Financial Crises and Bank Failures

Abstract

In this study we try to explore the concept of “Financial Crises” in a holistic context. The main focus of the research is on “Fiunancial Crises of U.S” and its relation with “Bank Failure”. The research also analyzes many aspects of “Financial Crises” and tries to gauge its effect on “Bank Failure”. Finally the research describes various factors which are responsible for “Financial Crises” and tries to describe the overall effect of “Financial Crises” on “Bank Failure”.

Executive Summary

Banks made extraordinary amounts of money from the rising housing market, using derivatives to trade pools of mortgages back and forth at constantly increasing prices, expecting that the values of the homes underlying those mortgages would continue to rise. In mid-2007, however, many of the subprime borrowers who had recently purchased homes became unable to pay their mortgages. Millions of properties soon went into foreclosure, and housing prices fell. The largest banks in the U.S. lost billions of pounds. Government authorized the Troubled Asset Relief Program (TARP) to inject capital into struggling banks so that they would not collapse the way Lehman did. To stave off a recession and spark new economic growth, the Federal Reserve took emergency measures, cutting interest rates twice. This move was meant to pave the way for cheaper loans and make it easier for businesses and individuals to borrow money from banks.

Table of Contents

Abstracti

Executive Summaryii

Introduction1

Aims and Objectives2

Causes of Recent Financial Crisis3

Changes in Economy Boom Phases3

Subprime Mortgage Crisis6

Financial Upheavals and Banking Sector Uncertainty7

Subprime Mortgage Crisis and Bank's Involvement8

Former Deregulations Impact on Bank's Recent Performance9

The Housing Crisis and Recent Bailouts12

Banking Sector Crisis Impact on Stock Market13

Approaches to Manage Banking Sector Position15

Troubled Asset Relief Plan Program17

Economic Stimulus Act of 200819

Critiques Viewpoint20

Conclusions24

References26

Financial Crises and Bank Failures

Introduction

For decades, the U.S. has had the largest economy in the world. But even the strongest economies struggle sometimes. Throughout its 232-year history, the country has endured several recessions' periods of economic contraction and declines in business activity. Some of these economic downturns have been mild, lasting as little as three months. Others have been severe, lasting for years and resulting in widespread unemployment, bankruptcies and even social unrest. As of early 2008, the U.S. finds its economy sluggish. Business growth slowed to a near standstill, consumer confidence deteriorated, U.S. dollar weakened in power as it has been in 17 years and the country is losing jobs (Ibis World, 2012a). Many economists say the combination of these factors makes it clear that a recession has already begun. 

The roots of the current financial crisis date back to around 2001, when the stock market was suffering substantially from the bursting of the "dot-com bubble," in which Internet-related stocks with no real value traded for large sums of money. Additionally, the terrorist attacks of Sept. 11 placed a great strain on the economy. To combat the sluggish economy, the Federal Reserve, which regulates and influences key interest rates, lowered rates substantially, making it easier for financial institutions to borrow money from both the government and each other (Mergent Investor, ...