BANKING AND FINANCIAL CRISES

Banking and Financial Crises

BANKING AND FINANCIAL CRISES

Introduction

Financial crises are scenarios where there is large scale default. This default is both on the part of the financial and non financial institutions. This state is usually accompanied by falling income and prices in the economy. This crisis is mostly caused due to the mismanagement in a certain country, but slowly and gradually it can spreads like wild fire into different countries. This spreading of financial crisis is due to the fact that most of the transaction in the world is interlinked and that world is a global village.

These financial crises covering the second form of crisis are like balance of payment and foreign exchange crisis. These crises are triggered in the countries from where the fund is withdrawn by the foreign investors. The third form of crises is the fiscal crisis which is related to government debt crises. These are triggered when the host country whose debt is held by other countries rejects to pay them back due to certain issues.

The various crises which the world has seen over the modern history are the tulip mania in 1636, south sea bubble in 1720, east India company crises 1772, US banking panics which occurred in 1873, 1893 and 1907, great depression of 1930s, internet bubble of the 2000 and the most recent of all 2008 recession.

During Financial crises

When the crises start the effects of it spread like wild fire the entire place where it is related to. People are in a hurry to secure their position in various markets. Mass drop in asset prices are seen all over the place. The assets prices drop are transmitted all over the financial sectors and further into the real sate markets. For e.g. a speculation appears in the market that bank lending to real estate and stock markets will fail, thus this send a series of wild fire in the economy. This will trigger a contraction in the interbank money market and ultimately the banks will see a run over. This liquidity when reduces in the market will cause massive liquidity crunch in various sector of the economy (Ryder &Chambers 2009 pp. 85). Corporate won't be able to fulfill their running finance need, thus it will result in production losses and ultimately laying of f labors.

Bankruptcy increase in the market together with the closure of big corporation. In general masses the tension for economic security increases which will induce them to spend less on house hold, thus the economic cycle stops. Ultimate result is recession which when prolongs transforms into recession. Thus now we are going to see the policies which can reduce the world financial crisis.

Too-Big-To-Fail

The recession of 2008 was caused by subprime. This was caused by excessive lending of the commercial banks from 2001 onwards due to low interest rates. They landed it to the subprime mortgagers. Thus on one hand the bank provided loan to these people and on the other hand it started dealing in ...