FINANCIAL CRISIS

The Recent Global Banking and Financial Crisis

The Recent Global Banking and Financial Crisis

Introduction

The financial crisis triggered by increasing default rate, real estate devaluation and financial asset depreciation associated with the US subprime mortgages conveyed back the argument about the structure of the US and international financial schemes, their promise systemic dangers, and their regulatory and supervisory mechanisms. Credit derivatives and organised goods endorsed by real estate credit duplicated and multiplied dangers by an unidentified component in addition to redistributing them at a global scale. A large number of badly regulated and awfully overseen financial institutions - no capital requirements, no get access to deposit insurances, rediscount operations, and last holiday resort credit lines by centered banks - became the counterparty of the credit risk move from the banking scheme and begun to contain increasing risks. The intermingling of these institutions and markets engendered a global shaded banking schemes and markets. (Torres 2008 696)

 

Discussion

The financial crisis that begun in the US in mid-2007, as a outcome of increasing default rates and the devaluation of real estate house and of financial assets connected to the US subprime mortgages, has granted improved power to the argument about the current architecture of the US and the international financial scheme, its promise systemic dangers and its means of supervision and regulation. This exact architecture turned a classic credit crisis into a financial and banking crisis of huge proportions, reaching a systemic dimension. In a classic credit crisis, the addition of the promise deficiency (corresponding to borrowings conceded against poor collateral) would be already known.

In the current structure of the financial scheme, the credit derivatives and the organised goods adhered to distinct credit operations have duplicated and multiplied this deficiency by an unidentified component and have redistributed the ensuing dangers to a whole mesh of financial institutions at a global scale. A year and a half after the outburst of the crisis, it is still unrealistic to assess the deficiency and to work out their distribution, aggravating the need of self-assurance that fueled the spread of the crisis. For this reason, interbank liquidity remains constrained, regardless of the relentless and voluminous injections of liquidity and the guaranties granted by the monetary authorities.

The unfolding of the crisis has put in question the very survival of numerous financial institutions, posing a threat to the current financial architecture as well as to the rudimentary principles of the scheme of banking and financial regulation and supervision. It has furthermore lost some lightweight on numerous characteristics of this architecture, previously cloaked in shaded, therefore paving the way for an understanding of its real structure. The most significant of those characteristics is the interaction between universal banks and other financial institutions, which evolved mostly in the obscure over-the-counter (OTC) markets. (UBS 2008 102)

Banks searched distinct entails for moving credit dangers off their balance-sheets, aiming at increasing the capacity of operations without the required to put apart the capital coefficients required by the Basel ...