevented and avoided at all costs. Lenders need to thoroughly take time to identify the transparent borrowers who genuinely pay loans and offer reasonable rates to them. The recognition of such borrowers assists in reduction on losses from unpaid loans and granting right investors and businessmen who contribute to economic growth.

The 2008 financial crisis was the worst economic disaster as identified by most economists and the leading cause of the crisis being deregulation in the financial industries. The regulations on lending issued then allowed financial institutions to trade with hedge fund trading with derivatives and use customer deposits. The reasons cited for using customer deposits for investments by the lenders were to compete with foreign firms. Banks and other financial institution lent money through  loans to individuals and companies who were credit unworthy. The crisis caused a rise in unemployment levels and lower housing prices and the interest of people venturing in investment in their business.

Financial products are instruments that assist an individual in savings investments and acquire insurance. Their creation is to help buyers and sellers with long-lasting financial gain and plan. Issued by various financial institutions, stock brokerage banks, and government institutions, they aid in risk circulation and enable liquidity to move around an economy. They include bonds, treasury bills, options and shares, amongst others. A financial product is also known as a contact between agents that specifies cash circulation and is classified based on the type of asset or volatility, risk and return.

The financial products highly contributed to the 2008 financial crisis. The fast development of products such as mortgage loans was risky to the economies. The banks had a desire to make quick money and hence complicate the financial products. Banks ventured into the sale of mortgage-backed securities which were a form of a commercial product whose price is set based on the value of mortgages used as collateral. Through this sale and marketing of this properties the banks gained a lot of profits from this derivatives. The investors had no issue with the banks and financial institutions doing business using the assets they wanted to purchase. Noting that they still contributed and made payments for them, they had confidence in their insurance companies to repay them in case anything went wrong. This engagement subsequently led to more banks engaging in this business and set aside the giving out of loans to investors. The institutions and banks saw this as more profitable than the lending activities, which eventually led to a financial disaster.

Reducing and preventing the risk of another financial crisis reoccurring can be done using various measures. One way is through bettering the regulations that run banks and financial institutions. Banks contribute immensely to the economic stability of a nation. Making sure that the institutions engage in reasonable activities and flexible policies that protect their customers is a step that would prevent further damages and crashes in the economy. The government ought to place harsh regulations, harsh consequences and fines for banks that go against the rules. Transparency in transactions and a regulatory change in the financial products that disable the nation, individuals and investors financially. Although not all the financial products result in a crisis in an economy, care needs to be taken by investors and businessmen. Regulators like the central bank should ensure banks act appropriately and do not abuse their positions and abilities. The self-regulation belief by financial institutions should be squashed or preferably controlled.

Another way to prevent another global crisis in the financial industry is by increasing the capital requirements for shadow banks. The conditions have to be strict on depository institutions. The solution begins with fixing and rectifying the incentive problems by bringing the shadow banks under the same regulatory bracket like the old traditional system. The unregulated activities by regulated institutions in the financial industry are what fueled the crisis in 2008. The shadow banks, being unregulated or not falling under the same regulatory category as traditional banks had a competitive advantage. The financial industry should ensure that shadow banks do not overtake again. Intensified oversight on the banks should be vital to preventing another scenario of investor extortion and misbehaviour in the banking field.