Analysis within the Latest Economic Disaster and then the Banking Industry

Analysis within the Latest Economic Disaster and then the Banking Industry

The recent economical disaster commenced as element with the world-wide liquidity crunch that happened among 2007 and 2008. It is really believed that the disaster had been precipitated with the in depth panic created via monetary asset selling coupled along with a huge deleveraging from the economical establishments from the important economies (Merrouche & Nier’, 2010). The collapse and exit belonging to the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by huge banking institutions in Europe as well as United States has been associated with the worldwide financial disaster. This paper will seeks to analyze how the worldwide economic disaster came to be and its relation with the banking sector.

Causes with the economical Crisis

The occurrence within the global economical disaster is said to have experienced multiple causes with the most important contributors being the money institutions and therefore the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced inside of the years prior to the personal disaster increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and economic establishments from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to economical engineers inside the big monetary establishments who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was the property rates in America would rise in future. However, the nationwide slump from the American property market in late 2006 meant that most of these collateralized debt obligations were worthless in terms of sourcing short-term funding and as such most banks were in danger of going bankrupt. The net effect was that most from the banking institutions had to reduce their lending into the property markets. The decline in lending caused a decline of prices around the property market and as such most borrowers who had speculated on future rise in prices had to sell off their assets to repay the loans an aspect that resulted into a bubble burst. The banking establishments panicked when this happened which necessitated further reduction in their lending thus causing a downward spiral that resulted to the global economic recession. The complacency with the central banks in terms of regulating the level of risk taking around the personal markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest which the low policy rates experienced globally prior to the disaster stimulated the build-up of personal imbalances which led to an economic recession. In addition to this, the failure by the central banks to caution against the declining interest rates by lowering the maximum loan to value ratios for the mortgages banking institution’s offered contributed to the economical disaster.


The far reaching effects the economic crisis caused to the worldwide economy especially inside of the banking market after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul with the international economic markets in terms of its mortgage and securities orientation need to be instituted to avert any future finance crisis. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending with the banking marketplace which would cushion against economic recessions caused by rising interest rates.